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

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 over-trading 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 over-trading, 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 piece-meal 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 in 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 hanks 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 his 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-houses, 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,

inclosing, manuring, and ploughing waste and uncultivated fields; in

building farmhouses, 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 insure, 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