An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith (ebook reader macos .TXT) 📕

what he can get for it, or in what he can exchange it for. If it could be

exchanged for nothing, it would, like a bill upon a bankrupt, be of no more

value than the most useless piece of paper.

Though the weekly or yearly revenue of all the different inhabitants of any

country, in the same manner, may be, and in reality frequently is, paid to

them in money, their real riches, however, the real weekly or yearly revenue

of all of them taken together, must always be great or small, in proportion

to the quantity of consumable goods which they can all of them purchase with

this money. The whole revenue of all of them taken together is evidently not

equal to both the money and the consumable goods, but only to one or other of

those two values, and to the latter more properly than to the former.

Though we frequently, therefore, express a person’s revenue by the metal

pieces which are annually paid to him, it is because the amount of those

pieces regulates the extent of his power of purchasing, or the value of the

goods which he can annually afford to consume. We still consider his revenue

as consisting in this power of purchasing or consuming, and not in the

pieces which convey it.

But if this is sufficiently evident, even with regard to an individual, it

is still more so with regard to a society. The amount of the metal pieces

which are annually paid to an individual, is often precisely equal to his

revenue, and is upon that account the shortest and best expression of its

value. But the amount of the metal pieces which circulate in a society, can

never be equal to the revenue of all its members. As the same guinea which

pays the weekly pension of one man to-day, may pay that of another

to-morrow, and that of a third the day thereafter, the amount of the metal

pieces which annually circulate in any country, must always be of much less

value than the whole money pensions annually paid with them. But the power

of purchasing, or the goods which can successively be bought with the whole

of those money pensions, as they are successively paid, must always be

precisely of the same value with those pensions ; as must likewise be the

revenue of the different persons to whom they are paid. That revenue,

therefore, cannot consist in those metal pieces, of which the amount is so

much inferior to its value, but in the power of purchasing, in the goods

which can successively be bought with them as they circulate from hand to

hand.

Money, therefore, the great wheel of circulation, the great instrument of

commerce, like all other instruments of trade, though it makes a part, and a

very valuable part, of the capital, makes no part of the revenue of the

society to which it belongs; and though the metal pieces of which it is

composed, in the course of their annual circulation, distribute to every man

the revenue which properly belongs to him, they make themselves no part of

that revenue.

Thirdly, and lastly, the machines and instruments of trade, etc. which

compose the fixed capital, bear this further resemblance to that part of the

circulating capital which consists in money; that as every saving in the

expense of erecting and supporting those machines, which does not diminish

the introductive powers of labour, is an improvement of the neat revenue of

the society ; so every saving in the expense of collecting and supporting

that part of the circulating capital which consists in money is an

improvement of exactly the same kind.

It is sufficiently obvious, and it has partly, too, been explained already,

in what manner every saving in the expense of supporting the fixed capital

is an improvement of the neat revenue of the society. The whole capital of

the undertaker of every work is necessarily divided between his fixed and his

circulating capital. While his whole capital remains the same, the smaller

the one part, the greater must necessarily be the other. It is the

circulating capital which furnishes the materials and wages of labour, and

puts industry into motion. Every saving, therefore, in the expense of

maintaining the fixed capital, which does not diminish the productive powers

of labour, must increase the fund which puts industry into motion, and

consequently the annual produce of land and labour, the real revenue of

every society.

The substitution of paper in the room of gold and silver money, replaces a

very expensive instrument of commerce with one much less costly, and

sometimes equally convenient. Circulation comes to be carried on by a new

wheel, which it costs less both to erect and to maintain than the old one.

But in what manner this operation is performed, and in what manner it tends

to increase either the gross or the neat revenue of the society, is not

altogether so obvious, and may therefore require some further explication.

There are several different sorts of paper money; but the circulating notes

of banks and bankers are the species which is best known, and which seems

best adapted for this purpose.

When the people of any particular country have such confidence in the

fortune, probity and prudence of a particular banker, as to believe that

he is always ready to pay upon demand such of his promissory notes as are

likely to be at any time presented to him, those notes come to have the same

currency as gold and silver money, from the confidence that such money can

at any time be had for them.

A particular banker lends among his customers his own 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 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 into 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 a 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 in addition to the neat 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 neat 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