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

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 unskilfulness 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 �10 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 20s. 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 �5, or even for 20s.

would be rejected by every body, 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 �5. 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 �10 value ; �5 being, in most part of the kingdom,

a sum which, though it will purchase, perhaps, little more than half the

quantity of goods, is as much considered, and is as seldom spent all at

once, as �10 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 will 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 respect 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 or 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 anytime 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 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 mean time, 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