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

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

two same 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 a 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 these projectors

by degrees to have recourse, either to other bankers, or to other methods of

raising money : so as 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 draught 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 as they were issued, it had been

constantly in the practice of drawing bills of exchange upon London, of

which the number and value were continually increasing, and. when it stopt,

amounted to upwards of six hundred thousand pounds. This bank, therefore,

had, in little more than the course of two years, advanced to different

people upwards of eight hundred thousand pounds at five per cent. Upon the

two hundred thousand pounds which it circulated in bank notes, this five per

cent. might perhaps be considered as a clear gain, without any other

deduction besides the expense of management. But upon upwards of six hundred

thousand pounds, for which it was continually drawing bills of exchange upon

London, it was paying, in the way of interest and commission, upwards of

eight per cent. and was consequently losing more than three per cent. upon

more than three fourths of all its dealings.

The operations of this bank seem to have produced effects quite opposite to

those which were intended by the particular persons who planned and directed

it. They seem to have intended to support the spirited undertakings, for as

such they considered them, which were at that time carrying on in different

parts of the country ; and, at the same time, by drawing the whole banking

business to themselves, to supplant all the other Scotch banks, particularly

those established at Edinburgh, whose backwardness in discounting bills of

exchange had given some offence. This bank, no doubt, gave some temporary

relief to those projectors, and enabled them to carry on their projects for

about two years longer than they could otherwise have done. But it thereby

only enabled them to get so much deeper into debt ; so that, when ruin came,

it fell so much the heavier both upon them and upon their creditors. The

operations of this bank, therefore, instead of relieving, in reality

aggravated in the long-run the distress which those projectors had brought

both upon themselves and upon their country. It would have been much better

for themselves, their creditors, and their country, had the greater part of

them been obliged to stop two years sooner than they actually did. The

temporary relief, however, which this bank afforded to those projectors,

proved a real and permanent relief to the other Scotch banks. All the

dealers in circulating bills of exchange, which those other banks had become

so backward in discounting, had recourse to this new bank, where they were

received with open arms. Those other banks, therefore, were enabled to get

very easily out of that fatal circle, from which they could not otherwise

have disengaged themselves without incurring a considerable loss, and

perhaps, too, even some degree of discredit.

In the long-run, therefore, the operations of this bank increased the real

distress of the country, which it meant to relieve ; and effectually

relieved, from a very great distress, those rivals whom it meant to

supplant.

At the first setting out of this bank, it was the opinion of some people,

that how fast soever its coffers might be emptied, it might easily replenish

them, by raising money upon the securities of those to whom it had advanced

its paper. Experience, I believe, soon convinced them that this method of

raising money was by much too slow to answer their purpose; and that coffers

which originally were so ill filled, and which emptied themselves so very

fast, could be replenished by no other expedient but the ruinous one of

drawing bills upon London, and when they became due, paying them by other

draughts on the same place, with accumulated interest and commission. But

though they had been able by this method to raise money as fast as they

wanted it, yet, instead of making a profit, they must have suffered a loss

of every such operation ; so that in the long-run they must have ruined

themselves as a mercantile company, though perhaps not so soon as by the

more expensive practice of drawing and redrawing. They could still have made

nothing by the interest of the paper, which, being over and above what the

circulation of the country could absorb and employ, returned upon them in

order to be exchanged for gold and silver, as fast as they issued it ; and

for the payment of which they were themselves continually obliged to borrow

money. On the contrary, the whole expense of this borrowing, of employing

agents to look out for people who had money to lend, of negotiating with

those people, and of drawing the proper bond or assignment, must have fallen

upon them, and have been so much clear loss upon the balance of their

accounts. The project of replenishing their coffers in this manner may be

compared to that of a man who had a water-pond from which a stream was

continually running out, and into which no stream was continually running,

but who proposed to