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

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 for 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 farther 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 fortyfour 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 (inconsequence 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 �3:17:10 1/2 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 this 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 commission, some 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 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