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 overtrading 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 overtrading, 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 piecemeal 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 of 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 banks 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 its 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-house, his workhouses 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, enclosing,
manuring, and ploughing waste and uncultivated fields, in
building farm-houses, 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 ensure, 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
overtraded 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
overtrading. 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
