Chapter OF MONEY, CONSIDERED AS A PARTICULAR

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

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