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
overtrading, is said to have 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 an 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 endorsed, that is, written their names upon
the back of the bill; each endorser 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 endorsers 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 draft. This commission being repeated
more than six times in the year, whatever money A might raise by
this expedient must 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 awaking,
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 bills 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 bankers 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 run 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 same two 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 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 those projectors by degrees to
have recourse, either to other bankers, or to other methods of
raising money; so 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 draft 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 they were issued, it had been
