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
in 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 the 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 an
addition to the net 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 net 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 may be 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 recompense 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 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 kinds are
commonly made. Silver very seldom appears except in the change of
a twenty shillings 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; the other, called the Royal Bank, by royal
charter in 1727. Whether the trade, either of Scotland in
general, or 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 L411,117 10s. 9d. 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
