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 called 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 piecemeal, 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 of 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 further 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 53 17s. 10 1/2d.
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 the 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 a commission, sonic 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
