great company has been reduced to the necessity of paying in
sixpences.
It is not by augmenting the capital of the country, but by
rendering a greater part of that capital active and productive
than would otherwise be so, that the most judicious operations of
banking can increase the industry of the country. That part of
his capital which a dealer is obliged to keep by him unemployed,
and in ready money, for answering occasional demands, is so much
dead stock, which, so long as it remains in this situation,
produces nothing either to him or to his country. The judicious
operations of banking enable him to convert this dead stock into
active and productive stock; into materials to work upon, into
tools to work with, and into provisions and subsistence to work
for; into stock which produces something both to himself and to
his country. The gold and silver money which circulates in any
country, and by means of which the produce of its land and labour
is annually circulated and distributed to the proper consumers,
is, in the same manner as the ready money of the dealer, all dead
stock. It is a very valuable part of the capital of the country,
which produces nothing to the country. The judicious operations
of banking, by substituting paper in the room of a great part of
this gold and silver, enables the country to convert a great part
of this dead stock into active and productive stock; into stock
which produces something to the country. The gold and silver
money which circulates in any country may very properly be
compared to a highway, which, while it circulates and carries to
market all the grass and corn of the country, produces itself not
a single pile of either. The judicious operations of banking, by
providing, if I may be allowed so violent a metaphor, a sort of
waggon-way through the air, enable the country to convert, as it
were, a great part of its highways into good pastures and
corn-fields, and thereby to increase very considerably the annual
produce of its land and labour. The commerce and industry of the
country, however, it must be acknowledged, though they may be
somewhat augmented, cannot be altogether so secure when they are
thus, as it were, suspended upon the Daedalian wings of paper
money as when they travel about upon the solid ground of gold and
silver. Over and above the accidents to which they are exposed
from the unskillfulness of the conductors of this paper money,
they are liable to several others, from which no prudence or
skill of those conductors can guard them.
An unsuccessful war, for example, in which the enemy got
possession of the capital, and consequently of that treasure
which supported the credit of the paper money, would occasion a
much greater confusion in a country where the whole circulation
was carried on by paper, than in one where the greater part of it
was carried on by gold and silver. The usual instrument of
commerce having lost its value, no exchanges could be made but
either by barter or upon credit. All taxes having been usually
paid in paper money, the prince would not have wherewithal either
to pay his troops, or to furnish his magazines; and the state of
the country would be much more irretrievable than if the greater
part of its circulation had consisted in gold and silver. A
prince, anxious to maintain his dominions at all times in the
state in which he can most easily defend them, ought, upon this
account, to guard, not only against that excessive multiplication
of paper money which ruins the very banks which issue it; but
even against that multiplication of it which enables them to fill
the greater part of the circulation of the country with it.
The circulation of every country may be considered as
divided into two different branches: the circulation of the
dealers with one another, and the circulation between the dealers
and the consumers. Though the same pieces of money, whether paper
or metal, may be employed sometimes in the one circulation and
sometimes in the other, yet as both are constantly going on at
the same time, each requires a certain stock of money of one kind
or another to carry it on. The value of the goods circulated
between the different dealers, never can exceed the value of
those circulated between the dealers and the consumers; whatever
is bought by the dealers, being ultimately destined to be sold to
the consumers. The circulation between the dealers, as it is
carried on by wholesale, requires generally a pretty large sum
for every particular transaction. That between the dealers and
the consumers, on the contrary, as it is generally carried on by
retail, frequently requires but very small ones, a shilling, or
even a halfpenny, being often sufficient. But small sums
circulate much faster than large ones. A shilling changes masters
more frequently than a guinea, and a halfpenny more frequently
than a shilling. Though the annual purchases of all the
consumers, therefore, are at least equal in value to those of all
the dealers, they can generally be transacted with a much smaller
quantity of money; the same pieces, by a more rapid circulation,
serving as the instrument of many more purchases of the one kind
than of the other.
Paper money may be so regulated as either to confine itself
very much to the circulation between the different dealers, or to
extend itself likewise to a great part of that between the
dealers and the consumers. Where no bank notes are circulated
under ten pounds value, as in London, paper money confines itself
very much to the circulation between the dealers. When a ten
pound bank note comes into the hands of a consumer, he is
generally obliged to change it at the first shop where he has
occasion to purchase five shillings' worth of goods, so that it
often returns into the hands of a dealer before the consumer has
spent the fortieth part of the money. Where bank notes are issued
for so small sums as twenty shillings, as in Scotland, paper
money extends itself to a considerable part of the circulation
between dealers and consumers. Before the Act of Parliament,
which put a stop to the circulation of ten and five shilling
notes, it filled a still greater part of that circulation. In the
currencies of North America, paper was commonly issued for so
small a sum as a shilling, and filled almost the whole of that
circulation. In some paper currencies of Yorkshire, it was issued
even for so small a sum as a sixpence.
Where the issuing of bank notes for such very small sums is
allowed and commonly practised, many mean people are both enabled
and encouraged to become bankers. A person whose promissory note
for five pounds, or even for twenty shillings, would be rejected
by everybody, will get it to be received without scruple when it
is issued for so small a sum as a sixpence. But the frequent
bankruptcies to which such beggarly bankers must be liable may
occasion a very considerable inconveniency, and sometimes even a
very great calamity to many poor people who had received their
notes in payment.
It were better, perhaps, that no bank notes were issued in
any part of the kingdom for a smaller sum than five pounds. Paper
money would then, probably, confine itself, in every part of the
kingdom, to the circulation between the different dealers, as
much as it does at present in London, where no bank notes are
issued under ten pounds' value; five pounds being, in most parts
of the kingdom, a sum which, though it will purchase, little more
than half the quantity of goods, is as much considered, and is as
seldom spent all at once, as ten pounds are amidst the profuse
expense of London.
Where paper money, it is to be observed, is pretty much
confined to the circulation between dealers and dealers, as at
London, there is always plenty of gold and silver. Where it
extends itself to a considerable part of the circulation between
dealers and consumers, as in Scotland, and still more in North
America, it banishes gold and silver almost entirely from the
country; almost all the ordinary transactions of its interior
commerce being thus carried on by paper. The suppression of ten
and five shilling bank notes somewhat relieved the scarcity of
gold and silver in Scotland; and the suppression of twenty
shilling notes would probably relieve it still more. Those metals
are said to have become more abundant in America since the
suppression of some of their paper currencies. They are said,
likewise, to have been more abundant before the institution of
those currencies.
Though paper money should be pretty much confined to the
circulation between dealers and dealers, yet banks and bankers
might still be able to give nearly the same assistance to the
industry and commerce of the country as they had done when paper
money filled almost the whole circulation. The ready money which
a dealer is obliged to keep by him, for answering occasional
demands, is destined altogether for the circulation between
himself and other dealers of whom he buys goods. He has no
occasion to keep any by him for the circulation between himself
and the consumers, who are his customers, and who bring ready
money to him, instead of taking any from him. Though no paper
money, therefore, was allowed to be issued but for such sums as
would confine it pretty much to the circulation between dealers
and dealers, yet, partly by discounting real bills of exchange,
and partly by lending upon cash accounts, banks and bankers might
still be able to relieve the greater part of those dealers from
the necessity of keeping any considerable part of their stock by
them, unemployed and in ready money, for answering occasional
demands. They might still be able to give the utmost assistance
which banks and bankers can, with propriety, give to traders of
every kind.
To restrain private people, it may be said, from receiving
in payment the promissory notes of a banker, for any sum whether
great or small, when they themselves are willing to receive them,
or to restrain a banker from issuing such notes, when all his
neighbours are willing to accept of them, is a manifest violation
of that natural liberty which it is the proper business of law
not to infringe, but to support. Such regulations may, no doubt,
be considered as in some respects a violation of natural liberty.
But those exertions of the natural liberty of a few individuals,
which might endanger the security of the whole society, are, and
ought to be, restrained by the laws of all governments, of the
most free as well as of the most despotical. The obligation of
building party walls, in order to prevent the communication of
fire, is a violation of natural liberty exactly of the same kind
with the regulations of the banking trade which are here
proposed.
A paper money consisting in bank notes, issued by people of
undoubted credit, payable upon demand without any condition, and
in fact always readily paid as soon as presented, is, in every
respect, equal in value to gold and silver money; since gold and
silver money can at any time be had for it. Whatever is either
bought or sold for such paper must necessarily be bought or sold
as cheap as it could have been for gold and silver.
The increase of paper money, it has been said, by augmenting
the quantity, and consequently diminishing the value of the whole
currency, necessarily augments the money price of commodities.
But as the quantity of gold and silver, which is taken from the
currency, is always equal to the quantity of paper which is added
to it, paper money does not necessarily increase the quantity of
the whole currency. From the beginning of the last century to the
present time, provisions never were cheaper in Scotland than in
1759, though, from the circulation of ten and five shilling bank
notes, there was then more paper money in the country than at
present. The proportion between the price of provisions in
Scotland and that in England is the same now as before the great
multiplication of banking companies in Scotland. Corn is, upon
most occasions, fully as cheap in England as in France; though
there is a great deal of paper money in England, and scarce any
in France. In 1751 and in 1752, when Mr. Hume published his
Political Discourses, and soon after the great multiplication of
paper money in Scotland, there was a very sensible rise in the
price of provisions, owing, probably, to the badness of the
seasons, and not to the multiplication of paper money.
It would be otherwise, indeed, with a paper money consisting
in promissory notes, of which the immediate payment depended, in
any respect, either upon the good will of those who issued them,
or upon a condition which the holder of the notes might not
always have it in his power to fulfil; or of which the payment
was not exigible till after a certain number of years, and which
in the meantime bore no interest. Such a paper money would, no
doubt, fall more or less below the value of gold and silver,
according as the difficulty or uncertainty of obtaining immediate
payment was supposed to be greater or less; or according to the
greater or less distance of time at which payment was exigible.
Some years ago the different banking companies of Scotland
were in the practice of inserting into their bank notes, what
they called an Optional Clause, by which they promised payment to
the bearer, either as soon as the note should be presented, or,
in the option of the directors, six months after such
presentment, together with the legal interest for the said six
months. The directors of some of those banks sometimes took
advantage of this optional clause, and sometimes threatened those
who demanded gold and silver in exchange for a considerable
number of their notes that they Would take advantage of it,
unless such demanders would content themselves with a part of
what they demanded. The promissory notes of those banking
companies constituted at that time the far greater part of the
currency of Scotland, which this uncertainty of payment
