---
id: book-2-chapter-02
title: "OF MONEY, CONSIDERED AS A PARTICULAR BRANCH OF THE GENERAL STOCK OF THE SOCIETY, OR OF THE EXPENSE OF MAINTAINING THE NATIONAL CAPITAL."
book: "2"
chapter: 2
artifact_type: content
---

CHAPTER II.
OF MONEY, CONSIDERED AS A PARTICULAR
BRANCH OF THE GENERAL STOCK OF THE SOCIETY, OR OF THE EXPENSE OF MAINTAINING
THE NATIONAL CAPITAL.



      It has been shown in the First Book, that the price of the greater part of
      commodities resolves itself into three parts, of which one pays the wages
      of the labour, another the profits of the stock, and a third the rent of
      the land which had been employed in producing and bringing them to market:
      that there are, indeed, some commodities of which the price is made up of
      two of those parts only, the wages of labour, and the profits of stock;
      and a very few in which it consists altogether in one, the wages of
      labour; but that the price of every commodity necessarily resolves itself
      into some one or other, or all, of those three parts; every part of it
      which goes neither to rent nor to wages, being necessarily profit to some
      body.

      Since this is the case, it has been observed, with regard to every
      particular commodity, taken separately, it must be so with regard to all
      the commodities which compose the whole annual produce of the land and
      labour of every country, taken complexly. The whole price or exchangeable
      value of that annual produce must resolve itself into the same three
      parts, and be parcelled out among the different inhabitants of the
      country, either as the wages of their labour, the profits of their stock,
      or the rent of their land.

      But though the whole value of the annual produce of the land and labour of
      every country, is thus divided among, and constitutes a revenue to, its
      different inhabitants; yet, as in the rent of a private estate, we
      distinguish between the gross rent and the neat rent, so may we likewise
      in the revenue of all the inhabitants of a great country.

      The gross rent of a private estate comprehends whatever is paid by the
      farmer; the neat rent, what remains free to the landlord, after deducting
      the expense of management, of repairs, and all other necessary charges; or
      what, without hurting his estate, he can afford to place in his stock
      reserved for immediate consumption, or to spend upon his table, equipage,
      the ornaments of his house and furniture, his private enjoyments and
      amusements. His real wealth is in proportion, not to his gross, but to his
      neat rent.

      The gross revenue of all the inhabitants of a great country comprehends
      the whole annual produce of their land and labour; the neat revenue, what
      remains free to them, after deducting the expense of maintaining first,
      their fixed, and, secondly, their circulating capital, or what, without
      encroaching upon their capital, they can place in their stock reserved for
      immediate consumption, or spend upon their subsistence, conveniencies, and
      amusements. Their real wealth, too, is in proportion, not to their gross,
      but to their neat revenue.

      The whole expense of maintaining the fixed capital must evidently be
      excluded from the neat revenue of the society. Neither the materials
      necessary for supporting their useful machines and instruments of trade,
      their profitable buildings, etc. nor the produce of the labour necessary
      for fashioning those materials into the proper form, can ever make any
      part of it. The price of that labour may indeed make a part of it; as the
      workmen so employed may place the whole value of their wages in their
      stock reserved for immediate consumption. But in other sorts of labour,
      both the price and the produce go to this stock; the price to that of the
      workmen, the produce to that of other people, whose subsistence,
      conveniencies, and amusements, are augmented by the labour of those
      workmen.

      The intention of the fixed capital is to increase the productive powers of
      labour, or to enable the same number of labourers to perform a much
      greater quantity of work. In a farm where all the necessary buildings,
      fences, drains, communications, etc. are in the most perfect good order,
      the same number of labourers and labouring cattle will raise a much
      greater produce, than in one of equal extent and equally good ground, but
      not furnished with equal conveniencies. In manufactures, the same number
      of hands, assisted with the best machinery, will work up a much greater
      quantity of goods than with more imperfect instruments of trade. The
      expense which is properly laid out upon a fixed capital of any kind, is
      always repaid with great profit, and increases the annual produce by a
      much greater value than that of the support which such improvements
      require. This support, however, still requires a certain portion of that
      produce. A certain quantity of materials, and the labour of a certain
      number of workmen, both of which might have been immediately employed to
      augment the food, clothing, and lodging, the subsistence and conveniencies
      of the society, are thus diverted to another employment, highly
      advantageous indeed, but still different from this one. It is upon this
      account that all such improvements in mechanics, as enable the same number
      of workmen to perform an equal quantity of work with cheaper and simpler
      machinery than had been usual before, are always regarded as advantageous
      to every society. A certain quantity of materials, and the labour of a
      certain number of workmen, which had before been employed in supporting a
      more complex and expensive machinery, can afterwards be applied to augment
      the quantity of work which that or any other machinery is useful only for
      performing. The undertaker of some great manufactory, who employs a
      thousand a-year in the maintenance of his machinery, if he can reduce this
      expense to five hundred, will naturally employ the other five hundred in
      purchasing an additional quantity of materials, to be wrought up by an
      additional number of workmen. The quantity of that work, therefore, which
      his machinery was useful only for performing, will naturally be augmented,
      and with it all the advantage and conveniency which the society can derive
      from that work.

      The expense of maintaining the fixed capital in a great country, may very
      properly be compared to that of repairs in a private estate. The expense
      of repairs may frequently be necessary for supporting the produce of the
      estate, and consequently both the gross and the neat rent of the landlord.
      When by a more proper direction, however, it can be diminished without
      occasioning any diminution of produce, the gross rent remains at least the
      same as before, and the neat rent is necessarily augmented.

      But though the whole expense of maintaining the fixed capital is thus
      necessarily excluded from the neat revenue of the society, it is not the
      same case with that of maintaining the circulating capital. Of the four
      parts of which this latter capital is composed, money, provisions,
      materials, and finished work, the three last, it has already been
      observed, are regularly withdrawn from it, and placed either in the fixed
      capital of the society, or in their stock reserved for immediate
      consumption. Whatever portion of those consumable goods is not employed in
      maintaining the former, goes all to the latter, and makes a part of the
      neat revenue of the society. The maintenance of those three parts of the
      circulating capital, therefore, withdraws no portion of the annual produce
      from the neat revenue of the society, besides what is necessary for
      maintaining the fixed capital.

      The circulating capital of a society is in this respect different from
      that of an individual. That of an individual is totally excluded from
      making any part of his neat revenue, which must consist altogether in his
      profits. But though the circulating capital of every individual makes a
      part of that of the society to which he belongs, it is not upon that
      account totally excluded from making a part likewise of their neat
      revenue. Though the whole goods in a merchant’s shop must by no means be
      placed in his own stock reserved for immediate consumption, they may in
      that of other people, who, from a revenue derived from other funds, may
      regularly replace their value to him, together with its profits, without
      occasioning any diminution either of his capital or of theirs.

      Money, therefore, is the only part of the circulating capital of a
      society, of which the maintenance can occasion any diminution in their
      neat revenue.

      The fixed capital, and that part of the circulating capital which consists
      in money, so far as they affect the revenue of the society, bear a very
      great resemblance to one another.

      First, as those machines and instruments of trade, etc. require a certain
      expense, first to erect them, and afterwards to support them, both which
      expenses, though they make a part of the gross, are deductions from the
      neat revenue of the society; so the stock of money which circulates in any
      country must require a certain expense, first to collect it, and
      afterwards to support it; both which expenses, though they make a part of
      the gross, are, in the same manner, deductions from the neat revenue of
      the society. A certain quantity of very valuable materials, gold and
      silver, and of very curious labour, instead of augmenting the stock
      reserved for immediate consumption, the subsistence, conveniencies, and
      amusements of individuals, is employed in supporting that great but
      expensive instrument of commerce, by means of which every individual in
      the society has his subsistence, conveniencies, and amusements, regularly
      distributed to him in their proper proportions.

      Secondly, as the machines and instruments of trade, etc. which compose the
      fixed capital either of an individual or of a society, make no part either
      of the gross or of the neat revenue of either; so money, by means of which
      the whole revenue of the society is regularly distributed among all its
      different members, makes itself no part of that revenue. The great wheel
      of circulation is altogether different from the goods which are circulated
      by means of it. The revenue of the society consists altogether in those
      goods, and not in the wheel which circulates them. In computing either the
      gross or the neat revenue of any society, we must always, from the whole
      annual circulation of money and goods, deduct the whole value of the
      money, of which not a single farthing can ever make any part of either.

      It is the ambiguity of language only which can make this proposition
      appear either doubtful or paradoxical. When properly explained and
      understood, it is almost self-evident.

      When we talk of any particular sum of money, we sometimes mean nothing but
      the metal pieces of which it is composed, and sometimes we include in our
      meaning some obscure reference to the goods which can be had in exchange
      for it, or to the power of purchasing which the possession of it conveys.
      Thus, when we say that the circulating money of England has been computed
      at eighteen millions, we mean only to express the amount of the metal
      pieces, which some writers have computed, or rather have supposed, to
      circulate in that country. But when we say that a man is worth fifty or a
      hundred pounds a-year, we mean commonly to express, not only the amount of
      the metal pieces which are annually paid to him, but the value of the
      goods which he can annually purchase or consume; we mean commonly to
      ascertain what is or ought to be his way of living, or the quantity and
      quality of the necessaries and conveniencies of life in which he can with
      propriety indulge himself.

      When, by any particular sum of money, we mean not only to express the
      amount of the metal pieces of which it is composed, but to include in its
      signification some obscure reference to the goods which can be had in
      exchange for them, the wealth or revenue which it in this case denotes, is
      equal only to one of the two values which are thus intimated somewhat
      ambiguously by the same word, and to the latter more properly than to the
      former, to the money’s worth more properly than to the money.

      Thus, if a guinea be the weekly pension of a particular person, he can in
      the course of the week purchase with it a certain quantity of subsistence,
      conveniencies, and amusements. In proportion as this quantity is great or
      small, so are his real riches, his real weekly revenue. His weekly revenue
      is certainly not equal both to the guinea and to what can be purchased
      with it, but only to one or other of those two equal values, and to the
      latter more properly than to the former, to the guinea’s worth rather than
      to the guinea.

      If the pension of such a person was paid to him, not in gold, but in a
      weekly bill for a guinea, his revenue surely would not so properly consist
      in the piece of paper, as in what he could get for it. A guinea may be
      considered as a bill for a certain quantity of necessaries and
      conveniencies upon all the tradesmen in the neighbourhood. The revenue of
      the person to whom it is paid, does not so properly consist in the piece
      of gold, as in what he can get for it, or in what he can exchange it for.
      If it could be exchanged for nothing, it would, like a bill upon a
      bankrupt, be of no more value than the most useless piece of paper.

      Though the weekly or yearly revenue of all the different inhabitants of
      any country, in the same manner, may be, and in reality frequently is,
      paid to them in money, their real riches, however, the real weekly or
      yearly revenue of all of them taken together, must always be great or
      small, in proportion to the quantity of consumable goods which they can
      all of them purchase with this money. The whole revenue of all of them
      taken together is evidently not equal to both the money and the consumable
      goods, but only to one or other of those two values, and to the latter
      more properly than to the former.

      Though we frequently, therefore, express a person’s revenue by the metal
      pieces which are annually paid to him, it is because the amount of those
      pieces regulates the extent of his power of purchasing, or the value of
      the goods which he can annually afford to consume. We still consider his
      revenue as consisting in this power of purchasing or consuming, and not in
      the pieces which convey it.

      But if this is sufficiently evident, even with regard to an individual, it
      is still more so with regard to a society. The amount of the metal pieces
      which are annually paid to an individual, is often precisely equal to his
      revenue, and is upon that account the shortest and best expression of its
      value. But the amount of the metal pieces which circulate in a society,
      can never be equal to the revenue of all its members. As the same guinea
      which pays the weekly pension of one man to-day, may pay that of another
      to-morrow, and that of a third the day thereafter, the amount of the metal
      pieces which annually circulate in any country, must always be of much
      less value than the whole money pensions annually paid with them. But the
      power of purchasing, or the goods which can successively be bought with
      the whole of those money pensions, as they are successively paid, must
      always be precisely of the same value with those pensions; as must
      likewise be the revenue of the different persons to whom they are paid.
      That revenue, therefore, cannot consist in those metal pieces, of which
      the amount is so much inferior to its value, but in the power of
      purchasing, in the goods which can successively be bought with them as
      they circulate from hand to hand.

      Money, therefore, the great wheel of circulation, the great instrument of
      commerce, like all other instruments of trade, though it makes a part, and
      a very valuable part, of the capital, makes no part of the revenue of the
      society to which it belongs; and though the metal pieces of which it is
      composed, in the course of their annual circulation, distribute to every
      man the revenue which properly belongs to him, they make themselves no
      part of that revenue.

      Thirdly, and lastly, the machines and instruments of trade, etc. which
      compose the fixed capital, bear this further resemblance to that part of
      the circulating capital which consists in money; that as every saving in
      the expense of erecting and supporting those machines, which does not
      diminish the introductive powers of labour, is an improvement of the neat
      revenue of the society; so every saving in the expense of collecting and
      supporting that part of the circulating capital which consists in money is
      an improvement of exactly the same kind.

      It is sufficiently obvious, and it has partly, too, been explained
      already, in what manner every saving in the expense of supporting the
      fixed capital is an improvement of the neat revenue of the society. The
      whole capital of the undertaker of every work is necessarily divided
      between his fixed and his circulating capital. While his whole capital
      remains the same, the smaller the one part, the greater must necessarily
      be the other. It is the circulating capital which furnishes the materials
      and wages of labour, and puts industry into motion. Every saving,
      therefore, in the expense of maintaining the fixed capital, which does not
      diminish the productive powers of labour, must increase the fund which
      puts industry into motion, and consequently the annual produce of land and
      labour, the real revenue of every society.

      The substitution of paper in the room of gold and silver money, replaces a
      very expensive instrument of commerce with one much less costly, and
      sometimes equally convenient. Circulation comes to be carried on by a new
      wheel, which it costs less both to erect and to maintain than the old one.
      But in what manner this operation is performed, and in what manner it
      tends to increase either the gross or the neat revenue of the society, is
      not altogether so obvious, and may therefore require some further
      explication.

      There are several different sorts of paper money; but the circulating
      notes of banks and bankers are the species which is best known, and which
      seems best adapted for this purpose.

      When the people of any particular country have such confidence in the
      fortune, probity and prudence of a particular banker, as to believe that
      he is always ready to pay upon demand such of his promissory notes as are
      likely to be at any time presented to him, those notes come to have the
      same currency as gold and silver money, from the confidence that such
      money can at any time be had for them.

      A particular banker lends among his customers his own promissory notes,
      to the extent, we shall suppose, of a hundred thousand pounds. As those
      notes serve all the purposes of money, his debtors pay him the same
      interest as if he had lent them so much money. This interest is the
      source of his gain. Though some of those notes are continually coming
      back upon him for payment, part of them continue to circulate for months
      and years together. Though he has generally in circulation, therefore,
      notes to the extent of a hundred thousand pounds, twenty thousand pounds
      in gold and silver may, frequently, be a sufficient provision for
      answering occasional demands. By this operation, therefore, twenty
      thousand pounds in gold and silver perform all the functions which a
      hundred thousand could otherwise have performed. The same exchanges may
      be made, the same quantity of consumable goods may be circulated and
      distributed to their proper consumers, by means of his promissory notes,
      to the value of a hundred thousand pounds, as by an equal value of gold
      and silver money. Eighty thousand pounds of gold and silver, therefore,
      can in this manner be spared from the circulation of the country; and if
      different operations of the same kind should, at the same time, be
      carried on by many different banks and bankers, the whole circulation may
      thus be conducted with a fifth part only of the gold and silver which
      would otherwise have been requisite.

      Let us suppose, for example, that the whole circulating money of some
      particular country amounted, at a particular time, to one million
      sterling, that sum being then sufficient for circulating the whole annual
      produce of their land and labour; let us suppose, too, that some time
      thereafter, different banks and bankers issued promissory notes payable to
      the bearer, to the extent of one million, reserving in their different
      coffers two hundred thousand pounds for answering occasional demands;
      there would remain, therefore, in circulation, eight hundred thousand
      pounds in gold and silver, and a million of bank notes, or eighteen
      hundred thousand pounds of paper and money together. But the annual
      produce of the land and labour of the country had before required only one
      million to circulate and distribute it to its proper consumers, and that
      annual produce cannot be immediately augmented by those operations of
      banking. One million, therefore, will be sufficient to circulate it after
      them. The goods to be bought and sold being precisely the same as before,
      the same quantity of money will be sufficient for buying and selling them.
      The channel of circulation, if I may be allowed such an expression, will
      remain precisely the same as before. One million we have supposed
      sufficient to fill that channel. Whatever, therefore, is poured into it
      beyond this sum, cannot run into it, but must overflow. One million eight
      hundred thousand pounds are poured into it. Eight hundred thousand pounds,
      therefore, must overflow, that sum being over and above what can be
      employed in the circulation of the country. But though this sum cannot be
      employed at home, it is too valuable to be allowed to lie idle. It will,
      therefore, be sent abroad, in order to seek that profitable employment
      which it cannot find at home. But the paper cannot go abroad; because at a
      distance from the banks which issue it, and from the country in which
      payment of it can be exacted by law, it will not be received in common
      payments. Gold and silver, therefore, to the amount of eight hundred
      thousand pounds, will be sent abroad, and the channel of home circulation
      will remain filled with a million of paper instead of a million of those
      metals which filled it before.

      But though so great a quantity of gold and silver is thus sent abroad, we
      must not imagine that it is sent abroad for nothing, or that its
      proprietors make a present of it to foreign nations. They will exchange it
      for foreign goods of some kind or another, in order to supply the
      consumption either of some other foreign country, or of their own.

      If they employ it in purchasing goods in one foreign country, in order to
      supply the consumption of another, or in what is called the carrying
      trade, whatever profit they make will be in addition to the neat revenue
      of their own country. It is like a new fund, created for carrying on a new
      trade; domestic business being now transacted by paper, and the gold and
      silver being converted into a fund for this new trade.

      If they employ it in purchasing foreign goods for home consumption, they
      may either, first, purchase such goods as are likely to be consumed by
      idle people, who produce nothing, such as foreign wines, foreign silks,
      etc.; or, secondly, they may purchase an additional stock of materials,
      tools, and provisions, in order to maintain and employ an additional
      number of industrious people, who reproduce, with a profit, the value of
      their annual consumption.

      So far as it is employed in the first way, it promotes prodigality,
      increases expense and consumption, without increasing production, or
      establishing any permanent fund for supporting that expense, and is in
      every respect hurtful to the society.

      So far as it is employed in the second way, it promotes industry; and
      though it increases the consumption of the society, it provides a
      permanent fund for supporting that consumption; the people who consume
      reproducing, with a profit, the whole value of their annual consumption.
      The gross revenue of the society, the annual produce of their land and
      labour, is increased by the whole value which the labour of those workmen
      adds to the materials upon which they are employed, and their neat revenue
      by what remains of this value, after deducting what is necessary for
      supporting the tools and instruments of their trade.

      That the greater part of the gold and silver which being forced abroad by
      those operations of banking, is employed in purchasing foreign goods for
      home consumption, is, and must be, employed in purchasing those of this
      second kind, seems not only probable, but almost unavoidable. Though some
      particular men may sometimes increase their expense very considerably,
      though their revenue does not increase at all, we maybe assured that no
      class or order of men ever does so; because, though the principles of
      common prudence do not always govern the conduct of every individual, they
      always influence that of the majority of every class or order. But the
      revenue of idle people, considered as a class or order, cannot, in the
      smallest degree, be increased by those operations of banking. Their
      expense in general, therefore, cannot be much increased by them, though
      that of a few individuals among them may, and in reality sometimes is. The
      demand of idle people, therefore, for foreign goods, being the same, or
      very nearly the same as before, a very small part of the money which,
      being forced abroad by those operations of banking, is employed in
      purchasing foreign goods for home consumption, is likely to be employed in
      purchasing those for their use. The greater part of it will naturally be
      destined for the employment of industry, and not for the maintenance of
      idleness.

      When we compute the quantity of industry which the circulating capital of
      any society can employ, we must always have regard to those parts of it
      only which consist in provisions, materials, and finished work; the other,
      which consists in money, and which serves only to circulate those three,
      must always be deducted. In order to put industry into motion, three
      things are requisite; materials to work upon, tools to work with, and the
      wages or recompence for the sake of which the work is done. Money is
      neither a material to work upon, nor a tool to work with; and though the
      wages of the workman are commonly paid to him in money, his real revenue,
      like that of all other men, consists, not in the money, but in the money’s
      worth; not in the metal pieces, but in what can be got for them.

      The quantity of industry which any capital can employ, must evidently be
      equal to the number of workmen whom it can supply with materials, tools,
      and a maintenance suitable to the nature of the work. Money may be
      requisite for purchasing the materials and tools of the work, as well as
      the maintenance of the workmen; but the quantity of industry which the
      whole capital can employ, is certainly not equal both to the money which
      purchases, and to the materials, tools, and maintenance, which are
      purchased with it, but only to one or other of those two values, and to
      the latter more properly than to the former.

      When paper is substituted in the room of gold and silver money, the
      quantity of the materials, tools, and maintenance, which the whole
      circulating capital can supply, may be increased by the whole value of
      gold and silver which used to be employed in purchasing them. The whole
      value of the great wheel of circulation and distribution is added to the
      goods which are circulated and distributed by means of it. The operation,
      in some measure, resembles that of the undertaker of some great work, who,
      in consequence of some improvement in mechanics, takes down his old
      machinery, and adds the difference between its price and that of the new
      to his circulating capital, to the fund from which he furnishes materials
      and wages to his workmen.

      What is the proportion which the circulating money of any country bears to
      the whole value of the annual produce circulated by means of it, it is
      perhaps impossible to determine. It has been computed by different authors
      at a fifth, at a tenth, at a twentieth, and at a thirtieth, part of that
      value. But how small soever the proportion which the circulating money may
      bear to the whole value of the annual produce, as but a part, and
      frequently but a small part, of that produce, is ever destined for the
      maintenance of industry, it must always bear a very considerable
      proportion to that part. When, therefore, by the substitution of paper,
      the gold and silver necessary for circulation is reduced to, perhaps, a
      fifth part of the former quantity, if the value of only the greater part
      of the other four-fifths be added to the funds which are destined for the
      maintenance of industry, it must make a very considerable addition to the
      quantity of that industry, and, consequently, to the value of the annual
      produce of land and labour.

      An operation of this kind has, within these five-and-twenty or thirty
      years, been performed in Scotland, by the erection of new banking
      companies in almost every considerable town, and even in some country
      villages. The effects of it have been precisely those above described. The
      business of the country is almost entirely carried on by means of the
      paper of those different banking companies, with which purchases and
      payments of all kinds are commonly made. Silver very seldom appears,
      except in the change of a twenty shilling bank note, and gold still
      seldomer. But though the conduct of all those different companies has not
      been unexceptionable, and has accordingly required an act of parliament to
      regulate it, the country, notwithstanding, has evidently derived great
      benefit from their trade. I have heard it asserted, that the trade of the
      city of Glasgow doubled in about fifteen years after the first erection of
      the banks there; and that the trade of Scotland has more than quadrupled
      since the first erection of the two public banks at Edinburgh; of which
      the one, called the Bank of Scotland, was established by act of parliament
      in 1695, and the other, called the Royal Bank, by royal charter in 1727.
      Whether the trade, either of Scotland in general, or of the city of
      Glasgow in particular, has really increased in so great a proportion,
      during so short a period, I do not pretend to know. If either of them has
      increased in this proportion, it seems to be an effect too great to be
      accounted for by the sole operation of this cause. That the trade and
      industry of Scotland, however, have increased very considerably during
      this period, and that the banks have contributed a good deal to this
      increase, cannot be doubted.

      The value of the silver money which circulated in Scotland before the
      Union in 1707, and which, immediately after it, was brought into the Bank
      of Scotland, in order to be recoined, amounted to £411,117: 10: 9
      sterling. No account has been got of the gold coin; but it appears from
      the ancient accounts of the mint of Scotland, that the value of the gold
      annually coined somewhat exceeded that of the silver. There were a good
      many people, too, upon this occasion, who, from a diffidence of repayment,
      did not bring their silver into the Bank of Scotland; and there was,
      besides, some English coin, which was not called in. The whole value of
      the gold and silver, therefore, which circulated in Scotland before the
      Union, cannot be estimated at less than a million sterling. It seems to
      have constituted almost the whole circulation of that country; for though
      the circulation of the Bank of Scotland, which had then no rival, was
      considerable, it seems to have made but a very small part of the whole. In
      the present times, the whole circulation of Scotland cannot be estimated
      at less than two millions, of which that part which consists in gold and
      silver, most probably, does not amount to half a million. But though the
      circulating gold and silver of Scotland have suffered so great a
      diminution during this period, its real riches and prosperity do not
      appear to have suffered any. Its agriculture, manufactures, and trade, on
      the contrary, the annual produce of its land and labour, have evidently
      been augmented.

      It is chiefly by discounting bills of exchange, that is, by advancing
      money upon them before they are due, that the greater part of banks and
      bankers issue their promissory notes. They deduct always, upon whatever
      sum they advance, the legal interest till the bill shall become due. The
      payment of the bill, when it becomes due, replaces to the bank the value
      of what had been advanced, together with a clear profit of the interest.
      The banker, who advances to the merchant whose bill he discounts, not gold
      and silver, but his own promissory notes, has the advantage of being able
      to discount to a greater amount by the whole value of his promissory
      notes, which he finds, by experience, are commonly in circulation. He is
      thereby enabled to make his clear gain of interest on so much a larger
      sum.

      The commerce of Scotland, which at present is not very great, was still
      more inconsiderable when the two first banking companies were established;
      and those companies would have had but little trade, had they confined
      their business to the discounting of bills of exchange. They invented,
      therefore, another method of issuing their promissory notes; by granting
      what they call cash accounts, that is, by giving credit, to the extent of
      a certain sum (two or three thousand pounds for example), to any
      individual who could procure two persons of undoubted credit and good
      landed estate to become surety for him, that whatever money should be
      advanced to him, within the sum for which the credit had been given,
      should be repaid upon demand, together with the legal interest. Credits of
      this kind are, I believe, commonly granted by banks and bankers in all
      different parts of the world. But the easy terms upon which the Scotch
      banking companies accept of repayment are, so far as I know, peculiar to
      them, and have perhaps been the principal cause, both of the great trade
      of those companies, and of the benefit which the country has received from
      it.

      Whoever has a credit of this kind with one of those companies, and borrows
      a thousand pounds upon it, for example, may repay this sum piece-meal, by
      twenty and thirty pounds at a time, the company discounting a
      proportionable part of the interest of the great sum, from the day on
      which each of those small sums is paid in, till the whole be in this
      manner repaid. All merchants, therefore, and almost all men of business,
      find it convenient to keep such cash accounts with them, and are thereby
      interested to promote the trade of those companies, by readily receiving
      their notes in all payments, and by encouraging all those with whom they
      have any influence to do the same. The banks, when their customers apply
      to them for money, generally advance it to them in their own promissory
      notes. These the merchants pay away to the manufacturers for goods, the
      manufacturers to the farmers for materials and provisions, the farmers to
      their landlords for rent; the landlords repay them to the merchants for
      the conveniencies and luxuries with which they supply them, and the
      merchants again return them to the banks, in order to balance their cash
      accounts, or to replace what they may have borrowed of them; and thus
      almost the whole money business of the country is transacted by means of
      them. Hence the great trade of those companies.

      By means of those cash accounts, every merchant can, without imprudence,
      carry on a greater trade than he otherwise could do. If there are two
      merchants, one in London and the other in Edinburgh, who employ equal
      stocks in the same branch of trade, the Edinburgh merchant can, without
      imprudence, carry on a greater trade, and give employment to a greater
      number of people, than the London merchant. The London merchant must
      always keep by him a considerable sum of money, either in his own coffers,
      or in those of his banker, who gives him no interest for it, in order to
      answer the demands continually coming upon him for payment of the goods
      which he purchases upon credit. Let the ordinary amount of this sum be
      supposed five hundred pounds; the value of the goods in his warehouse must
      always be less, by five hundred pounds, than it would have been, had he
      not been obliged to keep such a sum unemployed. Let us suppose that he
      generally disposes of his whole stock upon hand, or of goods to the value
      of his whole stock upon hand, once in the year. By being obliged to keep
      so great a sum unemployed, he must sell in a year five hundred pounds
      worth less goods than he might otherwise have done. His annual profits
      must be less by all that he could have made by the sale of five hundred
      pounds worth more goods; and the number of people employed in preparing
      his goods for the market must be less by all those that five hundred
      pounds more stock could have employed. The merchant in Edinburgh, on the
      other hand, keeps no money unemployed for answering such occasional
      demands. When they actually come upon him, he satisfies them from his cash
      account with the bank, and gradually replaces the sum borrowed with the
      money or paper which comes in from the occasional sales of his goods. With
      the same stock, therefore, he can, without imprudence, have at all times
      in his warehouse a larger quantity of goods than the London merchant; and
      can thereby both make a greater profit himself, and give constant
      employment to a greater number of industrious people who prepare those
      goods for the market. Hence the great benefit which the country has
      derived from this trade.

      The facility of discounting bills of exchange, it may be thought, indeed,
      gives the English merchants a conveniency equivalent to the cash accounts
      of the Scotch merchants. But the Scotch merchants, it must be remembered,
      can discount their bills of exchange as easily as the English merchants;
      and have, besides, the additional conveniency of their cash accounts.

      The whole paper money of every kind which can easily circulate in any
      country, never can exceed the value of the gold and silver, of which it
      supplies the place, or which (the commerce being supposed the same) would
      circulate there, if there was no paper money. If twenty shilling notes,
      for example, are the lowest paper money current in Scotland, the whole of
      that currency which can easily circulate there, cannot exceed the sum of
      gold and silver which would be necessary for transacting the annual
      exchanges of twenty shillings value and upwards usually transacted within
      that country. Should the circulating paper at any time exceed that sum, as
      the excess could neither be sent abroad nor be employed in the circulation
      of the country, it must immediately return upon the banks, to be exchanged
      for gold and silver. Many people would immediately perceive that they had
      more of this paper than was necessary for transacting their business at
      home; and as they could not send it abroad, they would immediately demand
      payment for it from the banks. When this superfluous paper was converted
      into gold and silver, they could easily find a use for it, by sending it
      abroad; but they could find none while it remained in the shape of paper.
      There would immediately, therefore, be a run upon the banks to the whole
      extent of this superfluous paper, and if they showed any difficulty or
      backwardness in payment, to a much greater extent; the alarm which this
      would occasion necessarily increasing the run.

      Over and above the expenses which are common to every branch of trade,
      such as the expense of house-rent, the wages of servants, clerks,
      accountants, etc. the expenses peculiar to a bank consist chiefly in two
      articles: first, in the expense of keeping at all times in its coffers,
      for answering the occasional demands of the holders of its notes, a large
      sum of money, of which it loses the interest; and, secondly, in the
      expense of replenishing those coffers as fast as they are emptied by
      answering such occasional demands.

      A banking company which issues more paper than can be employed in the
      circulation of the country, and of which the excess is continually
      returning upon them for payment, ought to increase the quantity of gold
      and silver which they keep at all times in their coffers, not only in
      proportion to this excessive increase of their circulation, but in a much
      greater proportion; their notes returning upon them much faster than in
      proportion to the excess of their quantity. Such a company, therefore,
      ought to increase the first article of their expense, not only in
      proportion to this forced increase of their business, but in a much
      greater proportion.

      The coffers of such a company, too, though they ought to be filled much
      fuller, yet must empty themselves much faster than if their business was
      confined within more reasonable bounds, and must require not only a more
      violent, but a more constant and uninterrupted exertion of expense, in
      order to replenish them, The coin, too, which is thus continually drawn in
      such large quantities from their coffers, cannot be employed in the
      circulation of the country. It comes in place of a paper which is over and
      above what can be employed in that circulation, and is, therefore, over
      and above what can be employed in it too. But as that coin will not be
      allowed to lie idle, it must, in one shape or another, be sent abroad, in
      order to find that profitable employment which it cannot find at home; and
      this continual exportation of gold and silver, by enhancing the
      difficulty, must necessarily enhance still farther the expense of the
      bank, in finding new gold and silver in order to replenish those coffers,
      which empty themselves so very rapidly. Such a company, therefore, must in
      proportion to this forced increase of their business, increase the second
      article of their expense still more than the first.

      Let us suppose that all the paper of a particular bank, which the
      circulation of the country can easily absorb and employ, amounts exactly
      to forty thousand pounds, and that, for answering occasional demands, this
      bank is obliged to keep at all times in its coffers ten thousand pounds in
      gold and silver. Should this bank attempt to circulate forty-four thousand
      pounds, the four thousand pounds which are over and above what the
      circulation can easily absorb and employ, will return upon it almost as
      fast as they are issued. For answering occasional demands, therefore, this
      bank ought to keep at all times in its coffers, not eleven thousand pounds
      only, but fourteen thousand pounds. It will thus gain nothing by the
      interest of the four thousand pounds excessive circulation; and it will
      lose the whole expense of continually collecting four thousand pounds in
      gold and silver, which will be continually going out of its coffers as
      fast as they are brought into them.

      Had every particular banking company always understood and attended to its
      own particular interest, the circulation never could have been overstocked
      with paper money. But every particular banking company has not always
      understood or attended to its own particular interest, and the circulation
      has frequently been overstocked with paper money.

      By issuing too great a quantity of paper, of which the excess was
      continually returning, in order to be exchanged for gold and silver, the
      Bank of England was for many years together obliged to coin gold to the
      extent of between eight hundred thousand pounds and a million a-year; or,
      at an average, about eight hundred and fifty thousand pounds. For this
      great coinage, the bank (in consequence of the worn and degraded state into
      which the gold coin had fallen a few years ago) was frequently obliged to
      purchase gold bullion at the high price of four pounds an ounce, which it
      soon after issued in coin at £3:17:10 ½ an ounce, losing in this manner
      between two and a half and three per cent. upon the coinage of so very
      large a sum. Though the bank, therefore, paid no seignorage, though the
      government was properly at the expense of this coinage, this liberality of
      government did not prevent altogether the expense of the bank.

      The Scotch banks, in consequence of an excess of the same kind, were all
      obliged to employ constantly agents at London to collect money for them,
      at an expense which was seldom below one and a half or two per cent. This
      money was sent down by the waggon, and insured by the carriers at an
      additional expense of three quarters per cent. or fifteen shillings on the
      hundred pounds. Those agents were not always able to replenish the coffers
      of their employers so fast as they were emptied. In this case, the
      resource of the banks was, to draw upon their correspondents in London
      bills of exchange, to the extent of the sum which they wanted. When those
      correspondents afterwards drew upon them for the payment of this sum,
      together with the interest and commission, some of those banks, from the
      distress into which their excessive circulation had thrown them, had
      sometimes no other means of satisfying this draught, but by drawing a
      second set of bills, either upon the same, or upon some other
      correspondents in London; and the same sum, or rather bills for the same
      sum, would in this manner make sometimes more than two or three journeys;
      the debtor bank paying always the interest and commission upon the whole
      accumulated sum. Even those Scotch banks which never distinguished
      themselves by their extreme imprudence, were sometimes obliged to employ
      this ruinous resource.

      The gold coin which was paid out, either by the Bank of England or by the
      Scotch banks, in exchange for that part of their paper which was over and
      above what could be employed in the circulation of the country, being
      likewise over and above what could be employed in that circulation, was
      sometimes sent abroad in the shape of coin, sometimes melted down and sent
      abroad in the shape of bullion, and sometimes melted down and sold to the
      Bank of England at the high price of four pounds an ounce. It was the
      newest, the heaviest, and the best pieces only, which were carefully
      picked out of the whole coin, and either sent abroad or melted down. At
      home, and while they remained in the shape of coin, those heavy pieces
      were of no more value than the light; but they were of more value abroad,
      or when melted down into bullion at home. The Bank of England,
      notwithstanding their great annual coinage, found, to their astonishment,
      that there was every year the same scarcity of coin as there had been the
      year before; and that, notwithstanding the great quantity of good and new
      coin which was every year issued from the bank, the state of the coin,
      instead of growing better and better, became every year worse and worse.
      Every year they found themselves under the necessity of coining nearly the
      same quantity of gold as they had coined the year before; and from the
      continual rise in the price of gold bullion, in consequence of the
      continual wearing and clipping of the coin, the expense of this great
      annual coinage became, every year, greater and greater. The Bank of
      England, it is to be observed, by supplying its own coffers with coin, is
      indirectly obliged to supply the whole kingdom, into which coin is
      continually flowing from those coffers in a great variety of ways.
      Whatever coin, therefore, was wanted to support this excessive circulation
      both of Scotch and English paper money, whatever vacuities this excessive
      circulation occasioned in the necessary coin of the kingdom, the Bank of
      England was obliged to supply them. The Scotch banks, no doubt, paid all
      of them very dearly for their own imprudence and inattention: but the Bank
      of England paid very dearly, not only for its own imprudence, but for the
      much greater imprudence of almost all the Scotch banks.

      The over-trading of some bold projectors in both parts of the united
      kingdom, was the original cause of this excessive circulation of paper
      money.

      What a bank can with propriety advance to a merchant or undertaker of any
      kind, is not either the whole capital with which he trades, or even any
      considerable part of that capital; but that part of it only which he would
      otherwise be obliged to keep by him unemployed and in ready money, for
      answering occasional demands. If the paper money which the bank advances
      never exceeds this value, it can never exceed the value of the gold and
      silver which would necessarily circulate in the country if there was no
      paper money; it can never exceed the quantity which the circulation of the
      country can easily absorb and employ.

      When a bank discounts to a merchant a real bill of exchange, drawn by a
      real creditor upon a real debtor, and which, as soon as it becomes due, is
      really paid by that debtor; it only advances to him a part of the value
      which he would otherwise be obliged to keep by him unemployed and in ready
      money, for answering occasional demands. The payment of the bill, when it
      becomes due, replaces to the bank the value of what it had advanced,
      together with the interest. The coffers of the bank, so far as its
      dealings are confined to such customers, resemble a water-pond, from
      which, though a stream is continually running out, yet another is
      continually running in, fully equal to that which runs out; so that,
      without any further care or attention, the pond keeps always equally, or
      very near equally full. Little or no expense can ever be necessary for
      replenishing the coffers of such a bank.

      A merchant, without over-trading, may frequently have occasion for a sum
      of ready money, even when he has no bills to discount. When a bank,
      besides discounting his bills, advances him likewise, upon such occasions,
      such sums upon his cash account, and accepts of a piece-meal repayment, as
      the money comes in from the occasional sale of his goods, upon the easy
      terms of the banking companies of Scotland; it dispenses him entirely from
      the necessity of keeping any part of his stock by him unemployed and in
      ready money for answering occasional demands. When such demands actually
      come upon him, he can answer them sufficiently from his cash account. The
      bank, however, in dealing with such customers, ought to observe with great
      attention, whether, in the course of some short period (of four, five,
      six, or eight months, for example), the sum of the repayments which it
      commonly receives from them, is, or is not, fully equal to that of the
      advances which it commonly makes to them. If, within the course of such
      short periods, the sum of the repayments from certain customers is, upon
      most occasions, fully equal to that of the advances, it may safely
      continue to deal with such customers. Though the stream which is in this
      case continually running out from its coffers may be very large, that
      which is continually running into them must be at least equally large, so
      that, without any further care or attention, those coffers are likely to
      be always equally or very near equally full, and scarce ever to require
      any extraordinary expense to replenish them. If, on the contrary, the sum
      of the repayments from certain other customers, falls commonly very much
      short of the advances which it makes to them, it cannot with any safety
      continue to deal with such customers, at least if they continue to deal
      with it in this manner. The stream which is in this case continually
      running out from its coffers, is necessarily much larger than that which
      is continually running in; so that, unless they are replenished by some
      great and continual effort of expense, those coffers must soon be
      exhausted altogether.

      The banking companies of Scotland, accordingly, were for a long time very
      careful to require frequent and regular repayments from all their
      customers, and did not care to deal with any person, whatever might be his
      fortune or credit, who did not make, what they called, frequent and
      regular operations with them. By this attention, besides saving almost
      entirely the extraordinary expense of replenishing their coffers, they
      gained two other very considerable advantages.

      First, by this attention they were enabled to make some tolerable judgment
      concerning the thriving or declining circumstances of their debtors,
      without being obliged to look out for any other evidence besides what
      their own books afforded them; men being, for the most part, either
      regular or irregular in their repayments, according as their circumstances
      are either thriving or declining. A private man who lends out his money to
      perhaps half a dozen or a dozen of debtors, may, either by himself or his
      agents, observe and inquire both constantly and carefully into the conduct
      and situation of each of them. But a banking company, which lends money to
      perhaps five hundred different people, and of which the attention is
      continually occupied by objects of a very different kind, can have no
      regular information concerning the conduct and circumstances of the
      greater part of its debtors, beyond what its own books afford it. In
      requiring frequent and regular repayments from all their customers, the
      banking companies of Scotland had probably this advantage in view.

      Secondly, by this attention they secured themselves from the possibility
      of issuing more paper money than what the circulation of the country could
      easily absorb and employ. When they observed, that within moderate periods
      of time, the repayments of a particular customer were, upon most
      occasions, fully equal to the advances which they had made to him, they
      might be assured that the paper money which they had advanced to him had
      not, at any time, exceeded the quantity of gold and silver which he would
      otherwise have been obliged to keep by him for answering occasional
      demands; and that, consequently, the paper money, which they had
      circulated by his means, had not at any time exceeded the quantity of gold
      and silver which would have circulated in the country, had there been no
      paper money. The frequency, regularity, and amount of his repayments,
      would sufficiently demonstrate that the amount of their advances had at no
      time exceeded that part of his capital which he would otherwise have been
      obliged to keep by him unemployed, and in ready money, for answering
      occasional demands; that is, for the purpose of keeping the rest of his
      capital in constant employment. It is this part of his capital only which,
      within moderate periods of time, is continually returning to every dealer
      in the shape of money, whether paper or coin, and continually going from
      him in the same shape. If the advances of the bank had commonly exceeded
      this part of his capital, the ordinary amount of his repayments could not,
      within moderate periods of time, have equalled the ordinary amount of its
      advances. The stream which, by means of his dealings, was continually
      running into the coffers of the bank, could not have been equal to the
      stream which, by means of the same dealings was continually running out.
      The advances of the bank paper, by exceeding the quantity of gold and
      silver which, had there been no such advances, he would have been obliged
      to keep by him for answering occasional demands, might soon come to exceed
      the whole quantity of gold and silver which ( the commerce being supposed
      the same ) would have circulated in the country, had there been no paper
      money; and, consequently, to exceed the quantity which the circulation of
      the country could easily absorb and employ; and the excess of this paper
      money would immediately have returned upon the bank, in order to be
      exchanged for gold and silver. This second advantage, though equally real,
      was not, perhaps, so well understood by all the different banking
      companies in Scotland as the first.

      When, partly by the conveniency of discounting bills, and partly by that
      of cash accounts, the creditable traders of any country can be dispensed
      from the necessity of keeping any part of their stock by them unemployed,
      and in ready money, for answering occasional demands, they can reasonably
      expect no farther assistance from hanks and bankers, who, when they have
      gone thus far, cannot, consistently with their own interest and safety, go
      farther. A bank cannot, consistently with its own interest, advance to a
      trader the whole, or even the greater part of the circulating capital with
      which he trades; because, though that capital is continually returning to
      him in the shape of money, and going from him in the same shape, yet the
      whole of the returns is too distant from the whole of the outgoings, and
      the sum of his repayments could not equal the sum of his advances within
      such moderate periods of time as suit the conveniency of a bank. Still
      less could a bank afford to advance him any considerable part of his fixed
      capital; of the capital which the undertaker of an iron forge, for
      example, employs in erecting his forge and smelting-houses, his
      work-houses, and warehouses, the dwelling-houses of his workmen, etc.; of
      the capital which the undertaker of a mine employs in sinking his shafts,
      in erecting engines for drawing out the water, in making roads and
      waggon-ways, etc.; of the capital which the person who undertakes to
      improve land employs in clearing, draining, inclosing, manuring, and
      ploughing waste and uncultivated fields; in building farmhouses, with all
      their necessary appendages of stables, granaries, etc. The returns of the
      fixed capital are, in almost all cases, much slower than those of the
      circulating capital: and such expenses, even when laid out with the
      greatest prudence and judgment, very seldom return to the undertaker till
      after a period of many years, a period by far too distant to suit the
      conveniency of a bank. Traders and other undertakers may, no doubt with
      great propriety, carry on a very considerable part of their projects with
      borrowed money. In justice to their creditors, however, their own capital
      ought in this case to be sufficient to insure, if I may say so, the
      capital of those creditors; or to render it extremely improbable that
      those creditors should incur any loss, even though the success of the
      project should fall very much short of the expectation of the projectors.
      Even with this precaution, too, the money which is borrowed, and which it
      is meant should not be repaid till after a period of several years, ought
      not to be borrowed of a bank, but ought to be borrowed upon bond or
      mortgage, of such private people as propose to live upon the interest of
      their money, without taking the trouble themselves to employ the capital,
      and who are, upon that account, willing to lend that capital to such
      people of good credit as are likely to keep it for several years. A bank,
      indeed, which lends its money without the expense of stamped paper, or of
      attorneys’ fees for drawing bonds and mortgages, and which accepts of
      repayment upon the easy terms of the banking companies of Scotland, would,
      no doubt, be a very convenient creditor to such traders and undertakers.
      But such traders and undertakers would surely be most inconvenient debtors
      to such a bank.

      It is now more than five and twenty years since the paper money issued by
      the different banking companies of Scotland was fully equal, or rather was
      somewhat more than fully equal, to what the circulation of the country
      could easily absorb and employ. Those companies, therefore, had so long
      ago given all the assistance to the traders and other undertakers of
      Scotland which it is possible for banks and bankers, consistently with
      their own interest, to give. They had even done somewhat more. They had
      over-traded a little, and had brought upon themselves that loss, or at
      least that diminution of profit, which, in this particular business, never
      fails to attend the smallest degree of over-trading. Those traders and
      other undertakers, having got so much assistance from banks and bankers,
      wished to get still more. The banks, they seem to have thought, could
      extend their credits to whatever sum might be wanted, without incurring
      any other expense besides that of a few reams of paper. They complained of
      the contracted views and dastardly spirit of the directors of those banks,
      which did not, they said, extend their credits in proportion to the
      extension of the trade of the country; meaning, no doubt, by the extension
      of that trade, the extension of their own projects beyond what they could
      carry on either with their own capital, or with what they had credit to
      borrow of private people in the usual way of bond or mortgage. The banks,
      they seem to have thought, were in honour bound to supply the deficiency,
      and to provide them with all the capital which they wanted to trade with.
      The banks, however, were of a different opinion; and upon their refusing
      to extend their credits, some of those traders had recourse to an
      expedient which, for a time, served their purpose, though at a much
      greater expense, yet as effectually as the utmost extension of bank
      credits could have done. This expedient was no other than the well known
      shift of drawing and redrawing; the shift to which unfortunate traders
      have sometimes recourse, when they are upon the brink of bankruptcy. The
      practice of raising money in this manner had been long known in England;
      and, during the course of the late war, when the high profits of trade
      afforded a great temptation to over-trading, is said to have been carried
      on to a very great extent. From England it was brought into Scotland,
      where, in proportion to the very limited commerce, and to the very
      moderate capital of the country, it was soon carried on to a much greater
      extent than it ever had been in England.

      The practice of drawing and redrawing is so well known to all men of
      business, that it may, perhaps, be thought unnecessary to give any account
      of it. But as this book may come into the hands of many people who are not
      men of business, and as the effects of this practice upon the banking
      trade are not, perhaps, generally understood, even by men of business
      themselves, I shall endeavour to explain it as distinctly as I can.

      The customs of merchants, which were established when the barbarous laws
      of Europe did not enforce the performance of their contracts, and which,
      during the course of the two last centuries, have been adopted into the
      laws of all European nations, have given such extraordinary privileges to
      bills of exchange, that money is more readily advanced upon them than upon
      any other species of obligation; especially when they are made payable
      within so short a period as two or three months after their date. If, when
      the bill becomes due, the acceptor does not pay it as soon as it is
      presented, he becomes from that moment a bankrupt. The bill is protested,
      and returns upon the drawer, who, if he does not immediately pay it,
      becomes likewise a bankrupt. If, before it came to the person who presents
      it to the acceptor for payment, it had passed through the hands of several
      other persons, who had successively advanced to one another the contents
      of it, either in money or goods, and who, to express that each of them had
      in his turn received those contents, had all of them in their order
      indorsed, that is, written their names upon the back of the bill; each
      indorser becomes in his turn liable to the owner of the bill for those
      contents, and, if he fails to pay, he becomes too, from that moment, a
      bankrupt. Though the drawer, acceptor, and indorsers of the bill, should
      all of them be persons of doubtful credit; yet, still the shortness of the
      date gives some security to the owner of the bill. Though all of them may
      be very likely to become bankrupts, it is a chance if they all become so
      in so short a time. The house is crazy, says a weary traveller to himself,
      and will not stand very long; but it is a chance if it falls to-night, and
      I will venture, therefore, to sleep in it to-night.

      The trader A in Edinburgh, we shall suppose, draws a bill upon B in
      London, payable two months after date. In reality B in London owes nothing
      to A in Edinburgh; but he agrees to accept of A’s bill, upon condition,
      that before the term of payment he shall redraw upon A in Edinburgh for
      the same sum, together with the interest and a commission, another bill,
      payable likewise two months after date. B accordingly, before the
      expiration of the first two months, redraws this bill upon A in Edinburgh;
      who, again before the expiration of the second two months, draws a second
      bill upon B in London, payable likewise two months after date; and before
      the expiration of the third two months, B in London redraws upon A in
      Edinburgh another bill payable also two months after date. This practice
      has sometimes gone on, not only for several months, but for several years
      together, the bill always returning upon A in Edinburgh with the
      accumulated interest and commission of all the former bills. The interest
      was five per cent. in the year, and the commission was never less than one
      half per cent. on each draught. This commission being repeated more than
      six times in the year, whatever money A might raise by this expedient
      might necessarily have cost him something more than eight per cent. in the
      year and sometimes a great deal more, when either the price of the
      commission happened to rise, or when he was obliged to pay compound
      interest upon the interest and commission of former bills. This practice
      was called raising money by circulation.

      In a country where the ordinary profits of stock, in the greater part of
      mercantile projects, are supposed to run between six and ten per cent. it
      must have been a very fortunate speculation, of which the returns could
      not only repay the enormous expense at which the money was thus borrowed
      for carrying it on, but afford, besides, a good surplus profit to the
      projector. Many vast and extensive projects, however, were undertaken, and
      for several years carried on, without any other fund to support them
      besides what was raised at this enormous expense. The projectors, no
      doubt, had in their golden dreams the most distinct vision of this great
      profit. Upon their awakening, however, either at the end of their
      projects, or when they were no longer able to carry them on, they very
      seldom, I believe, had the good fortune to find it.

      {The method described in the text was by no means either the most common
      or the most expensive one in which those adventurers sometimes raised
      money by circulation. It frequently happened, that A in Edinburgh would
      enable B in London to pay the first bill of exchange, by drawing, a few
      days before it became due, a second bill at three months date upon the
      same B in London. This bill, being payable to his own order, A sold in
      Edinburgh at par; and with its contents purchased bills upon London,
      payable at sight to the order of B, to whom he sent them by the post.
      Towards the end of the late war, the exchange between Edinburgh and London
      was frequently three per cent. against Edinburgh, and those bills at sight
      must frequently have cost A that premium. This transaction, therefore,
      being repeated at least four times in the year, and being loaded with a
      commission of at least one half per cent. upon each repetition, must at
      that period have cost A, at least, fourteen per cent. in the year. At
      other times A would enable to discharge the first bill of exchange, by
      drawing, a few days before it became due, a second bill at two months
      date, not upon B, but upon some third person, C, for example, in London.
      This other bill was made payable to the order of B, who, upon its being
      accepted by C, discounted it with some banker in London; and A enabled C
      to discharge it, by drawing, a few day’s before it became due, a third
      bill likewise at two months date, sometimes upon his first correspondent
      B, and sometimes upon some fourth or fifth person, D or E, for example.
      This third bill was made payable to the order of C, who, as soon as it was
      accepted, discounted it in the same manner with some banker in London.
      Such operations being repeated at least six times in the year, and being
      loaded with a commission of at least one half per cent. upon each
      repetition, together with the legal interest of five per cent. this method
      of raising money, in the same manner as that described in the text, must
      have cost A something more than eight per cent. By saving, however, the
      exchange between Edinburgh and London, it was less expensive than that
      mentioned in the foregoing part of this note; but then it required an
      established credit with more houses than one in London, an advantage which
      many of these adventurers could not always find it easy to procure.}

      The bills which A in Edinburgh drew upon B in London, he regularly
      discounted two months before they were due, with some bank or banker in
      Edinburgh; and the bills which B in London redrew upon A in Edinburgh, he
      as regularly discounted, either with the Bank of England, or with some
      other banker in London. Whatever was advanced upon such circulating bills
      was in Edinburgh advanced in the paper of the Scotch banks; and in London,
      when they were discounted at the Bank of England in the paper of that
      bank. Though the bills upon which this paper had been advanced were all of
      them repaid in their turn as soon as they became due, yet the value which
      had been really advanced upon the first bill was never really returned to
      the banks which advanced it; because, before each bill became due, another
      bill was always drawn to somewhat a greater amount than the bill which was
      soon to be paid: and the discounting of this other bill was essentially
      necessary towards the payment of that which was soon to be due. This
      payment, therefore, was altogether fictitious. The stream which, by means
      of those circulating bills of exchange, had once been made to run out from
      the coffers of the banks, was never replaced by any stream which really
      ran into them.

      The paper which was issued upon those circulating bills of exchange
      amounted, upon many occasions, to the whole fund destined for carrying on
      some vast and extensive project of agriculture, commerce, or manufactures;
      and not merely to that part of it which, had there been no paper money,
      the projector would have been obliged to keep by him unemployed, and in
      ready money, for answering occasional demands. The greater part of this
      paper was, consequently, over and above the value of the gold and silver
      which would have circulated in the country, had there been no paper money.
      It was over and above, therefore, what the circulation of the country
      could easily absorb and employ, and upon that account, immediately
      returned upon the banks, in order to be exchanged for gold and silver,
      which they were to find as they could. It was a capital which those
      projectors had very artfully contrived to draw from those banks, not only
      without their knowledge or deliberate consent, but for some time, perhaps,
      without their having the most distant suspicion that they had really
      advanced it.

      When two people, who are continually drawing and redrawing upon one
      another, discount their bills always with the same banker, he must
      immediately discover what they are about, and see clearly that they are
      trading, not with any capital of their own, but with the capital which he
      advances to them. But this discovery is not altogether so easy when they
      discount their bills sometimes with one banker, and sometimes with
      another, and when the two same persons do not constantly draw and redraw
      upon one another, but occasionally run the round of a great circle of
      projectors, who find it for their interest to assist one another in this
      method of raising money and to render it, upon that account, as difficult
      as possible to distinguish between a real and a fictitious bill of
      exchange, between a bill drawn by a real creditor upon a real debtor, and
      a bill for which there was properly no real creditor but the bank which
      discounted it, nor any real debtor but the projector who made use of the
      money. When a banker had even made this discovery, he might sometimes make
      it too late, and might find that he had already discounted the bills of
      those projectors to so great an extent, that, by refusing to discount any
      more, he would necessarily make them all bankrupts; and thus by ruining
      them, might perhaps ruin himself. For his own interest and safety,
      therefore, he might find it necessary, in this very perilous situation, to
      go on for some time, endeavouring, however, to withdraw gradually, and,
      upon that account, making every day greater and greater difficulties about
      discounting, in order to force these projectors by degrees to have
      recourse, either to other bankers, or to other methods of raising money:
      so as that he himself might, as soon as possible, get out of the circle.
      The difficulties, accordingly, which the Bank of England, which the
      principal bankers in London, and which even the more prudent Scotch banks
      began, after a certain time, and when all of them had already gone too
      far, to make about discounting, not only alarmed, but enraged, in the
      highest degree, those projectors. Their own distress, of which this
      prudent and necessary reserve of the banks was, no doubt, the immediate
      occasion, they called the distress of the country; and this distress of
      the country, they said, was altogether owing to the ignorance,
      pusillanimity, and bad conduct of the banks, which did not give a
      sufficiently liberal aid to the spirited undertakings of those who exerted
      themselves in order to beautify, improve, and enrich the country. It was
      the duty of the banks, they seemed to think, to lend for as long a time,
      and to as great an extent, as they might wish to borrow. The banks,
      however, by refusing in this manner to give more credit to those to whom
      they had already given a great deal too much, took the only method by
      which it was now possible to save either their own credit, or the public
      credit of the country.

      In the midst of this clamour and distress, a new bank was established in
      Scotland, for the express purpose of relieving the distress of the
      country. The design was generous; but the execution was imprudent, and the
      nature and causes of the distress which it meant to relieve, were not,
      perhaps, well understood. This bank was more liberal than any other had
      ever been, both in granting cash-accounts, and in discounting bills of
      exchange. With regard to the latter, it seems to have made scarce any
      distinction between real and circulating bills, but to have discounted all
      equally. It was the avowed principle of this bank to advance upon any
      reasonable security, the whole capital which was to be employed in those
      improvements of which the returns are the most slow and distant, such as
      the improvements of land. To promote such improvements was even said to be
      the chief of the public-spirited purposes for which it was instituted. By
      its liberality in granting cash-accounts, and in discounting bills of
      exchange, it, no doubt, issued great quantities of its bank notes. But
      those bank notes being, the greater part of them, over and above what the
      circulation of the country could easily absorb and employ, returned upon
      it, in order to be exchanged for gold and silver, as fast as they were
      issued. Its coffers were never well filled. The capital which had been
      subscribed to this bank, at two different subscriptions, amounted to one
      hundred and sixty thousand pounds, of which eighty per cent. only was paid
      up. This sum ought to have been paid in at several different instalments.
      A great part of the proprietors, when they paid in their first instalment,
      opened a cash-account with the bank; and the directors, thinking
      themselves obliged to treat their own proprietors with the same liberality
      with which they treated all other men, allowed many of them to borrow upon
      this cash-account what they paid in upon all their subsequent instalments.
      Such payments, therefore, only put into one coffer what had the moment
      before been taken out of another. But had the coffers of this bank been
      filled ever so well, its excessive circulation must have emptied them
      faster than they could have been replenished by any other expedient but
      the ruinous one of drawing upon London; and when the bill became due,
      paying it, together with interest and commission, by another draught upon
      the same place. Its coffers having been filled so very ill, it is said to
      have been driven to this resource within a very few months after it began
      to do business. The estates of the proprietors of this bank were worth
      several millions, and, by their subscription to the original bond or
      contract of the bank, were really pledged for answering all its
      engagements. By means of the great credit which so great a pledge
      necessarily gave it, it was, notwithstanding its too liberal conduct,
      enabled to carry on business for more than two years. When it was obliged
      to stop, it had in the circulation about two hundred thousand pounds in
      bank notes. In order to support the circulation of those notes, which were
      continually returning upon it as fast as they were issued, it had been
      constantly in the practice of drawing bills of exchange upon London, of
      which the number and value were continually increasing, and, when it
      stopt, amounted to upwards of six hundred thousand pounds. This bank,
      therefore, had, in little more than the course of two years, advanced to
      different people upwards of eight hundred thousand pounds at five per
      cent. Upon the two hundred thousand pounds which it circulated in bank
      notes, this five per cent. might perhaps be considered as a clear gain,
      without any other deduction besides the expense of management. But upon
      upwards of six hundred thousand pounds, for which it was continually
      drawing bills of exchange upon London, it was paying, in the way of
      interest and commission, upwards of eight per cent. and was consequently
      losing more than three per cent. upon more than three fourths of all its
      dealings.

      The operations of this bank seem to have produced effects quite opposite
      to those which were intended by the particular persons who planned and
      directed it. They seem to have intended to support the spirited
      undertakings, for as such they considered them, which were at that time
      carrying on in different parts of the country; and, at the same time, by
      drawing the whole banking business to themselves, to supplant all the
      other Scotch banks, particularly those established at Edinburgh, whose
      backwardness in discounting bills of exchange had given some offence. This
      bank, no doubt, gave some temporary relief to those projectors, and
      enabled them to carry on their projects for about two years longer than
      they could otherwise have done. But it thereby only enabled them to get so
      much deeper into debt; so that, when ruin came, it fell so much the
      heavier both upon them and upon their creditors. The operations of this
      bank, therefore, instead of relieving, in reality aggravated in the
      long-run the distress which those projectors had brought both upon
      themselves and upon their country. It would have been much better for
      themselves, their creditors, and their country, had the greater part of
      them been obliged to stop two years sooner than they actually did. The
      temporary relief, however, which this bank afforded to those projectors,
      proved a real and permanent relief to the other Scotch banks. All the
      dealers in circulating bills of exchange, which those other banks had
      become so backward in discounting, had recourse to this new bank, where
      they were received with open arms. Those other banks, therefore, were
      enabled to get very easily out of that fatal circle, from which they could
      not otherwise have disengaged themselves without incurring a considerable
      loss, and perhaps, too, even some degree of discredit.

      In the long-run, therefore, the operations of this bank increased the real
      distress of the country, which it meant to relieve; and effectually
      relieved, from a very great distress, those rivals whom it meant to
      supplant.

      At the first setting out of this bank, it was the opinion of some people,
      that how fast soever its coffers might be emptied, it might easily
      replenish them, by raising money upon the securities of those to whom it
      had advanced its paper. Experience, I believe, soon convinced them that
      this method of raising money was by much too slow to answer their purpose;
      and that coffers which originally were so ill filled, and which emptied
      themselves so very fast, could be replenished by no other expedient but
      the ruinous one of drawing bills upon London, and when they became due,
      paying them by other draughts on the same place, with accumulated interest
      and commission. But though they had been able by this method to raise
      money as fast as they wanted it, yet, instead of making a profit, they
      must have suffered a loss of every such operation; so that in the long-run
      they must have ruined themselves as a mercantile company, though perhaps
      not so soon as by the more expensive practice of drawing and redrawing.
      They could still have made nothing by the interest of the paper, which,
      being over and above what the circulation of the country could absorb and
      employ, returned upon them in order to be exchanged for gold and silver,
      as fast as they issued it; and for the payment of which they were
      themselves continually obliged to borrow money. On the contrary, the whole
      expense of this borrowing, of employing agents to look out for people who
      had money to lend, of negotiating with those people, and of drawing the
      proper bond or assignment, must have fallen upon them, and have been so
      much clear loss upon the balance of their accounts. The project of
      replenishing their coffers in this manner may be compared to that of a man
      who had a water-pond from which a stream was continually running out, and
      into which no stream was continually running, but who proposed to keep it
      always equally full, by employing a number of people to go continually
      with buckets to a well at some miles distance, in order to bring water to
      replenish it.

      But though this operation had proved not only practicable, but profitable
      to the bank, as a mercantile company; yet the country could have derived
      no benefit front it, but, on the contrary, must have suffered a very
      considerable loss by it. This operation could not augment, in the smallest
      degree, the quantity of money to be lent. It could only have erected this
      bank into a sort of general loan office for the whole country. Those who
      wanted to borrow must have applied to this bank, instead of applying to
      the private persons who had lent it their money. But a bank which lends
      money, perhaps to five hundred different people, the greater part of whom
      its directors can know very little about, is not likely to be more
      judicious in the choice of its debtors than a private person who lends out
      his money among a few people whom he knows, and in whose sober and frugal
      conduct he thinks he has good reason to confide. The debtors of such a
      bank as that whose conduct I have been giving some account of were likely,
      the greater part of them, to be chimerical projectors, the drawers and
      redrawers of circulating bills of exchange, who would employ the money in
      extravagant undertakings, which, with all the assistance that could be
      given them, they would probably never be able to complete, and which, if
      they should be completed, would never repay the expense which they had
      really cost, would never afford a fund capable of maintaining a quantity
      of labour equal to that which had been employed about them. The sober and
      frugal debtors of private persons, on the contrary, would be more likely
      to employ the money borrowed in sober undertakings which were proportioned
      to their capitals, and which, though they might have less of the grand and
      the marvellous, would have more of the solid and the profitable; which
      would repay with a large profit whatever had been laid out upon them, and
      which would thus afford a fund capable of maintaining a much greater
      quantity of labour than that which had been employed about them. The
      success of this operation, therefore, without increasing in the smallest
      degree the capital of the country, would only have transferred a great
      part of it from prudent and profitable to imprudent and unprofitable
      undertakings.

      That the industry of Scotland languished for want of money to employ it,
      was the opinion of the famous Mr Law. By establishing a bank of a
      particular kind, which he seems to have imagined might issue paper to the
      amount of the whole value of all the lands in the country, he proposed to
      remedy this want of money. The parliament of Scotland, when he first
      proposed his project, did not think proper to adopt it. It was afterwards
      adopted, with some variations, by the Duke of Orleans, at that time regent
      of France. The idea of the possibility of multiplying paper money to
      almost any extent was the real foundation of what is called the
      Mississippi scheme, the most extravagant project, both of banking and
      stock-jobbing, that perhaps the world ever saw. The different operations
      of this scheme are explained so fully, so clearly, and with so much order
      and distinctness, by Mr Du Verney, in his Examination of the Political
      Reflections upon commerce and finances of Mr Du Tot, that I shall not give
      any account of them. The principles upon which it was founded are
      explained by Mr Law himself, in a discourse concerning money and trade,
      which he published in Scotland when he first proposed his project. The
      splendid but visionary ideas which are set forth in that and some other
      works upon the same principles, still continue to make an impression upon
      many people, and have, perhaps, in part, contributed to that excess of
      banking, which has of late been complained of, both in Scotland and in
      other places.

      The Bank of England is the greatest bank of circulation in Europe. It was
      incorporated, in pursuance of an act of parliament, by a charter under the
      great seal, dated the 27th of July 1694. It at that time advanced to
      government the sum of £1,200,000 for an annuity of £100,000, or for £
      96,000 a-year, interest at the rate of eight per cent. and £4,000 a-year for
      the expense of management. The credit of the new government, established
      by the Revolution, we may believe, must have been very low, when it was
      obliged to borrow at so high an interest.

      In 1697, the bank was allowed to enlarge its capital stock, by an
      ingraftment of £1,001,171:10s. Its whole capital stock, therefore,
      amounted at this time to £2,201,171: 10s. This ingraftment is said to have
      been for the support of public credit. In 1696, tallies had been at forty,
      and fifty, and sixty, per cent. discount, and bank notes at twenty per
      cent. {James Postlethwaite’s History of the Public Revenue, p.301.} During
      the great re-coinage of the silver, which was going on at this time, the
      bank had thought proper to discontinue the payment of its notes, which
      necessarily occasioned their discredit.

      In pursuance of the 7th Anne, c. 7, the bank advanced and paid into the
      exchequer the sum of £400,000; making in all the sum of £1,600,000, which
      it had advanced upon its original annuity of £96,000 interest, and £4,000
      for expense of management. In 1708, therefore, the credit of government
      was as good as that of private persons, since it could borrow at six per
      cent. interest, the common legal and market rate of those times. In
      pursuance of the same act, the bank cancelled exchequer bills to the
      amount of £ 1,775,027: 17s: 10½d. at six per cent. interest, and was at
      the same time allowed to take in subscriptions for doubling its capital.
      In 1703, therefore, the capital of the bank amounted to £4,402,343; and it
      had advanced to government the sum of £3,375,027:17:10½d.

      By a call of fifteen per cent. in 1709, there was paid in, and made stock,
      £ 656,204:1:9d.; and by another of ten per cent. in 1710, £501,448:12:11d.
      In consequence of those two calls, therefore, the bank capital amounted to
      £ 5,559,995:14:8d.

      In pursuance of the 3rd George I. c.8, the bank delivered up two millions
      of exchequer Bills to be cancelled. It had at this time, therefore,
      advanced to government £5,375,027:17 10d. In pursuance of the 8th George
      I. c.21, the bank purchased of the South-sea company, stock to the amount
      of £4,000,000: and in 1722, in consequence of the subscriptions which it
      had taken in for enabling it to make this purchase, its capital stock was
      increased by £ 3,400,000. At this time, therefore, the bank had advanced
      to the public £ 9,375,027 17s. 10½d.; and its capital stock amounted only
      to £ 8,959,995:14:8d. It was upon this occasion that the sum which the
      bank had advanced to the public, and for which it received interest, began
      first to exceed its capital stock, or the sum for which it paid a dividend
      to the proprietors of bank stock; or, in other words, that the bank began
      to have an undivided capital, over and above its divided one. It has
      continued to have an undivided capital of the same kind ever since. In
      1746, the bank had, upon different occasions, advanced to the public
      £11,686,800, and its divided capital had been raised by different calls
      and subscriptions to £ 10,780,000. The state of those two sums has
      continued to be the same ever since. In pursuance of the 4th of George
      III. c.25, the bank agreed to pay to government for the renewal of its
      charter £110,000, without interest or re-payment. This sum, therefore did
      not increase either of those two other sums.

      The dividend of the bank has varied according to the variations in the
      rate of the interest which it has, at different times, received for the
      money it had advanced to the public, as well as according to other
      circumstances. This rate of interest has gradually been reduced from eight
      to three per cent. For some years past, the bank dividend has been at five
      and a half per cent.

      The stability of the bank of England is equal to that of the British
      government. All that it has advanced to the public must be lost before its
      creditors can sustain any loss. No other banking company in England can be
      established by act of parliament, or can consist of more than six members.
      It acts, not only as an ordinary bank, but as a great engine of state. It
      receives and pays the greater part of the annuities which are due to the
      creditors of the public; it circulates exchequer bills; and it advances to
      government the annual amount of the land and malt taxes, which are
      frequently not paid up till some years thereafter. In these different
      operations, its duty to the public may sometimes have obliged it, without
      any fault of its directors, to overstock the circulation with paper money.
      It likewise discounts merchants’ bills, and has, upon several different
      occasions, supported the credit of the principal houses, not only of
      England, but of Hamburgh and Holland. Upon one occasion, in 1763, it is
      said to have advanced for this purpose, in one week, about £1,600,000, a
      great part of it in bullion. I do not, however, pretend to warrant either
      the greatness of the sum, or the shortness of the time. Upon other
      occasions, this great company has been reduced to the necessity of paying
      in sixpences.

      It is not by augmenting the capital of the country, but by rendering a
      greater part of that capital active and productive than would otherwise be
      so, that the most judicious operations of banking can increase the
      industry of the country. That part of his capital which a dealer is
      obliged to keep by him unemployed and in ready money, for answering
      occasional demands, is so much dead stock, which, so long as it remains in
      this situation, produces nothing, either to him or to his country. The
      judicious operations of banking enable him to convert this dead stock into
      active and productive stock; into materials to work upon; into tools to
      work with; and into provisions and subsistence to work for; into stock
      which produces something both to himself and to his country. The gold and
      silver money which circulates in any country, and by means of which, the
      produce of its land and labour is annually circulated and distributed to
      the proper consumers, is, in the same manner as the ready money of the
      dealer, all dead stock. It is a very valuable part of the capital of the
      country, which produces nothing to the country. The judicious operations
      of banking, by substituting paper in the room of a great part of this gold
      and silver, enable the country to convert a great part of this dead stock
      into active and productive stock; into stock which produces something to
      the country. The gold and silver money which circulates in any country may
      very properly be compared to a highway, which, while it circulates and
      carries to market all the grass and corn of the country, produces itself
      not a single pile of either. The judicious operations of banking, by
      providing, if I may be allowed so violent a metaphor, a sort of waggon-way
      through the air, enable the country to convert, as it were, a great part
      of its highways into good pastures, and corn fields, and thereby to
      increase, very considerably, the annual produce of its land and labour.
      The commerce and industry of the country, however, it must be
      acknowledged, though they may be somewhat augmented, cannot be altogether
      so secure, when they are thus, as it were, suspended upon the Daedalian
      wings of paper money, as when they travel about upon the solid ground of
      gold and silver. Over and above the accidents to which they are exposed
      from the unskilfulness of the conductors of this paper money, they are
      liable to several others, from which no prudence or skill of those
      conductors can guard them.

      An unsuccessful war, for example, in which the enemy got possession of the
      capital, and consequently of that treasure which supported the credit of
      the paper money, would occasion a much greater confusion in a country
      where the whole circulation was carried on by paper, than in one where the
      greater part of it was carried on by gold and silver. The usual instrument
      of commerce having lost its value, no exchanges could be made but either
      by barter or upon credit. All taxes having been usually paid in paper
      money, the prince would not have wherewithal either to pay his troops, or
      to furnish his magazines; and the state of the country would be much more
      irretrievable than if the greater part of its circulation had consisted in
      gold and silver. A prince, anxious to maintain his dominions at all times
      in the state in which he can most easily defend them, ought upon this
      account to guard not only against that excessive multiplication of paper
      money which ruins the very banks which issue it, but even against that
      multiplication of it which enables them to fill the greater part of the
      circulation of the country with it.

      The circulation of every country may be considered as divided into two
      different branches; the circulation of the dealers with one another, and
      the circulation between the dealers and the consumers. Though the same
      pieces of money, whether paper or metal, may be employed sometimes in the
      one circulation and sometimes in the other; yet as both are constantly
      going on at the same time, each requires a certain stock of money, of one
      kind or another, to carry it on. The value of the goods circulated between
      the different dealers never can exceed the value of those circulated
      between the dealers and the consumers; whatever is bought by the dealers
      being ultimately destined to be sold to the consumers. The circulation
      between the dealers, as it is carried on by wholesale, requires generally
      a pretty large sum for every particular transaction. That between the
      dealers and the consumers, on the contrary, as it is generally carried on
      by retail, frequently requires but very small ones, a shilling, or even a
      halfpenny, being often sufficient. But small sums circulate much faster
      than large ones. A shilling changes masters more frequently than a guinea,
      and a halfpenny more frequently than a shilling. Though the annual
      purchases of all the consumers, therefore, are at least equal in value to
      those of all the dealers, they can generally be transacted with a much
      smaller quantity of money; the same pieces, by a more rapid circulation,
      serving as the instrument of many more purchases of the one kind than of
      the other.

      Paper money may be so regulated as either to confine itself very much to
      the circulation between the different dealers, or to extend itself
      likewise to a great part of that between the dealers and the consumers.
      Where no bank notes are circulated under £10 value, as in London, paper
      money confines itself very much to the circulation between the dealers.
      When a ten pound bank note comes into the hands of a consumer, he is
      generally obliged to change it at the first shop where he has occasion to
      purchase five shillings worth of goods; so that it often returns into the
      hands of a dealer before the consumer has spent the fortieth part of the
      money. Where bank notes are issued for so small sums as 20s. as in
      Scotland, paper money extends itself to a considerable part of the
      circulation between dealers and consumers. Before the Act of parliament
      which put a stop to the circulation of ten and five shilling notes, it
      filled a still greater part of that circulation. In the currencies of
      North America, paper was commonly issued for so small a sum as a shilling,
      and filled almost the whole of that circulation. In some paper currencies
      of Yorkshire, it was issued even for so small a sum as a sixpence.

      Where the issuing of bank notes for such very small sums is allowed, and
      commonly practised, many mean people are both enabled and encouraged to
      become bankers. A person whose promissory note for £5, or even for 20s.
      would be rejected by every body, will get it to be received without
      scruple when it is issued for so small a sum as a sixpence. But the
      frequent bankruptcies to which such beggarly bankers must be liable, may
      occasion a very considerable inconveniency, and sometimes even a very
      great calamity, to many poor people who had received their notes in
      payment.

      It were better, perhaps, that no bank notes were issued in any part of the
      kingdom for a smaller sum than £5. Paper money would then, probably,
      confine itself, in every part of the kingdom, to the circulation between
      the different dealers, as much as it does at present in London, where no
      bank notes are issued under £10 value; £5 being, in most part of the
      kingdom, a sum which, though it will purchase, perhaps, little more than
      half the quantity of goods, is as much considered, and is as seldom spent
      all at once, as £10 are amidst the profuse expense of London.

      Where paper money, it is to be observed, is pretty much confined to the
      circulation between dealers and dealers, as at London, there is always
      plenty of gold and silver. Where it extends itself to a considerable part
      of the circulation between dealers and consumers, as in Scotland, and
      still more in North America, it banishes gold and silver almost entirely
      from the country; almost all the ordinary transactions of its interior
      commerce being thus carried on by paper. The suppression of ten and five
      shilling bank notes, somewhat relieved the scarcity of gold and silver in
      Scotland; and the suppression of twenty shilling notes will probably
      relieve it still more. Those metals are said to have become more abundant
      in America, since the suppression of some of their paper currencies. They
      are said, likewise, to have been more abundant before the institution of
      those currencies.

      Though paper money should be pretty much confined to the circulation
      between dealers and dealers, yet banks and bankers might still be able to
      give nearly the same assistance to the industry and commerce of the
      country, as they had done when paper money filled almost the whole
      circulation. The ready money which a dealer is obliged to keep by him, for
      answering occasional demands, is destined altogether for the circulation
      between himself and other dealers of whom he buys goods. He has no
      occasion to keep any by him for the circulation between himself and the
      consumers, who are his customers, and who bring ready money to him,
      instead of taking any from him. Though no paper money, therefore, was
      allowed to be issued, but for such sums as would confine it pretty much to
      the circulation between dealers and dealers; yet partly by discounting
      real bills of exchange, and partly by lending upon cash-accounts, banks
      and bankers might still be able to relieve the greater part of those
      dealers from the necessity of keeping any considerable part of their stock
      by them unemployed, and in ready money, for answering occasional demands.
      They might still be able to give the utmost assistance which banks and
      bankers can with propriety give to traders of every kind.

      To restrain private people, it may be said, from receiving in payment the
      promissory notes of a banker for any sum, whether great or small, when
      they themselves are willing to receive them; or, to restrain a banker from
      issuing such notes, when all his neighbours are willing to accept of them,
      is a manifest violation of that natural liberty, which it is the proper
      business of law not to infringe, but to support. Such regulations may, no
      doubt, be considered as in some respect a violation of natural liberty.
      But those exertions of the natural liberty of a few individuals, which
      might endanger the security of the whole society, are, and ought to be,
      restrained by the laws of all governments; of the most free, as well as or
      the most despotical. The obligation of building party walls, in order to
      prevent the communication of fire, is a violation of natural liberty,
      exactly of the same kind with the regulations of the banking trade which
      are here proposed.

      A paper money, consisting in bank notes, issued by people of undoubted
      credit, payable upon demand, without any condition, and, in fact, always
      readily paid as soon as presented, is, in every respect, equal in value to
      gold and silver money, since gold and silver money can at anytime be had
      for it. Whatever is either bought or sold for such paper, must necessarily
      be bought or sold as cheap as it could have been for gold and silver.

      The increase of paper money, it has been said, by augmenting the quantity,
      and consequently diminishing the value, of the whole currency, necessarily
      augments the money price of commodities. But as the quantity of gold and
      silver, which is taken from the currency, is always equal to the quantity
      of paper which is added to it, paper money does not necessarily increase
      the quantity of the whole currency. From the beginning of the last century
      to the present time, provisions never were cheaper in Scotland than in
      1759, though, from the circulation of ten and five shilling bank notes,
      there was then more paper money in the country than at present. The
      proportion between the price of provisions in Scotland and that in England
      is the same now as before the great multiplication of banking companies in
      Scotland. Corn is, upon most occasions, fully as cheap in England as in
      France, though there is a great deal of paper money in England, and scarce
      any in France. In 1751 and 1752, when Mr Hume published his Political
      Discourses, and soon after the great multiplication of paper money in
      Scotland, there was a very sensible rise in the price of provisions,
      owing, probably, to the badness of the seasons, and not to the
      multiplication of paper money.

      It would be otherwise, indeed, with a paper money, consisting in
      promissory notes, of which the immediate payment depended, in any respect,
      either upon the good will of those who issued them, or upon a condition
      which the holder of the notes might not always have it in his power to
      fulfil, or of which the payment was not exigible till after a certain
      number of years, and which, in the mean time, bore no interest. Such a
      paper money would, no doubt, fall more or less below the value of gold and
      silver, according as the difficulty or uncertainty of obtaining immediate
      payment was supposed to be greater or less, or according to the greater or
      less distance of time at which payment was exigible.

      Some years ago the different banking companies of Scotland were in the
      practice of inserting into their bank notes, what they called an optional
      clause; by which they promised payment to the bearer, either as soon as
      the note should be presented, or, in the option of the directors, six
      months after such presentment, together with the legal interest for the
      said six months. The directors of some of those banks sometimes took
      advantage of this optional clause, and sometimes threatened those who
      demanded gold and silver in exchange for a considerable number of their
      notes, that they would take advantage of it, unless such demanders would
      content themselves with a part of what they demanded. The promissory notes
      of those banking companies constituted, at that time, the far greater part
      of the currency of Scotland, which this uncertainty of payment necessarily
      degraded below value of gold and silver money. During the continuance of
      this abuse (which prevailed chiefly in 1762, 1763, and 1764), while the
      exchange between London and Carlisle was at par, that between London and
      Dumfries would sometimes be four per cent. against Dumfries, though this
      town is not thirty miles distant from Carlisle. But at Carlisle, bills
      were paid in gold and silver; whereas at Dumfries they were paid in Scotch
      bank notes; and the uncertainty of getting these bank notes exchanged for
      gold and silver coin, had thus degraded them four per cent. below the
      value of that coin. The same act of parliament which suppressed ten and
      five shilling bank notes, suppressed likewise this optional clause, and
      thereby restored the exchange between England and Scotland to its natural
      rate, or to what the course of trade and remittances might happen to make
      it.

      In the paper currencies of Yorkshire, the payment of so small a sum as 6d.
      sometimes depended upon the condition, that the holder of the note should
      bring the change of a guinea to the person who issued it; a condition
      which the holders of such notes might frequently find it very difficult to
      fulfil, and which must have degraded this currency below the value of gold
      and silver money. An act of parliament, accordingly, declared all such
      clauses unlawful, and suppressed, in the same manner as in Scotland, all
      promissory notes, payable to the bearer, under 20s. value.

      The paper currencies of North America consisted, not in bank notes payable
      to the bearer on demand, but in a government paper, of which the payment
      was not exigible till several years after it was issued; and though the
      colony governments paid no interest to the holders of this paper, they
      declared it to be, and in fact rendered it, a legal tender of payment for
      the full value for which it was issued. But allowing the colony security
      to be perfectly good, £100, payable fifteen years hence, for example, in a
      country where interest is at six per cent., is worth little more than £40
      ready money. To oblige a creditor, therefore, to accept of this as full
      payment for a debt of £100, actually paid down in ready money, was an act
      of such violent injustice, as has scarce, perhaps, been attempted by the
      government of any other country which pretended to be free. It bears the
      evident marks of having originally been, what the honest and downright
      Doctor Douglas assures us it was, a scheme of fraudulent debtors to cheat
      their creditors. The government of Pennsylvania, indeed, pretended, upon
      their first emission of paper money, in 1722, to render their paper of
      equal value with gold and silver, by enacting penalties against all those
      who made any difference in the price of their goods when they sold them
      for a colony paper, and when they sold them for gold and silver, a
      regulation equally tyrannical, but much less, effectual, than that which
      it was meant to support. A positive law may render a shilling a legal
      tender for a guinea, because it may direct the courts of justice to
      discharge the debtor who has made that tender; but no positive law can
      oblige a person who sells goods, and who is at liberty to sell or not to
      sell as he pleases, to accept of a shilling as equivalent to a guinea in
      the price of them. Notwithstanding any regulation of this kind, it
      appeared, by the course of exchange with Great Britain, that £100 sterling
      was occasionally considered as equivalent, in some of the colonies, to
      £130, and in others to so great a sum as £1100 currency; this difference
      in the value arising from the difference in the quantity of paper emitted
      in the different colonies, and in the distance and probability of the term
      of its final discharge and redemption.

      No law, therefore, could be more equitable than the act of parliament, so
      unjustly complained of in the colonies, which declared, that no paper
      currency to be emitted there in time coming, should be a legal tender of
      payment.

      Pennsylvania was always more moderate in its emissions of paper money than
      any other of our colonies. Its paper currency, accordingly, is said never
      to have sunk below the value of the gold and silver which was current in
      the colony before the first emission of its paper money. Before that
      emission, the colony had raised the denomination of its coin, and had, by
      act of assembly, ordered 5s. sterling to pass in the colonies for 6s:3d.,
      and afterwards for 6s:8d. A pound, colony currency, therefore, even when
      that currency was gold and silver, was more than thirty per cent. below
      the value of £1 sterling; and when that currency was turned into paper, it
      was seldom much more than thirty per cent. below that value. The pretence
      for raising the denomination of the coin was to prevent the exportation of
      gold and silver, by making equal quantities of those metals pass for
      greater sums in the colony than they did in the mother country. It was
      found, however, that the price of all goods from the mother country rose
      exactly in proportion as they raised the denomination of their coin, so
      that their gold and silver were exported as fast as ever.

      The paper of each colony being received in the payment of the provincial
      taxes, for the full value for which it had been issued, it necessarily
      derived from this use some additional value, over and above what it would
      have had, from the real or supposed distance of the term of its final
      discharge and redemption. This additional value was greater or less,
      according as the quantity of paper issued was more or less above what
      could be employed in the payment of the taxes of the particular colony
      which issued it. It was in all the colonies very much above what could be
      employed in this manner.

      A prince, who should enact that a certain proportion of his taxes should
      be paid in a paper money of a certain kind, might thereby give a certain
      value to this paper money, even though the term of its final discharge and
      redemption should depend altogether upon the will of the prince. If the
      bank which issued this paper was careful to keep the quantity of it always
      somewhat below what could easily be employed in this manner, the demand
      for it might be such as to make it even bear a premium, or sell for
      somewhat more in the market than the quantity of gold or silver currency
      for which it was issued. Some people account in this manner for what is
      called the agio of the bank of Amsterdam, or for the superiority of bank
      money over current money, though this bank money, as they pretend, cannot
      be taken out of the bank at the will of the owner. The greater part of
      foreign bills of exchange must be paid in bank money, that is, by a
      transfer in the books of the bank; and the directors of the bank, they
      allege, are careful to keep the whole quantity of bank money always below
      what this use occasions a demand for. It is upon this account, they say,
      the bank money sells for a premium, or bears an agio of four or five per
      cent. above the same nominal sum of the gold and silver currency of the
      country. This account of the bank of Amsterdam, however, it will appear
      hereafter, is in a great measure chimerical.

      A paper currency which falls below the value of gold and silver coin, does
      not thereby sink the value of those metals, or occasion equal quantities
      of them to exchange for a smaller quantity of goods of any other kind. The
      proportion between the value of gold and silver and that of goods of any
      other kind, depends in all cases, not upon the nature and quantity of any
      particular paper money, which may be current in any particular country,
      but upon the richness or poverty of the mines, which happen at any
      particular time to supply the great market of the commercial world with
      those metals. It depends upon the proportion between the quantity of
      labour which is necessary in order to bring a certain quantity of gold and
      silver to market, and that which is necessary in order to bring thither a
      certain quantity of any other sort of goods.

      If bankers are restrained from issuing any circulating bank notes, or
      notes payable to the bearer, for less than a certain sum; and if they are
      subjected to the obligation of an immediate and unconditional payment of
      such bank notes as soon as presented, their trade may, with safety to the
      public, be rendered in all other respects perfectly free. The late
      multiplication of banking companies in both parts of the united kingdom,
      an event by which many people have been much alarmed, instead of
      diminishing, increases the security of the public. It obliges all of them
      to be more circumspect in their conduct, and, by not extending their
      currency beyond its due proportion to their cash, to guard themselves
      against those malicious runs, which the rivalship of so many competitors
      is always ready to bring upon them. It restrains the circulation of each
      particular company within a narrower circle, and reduces their circulating
      notes to a smaller number. By dividing the whole circulation into a
      greater number of parts, the failure of any one company, an accident
      which, in the course of things, must sometimes happen, becomes of less
      consequence to the public. This free competition, too, obliges all bankers
      to be more liberal in their dealings with their customers, lest their
      rivals should carry them away. In general, if any branch of trade, or any
      division of labour, be advantageous to the public, the freer and more
      general the competition, it will always be the more so.
