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An Inquiry Into The Nature And Causes Of The Wealth Of Nations - Chapter II continue

1. Introduction And Plan Of The Work

2. Book 1, Chapter 1

3. Chapter 2

4. Chapter 3

5. Chapter 4

6. Chapter 5

7. Chapter 6

8. Chapter 7

9. Chapter 8

10. Chapter 8 continue

11. Chapter 9

12. Chapter 10

13. Chapter 10 continue

14. Chapter 11

15. Chapter 11 continue

16. Chapter 11 continue.

17. Chapter 11 continue..

18. Chapter 11 continue...

19. Conclusion of the Chapter 11

20. Book 2 Introduction

21. Chapter 1

22. Chapter II

23. Chapter II continue

24. Chapter II continue

25. Chapter 3

26. Chapter 4

27. Chapter 5

28. Book 3, Chapter 1

29. Chapter 2

30. Chapter 3

31. Chapter 4

32. Book 4, Chapter 1

33. Chapter 1 continue

34. Chapter 2

35. Chapter 3, Part 1

36. Chapter 3, Part 2

37. Chapter 4

38. Chapter 5

39. Chapter 5 continue

40. Chapter 6

41. Chapter 7, Part 1

42. Chapter 7, Part 2

43. Chapter 7, Part 3

44. Chapter 7, Part 3 continue

45. Chapter 8

46. Chapter 9

47. Book 5, Chapter 1, Part 1

48. Chapter 1, Part 2

49. Chapter 1, Part 3

50. Chapter 1, Part 3 continue

51. Chapter 1, Part 3 continue B

52. Chapter 1, Part 4

53. Chapter 2, Part 1

54. Chapter 2, Part 2

55. Chapter 2, Part 2 continue

56. Chapter 2, Part 2 continue B

57. Chapter 2, Part 2 continue C

58. Chapter 2, Part 2 continue D

59. Chapter 3

60. Chapter 3 continue

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 kingdom, the 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

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 work-houses, 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

It is now more than five and twenty years since the paper money issued
by the different banking companies of Scotland was fully equal, or
rather was somewhat more than fully equal, to what the circulation of
the country could easily absorb and employ. Those companies, therefore,
had so long ago given all the assistance to the traders and other
undertakers of Scotland which it is possible for banks and bankers,
consistently with their own interest, to give. They had even done
somewhat more. They had over-traded a little, and had brought upon
themselves that loss, or at least that diminution of profit, which, in
this particular business, never fails to attend the smallest degree of
over-trading. Those traders and other undertakers, having got so much
assistance from banks and bankers, wished to get still more. The banks,
they seem to have thought, could extend their credits to whatever sum
might be wanted, without incurring any other expense besides that of
a few reams of paper. They complained of the contracted views and
dastardly spirit of the directors of those banks, which did not, they
said, extend their credits in proportion to the extension of the trade
of the country; meaning, no doubt, by the extension of that trade, the
extension of their own projects beyond what they could carry on either
with their own capital, or with what they had credit to borrow of
private people in the usual way of bond or mortgage. The banks, they
seem to have thought, were in honour bound to supply the deficiency, and
to provide them with all the capital which they wanted to trade with.
The banks, however, were of a different opinion; and upon their refusing
to extend their credits, some of those traders had recourse to an
expedient which, for a time, served their purpose, though at a much
greater expense, yet as effectually as the utmost extension of bank
credits could have done. This expedient was no other than the well known
shift of drawing and redrawing; the shift to which unfortunate traders
have sometimes recourse, when they are upon the brink of bankruptcy. The
practice of raising money in this manner had been long known in England;
and, during the course of the late war, when the high profits of trade
afforded a great temptation to over-trading, is said to have been
carried on to a very great extent. From England it was brought into
Scotland, where, in proportion to the very limited commerce, and to the
very moderate capital of the country, it was soon carried on to a much
greater extent than it ever had been in England.

The practice of drawing and redrawing is so well known to all men of
business, that it may, perhaps, be thought unnecessary to give any
account of it. But as this book may come into the hands of many people
who are not men of business, and as the effects of this practice upon
the banking trade are not, perhaps, generally understood, even by men of
business themselves, I shall endeavour to explain it as distinctly as I

The customs of merchants, which were established when the barbarous laws
of Europe did not enforce the performance of their contracts, and which,
during the course of the two last centuries, have been adopted into the
laws of all European nations, have given such extraordinary privileges
to bills of exchange, that money is more readily advanced upon them
than upon any other species of obligation; especially when they are
made payable within so short a period as two or three months after their
date. If, when the bill becomes due, the acceptor does not pay it as
soon as it is presented, he becomes from that moment a bankrupt. The
bill is protested, and returns upon the drawer, who, if he does not
immediately pay it, becomes likewise a bankrupt. If, before it came to
the person who presents it to the acceptor for payment, it had passed
through the hands of several other persons, who had successively
advanced to one another the contents of it, either in money or goods,
and who, to express that each of them had in his turn received those
contents, had all of them in their order indorsed, that is, written
their names upon the back of the bill; each indorser becomes in his turn
liable to the owner of the bill for those contents, and, if he fails to
pay, he becomes too, from that moment, a bankrupt. Though the drawer,
acceptor, and indorsers of the bill, should all of them be persons
of doubtful credit; yet, still the shortness of the date gives some
security to the owner of the bill. Though all of them may be very likely
to become bankrupts, it is a chance if they all become so in so short
a time. The house is crazy, says a weary traveller to himself, and will
not stand very long; but it is a chance if it falls to-night, and I will
venture, therefore, to sleep in it to-night.

The trader A in Edinburgh, we shall suppose, draws a bill upon B in
London, payable two months after date. In reality B in London owes
nothing to A in Edinburgh; but he agrees to accept of A 's bill, upon
condition, that before the term of payment he shall redraw upon A in
Edinburgh for the same sum, together with the interest and a commission,
another bill, payable likewise two months after date. B accordingly,
before the expiration of the first two months, redraws this bill upon A
in Edinburgh; who, again before the expiration of the second two months,
draws a second bill upon B in London, payable likewise two months after
date; and before the expiration of the third two months, B in London
redraws upon A in Edinburgh another bill payable also two months after
date. This practice has sometimes gone on, not only for several months,
but for several years together, the bill always returning upon A in
Edinburgh with the accumulated interest and commission of all the former
bills. The interest was five per cent. in the year, and the commission
was never less than one half per cent. on each draught. This commission
being repeated more than six times in the year, whatever money A might
raise by this expedient might necessarily have cost him something more
than eight per cent. in the year and sometimes a great deal more, when
either the price of the commission happened to rise, or when he was
obliged to pay compound interest upon the interest and commission of
former bills. This practice was called raising money by circulation.

In a country where the ordinary profits of stock, in the greater part of
mercantile projects, are supposed to run between six and ten per cent.
it must have been a very fortunate speculation, of which the returns
could not only repay the enormous expense at which the money was thus
borrowed for carrying it on, but afford, besides, a good surplus profit
to the projector. Many vast and extensive projects, however, were
undertaken, and for several years carried on, without any other fund
to support them besides what was raised at this enormous expense. The
projectors, no doubt, had in their golden dreams the most distinct
vision of this great profit. Upon their awakening, however, either at
the end of their projects, or when they were no longer able to carry
them on, they very seldom, I believe, had the good fortune to find it.

{The method described in the text was by no means either the most common
or the most expensive one in which those adventurers sometimes raised
money by circulation. It frequently happened, that A in Edinburgh would
enable B in London to pay the first bill of exchange, by drawing, a few
days before it became due, a second bill at three months date upon the
same B in London. This bill, being payable to his own order, A sold in
Edinburgh at par; and with its contents purchased bills upon London,
payable at sight to the order of B, to whom he sent them by the post.
Towards the end of the late war, the exchange between Edinburgh and
London was frequently three per cent. against Edinburgh, and those bills
at sight must frequently have cost A that premium. This transaction,
therefore, being repeated at least four times in the year, and being
loaded with a commission of at least one half per cent. upon each
repetition, must at that period have cost A, at least, fourteen per
cent. in the year. At other times A would enable to discharge the first
bill of exchange, by drawing, a few days before it became due, a second
bill at two months date, not upon B, but upon some third person, C, for
example, in London. This other bill was made payable to the order of
B, who, upon its being accepted by C, discounted it with some banker in
London; and A enabled C to discharge it, by drawing, a few day's before
it became due, a third bill likewise at two months date, sometimes
upon his first correspondent B, and sometimes upon some fourth or fifth
person, D or E, for example. This third bill was made payable to the
order of C, who, as soon as it was accepted, discounted it in the same
manner with some banker in London. Such operations being repeated at
least six times in the year, and being loaded with a commission of at
least one half per cent. upon each repetition, together with the legal
interest of five per cent. this method of raising money, in the same
manner as that described in the text, must have cost A something more
than eight per cent. By saving, however, the exchange between Edinburgh
and London, it was less expensive than that mentioned in the foregoing
part of this note; but then it required an established credit with more
houses than one in London, an advantage which many of these adventurers
could not always find it easy to procure.}

The bills which A in Edinburgh drew upon B in London, he regularly
discounted two months before they were due, with some bank or banker in
Edinburgh; and the bills which B in London redrew upon A in Edinburgh,
he as regularly discounted, either with the Bank of England, or with
some other banker in London. Whatever was advanced upon such circulating
bills was in Edinburgh advanced in the paper of the Scotch banks; and in
London, when they were discounted at the Bank of England in the paper of
that bank. Though the bills upon which this paper had been advanced were
all of them repaid in their turn as soon as they became due, yet the
value which had been really advanced upon the first bill was never
really returned to the banks which advanced it; because, before each
bill became due, another bill was always drawn to somewhat a greater
amount than the bill which was soon to be paid: and the discounting of
this other bill was essentially necessary towards the payment of that
which was soon to be due. This payment, therefore, was altogether
fictitious. The stream which, by means of those circulating bills of
exchange, had once been made to run out from the coffers of the banks,
was never replaced by any stream which really ran into them.

The paper which was issued upon those circulating bills of exchange
amounted, upon many occasions, to the whole fund destined for carrying
on some vast and extensive project of agriculture, commerce, or
manufactures; and not merely to that part of it which, had there been
no paper money, the projector would have been obliged to keep by him
unemployed, and in ready money, for answering occasional demands. The
greater part of this paper was, 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

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 keep it
always equally full, by employing a number of people to go continually
with buckets to a well at some miles distance, in order to bring water
to replenish it.

But though this operation had proved not only practicable, but
profitable to the bank, as a mercantile company; yet the country could
have derived no benefit front it, but, on the contrary, must have
suffered a very considerable loss by it. This operation could not
augment, in the smallest degree, the quantity of money to be lent. It
could only have erected this bank into a sort of general loan office for
the whole country. Those who wanted to borrow must have applied to this
bank, instead of applying to the private persons who had lent it their
money. But a bank which lends money, perhaps to five hundred different
people, the greater part of whom its directors can know very little
about, is not likely to be more judicious in the choice of its debtors
than a private person who lends out his money among a few people whom
he knows, and in whose sober and frugal conduct he thinks he has good
reason to confide. The debtors of such a bank as that whose conduct I
have been giving some account of were likely, the greater part of them,
to be chimerical projectors, the drawers and redrawers of circulating
bills of exchange, who would employ the money in extravagant
undertakings, which, with all the assistance that could be given them,
they would probably never be able to complete, and which, if they should
be completed, would never repay the expense which they had really cost,
would never afford a fund capable of maintaining a quantity of labour
equal to that which had been employed about them. The sober and frugal
debtors of private persons, on the contrary, would be more likely to
employ the money borrowed in sober undertakings which were proportioned
to their capitals, and which, though they might have less of the grand
and the marvellous, would have more of the solid and the profitable;
which would repay with a large profit whatever had been laid out upon
them, and which would thus afford a fund capable of maintaining a much
greater quantity of labour than that which had been employed about them.
The success of this operation, therefore, without increasing in the
smallest degree the capital of the country, would only have transferred
a great part of it from prudent and profitable to imprudent and
unprofitable undertakings.

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