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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

That the industry of Scotland languished for want of money to employ
it, was the opinion of the famous Mr Law. By establishing a bank of a
particular kind, which he seems to have imagined might issue paper
to the amount of the whole value of all the lands in the country, he
proposed to remedy this want of money. The parliament of Scotland, when
he first proposed his project, did not think proper to adopt it. It was
afterwards adopted, with some variations, by the Duke of Orleans, at
that time regent of France. The idea of the possibility of multiplying
paper money to almost any extent was the real foundation of what is
called the Mississippi scheme, the most extravagant project, both
of banking and stock-jobbing, that perhaps the world ever saw. The
different operations of this scheme are explained so fully, so clearly,
and with so much order and distinctness, by Mr Du Verney, in his
Examination of the Political Reflections upon commerce and finances of
Mr Du Tot, that I shall not give any account of them. The principles
upon which it was founded are explained by Mr Law himself, in a
discourse concerning money and trade, which he published in Scotland
when he first proposed his project. The splendid but visionary
ideas which are set forth in that and some other works upon the same
principles, still continue to make an impression upon many people, and
have, perhaps, in part, contributed to that excess of banking, which has
of late been complained of, both in Scotland and in other places.

The Bank of England is the greatest bank of circulation in Europe. It
was incorporated, in pursuance of an act of parliament, by a charter
under the great seal, dated the 27th of July 1694. It at that time
advanced to government the sum of 1,200,000 for an annuity of 100,000,
or for 96,000 a-year, interest at the rate of eight per cent. and
4,000 year for the expense of management. The credit of the new
government, established by the Revolution, we may believe, must have
been very low, when it was obliged to borrow at so high an interest.

In 1697, the bank was allowed to enlarge its capital stock, by an
ingraftment of 1,001,171:10s. Its whole capital stock, therefore,
amounted at this time to 2,201,171: 10s. This ingraftment is said to
have been for the support of public credit. In 1696, tallies had been
at forty, and fifty, and sixty, per cent. discount, and bank notes at
twenty per cent. {James Postlethwaite's History of the Public Revenue,
p.301.} During the great re-coinage of the silver, which was going on at
this time, the bank had thought proper to discontinue the payment of its
notes, which necessarily occasioned their discredit.

In pursuance of the 7th Anne, c. 7, the bank advanced and paid into
the exchequer the sum of 400,000; making in all the sum of 1,600,000,
which it had advanced upon its original annuity of 96,000 interest,
and 4,000 for expense of management. In 1708, therefore, the credit of
government was as good as that of private persons, since it could borrow
at six per cent. interest, the common legal and market rate of those
times. In pursuance of the same act, the bank cancelled exchequer bills
to the amount of 1,775,027: 17s: 10d. at six per cent. interest, and
was at the same time allowed to take in subscriptions for doubling
its capital. In 1703, therefore, the capital of the bank amounted
to 4,402,343; and it had advanced to government the sum of

By a call of fifteen per cent. in 1709, there was paid in, and made
stock, 656,204:1:9d.; and by another of ten per cent. in 1710,
501,448:12:11d. In consequence of those two calls, therefore, the bank
capital amounted to 5,559,995:14:8d.

In pursuance of the 3rd George I. c.8, the bank delivered up two
millions of exchequer Bills to be cancelled. It had at this time,
therefore, advanced to government 5,375,027:17 10d. In pursuance of the
8th George I. c.21, the bank purchased of the South-sea company,
stock to the amount of 4,000,000: and in 1722, in consequence of
the subscriptions which it had taken in for enabling it to make this
purchase, its capital stock was increased by 3,400,000. At this time,
therefore, the bank had advanced to the public 9,375,027 17s. 10d.;
and its capital stock amounted only to 8,959,995:14:8d. It was upon
this occasion that the sum which the bank had advanced to the public,
and for which it received interest, began first to exceed its capital
stock, or the sum for which it paid a dividend to the proprietors of
bank stock; or, in other words, that the bank began to have an undivided
capital, over and above its divided one. It has continued to have an
undivided capital of the same kind ever since. In 1746, the bank had,
upon different occasions, advanced to the public 11,686,800, and its
divided capital had been raised by different calls and subscriptions to
10,780,000. The state of those two sums has continued to be the same
ever since. In pursuance of the 4th of George III. c.25, the bank agreed
to pay to government for the renewal of its charter 110,000, without
interest or re-payment. This sum, therefore did not increase either of
those two other sums.

The dividend of the bank has varied according to the variations in the
rate of the interest which it has, at different times, received for
the money it had advanced to the public, as well as according to other
circumstances. This rate of interest has gradually been reduced from
eight to three per cent. For some years past, the bank dividend has been
at five and a half per cent.

The stability of the bank of England is equal to that of the British
government. All that it has advanced to the public must be lost before
its creditors can sustain any loss. No other banking company in England
can be established by act of parliament, or can consist of more than six
members. It acts, not only as an ordinary bank, but as a great engine of
state. It receives and pays the greater part of the annuities which are
due to the creditors of the public; it circulates exchequer bills; and
it advances to government the annual amount of the land and malt taxes,
which are frequently not paid up till some years thereafter. In these
different operations, its duty to the public may sometimes have obliged
it, without any fault of its directors, to overstock the circulation
with paper money. It likewise discounts merchants' bills, and has,
upon several different occasions, supported the credit of the principal
houses, not only of England, but of Hamburgh and Holland. Upon one
occasion, in 1763, it is said to have advanced for this purpose, in
one week, about 1,600,000, a great part of it in bullion. I do not,
however, pretend to warrant either the greatness of the sum, or the
shortness of the time. Upon other occasions, this great company has been
reduced to the necessity of paying in sixpences.

It is not by augmenting the capital of the country, but by rendering a
greater part of that capital active and productive than would otherwise
be so, that the most judicious operations of banking can increase the
industry of the country. That part of his capital which a dealer is
obliged to keep by him unemployed and in ready money, for answering
occasional demands, is so much dead stock, which, so long as it remains
in this situation, produces nothing, either to him or to his country.
The judicious operations of banking enable him to convert this dead
stock into active and productive stock; into materials to work upon;
into tools to work with; and into provisions and subsistence to work
for; into stock which produces something both to himself and to his
country. The gold and silver money which circulates in any country,
and by means of which, the produce of its land and labour is annually
circulated and distributed to the proper consumers, is, in the same
manner as the ready money of the dealer, all dead stock. It is a very
valuable part of the capital of the country, which produces nothing to
the country. The judicious operations of banking, by substituting paper
in the room of a great part of this gold and silver, enable the country
to convert a great part of this dead stock into active and productive
stock; into stock which produces something to the country. The gold
and silver money which circulates in any country may very properly be
compared to a highway, which, while it circulates and carries to market
all the grass and corn of the country, produces itself not a single pile
of either. The judicious operations of banking, by providing, if I may
be allowed so violent a metaphor, a sort of waggon-way through the air,
enable the country to convert, as it were, a great part of its highways
into good pastures, and corn fields, and thereby to increase, very
considerably, the annual produce of its land and labour. The commerce
and industry of the country, however, it must be acknowledged, though
they may be somewhat 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

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

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 those
banks sometimes took advantage of this optional clause, and sometimes
threatened those who demanded gold and silver in exchange for a
considerable number of their notes, that they would take advantage of
it, unless such demanders would content themselves with a part of
what they demanded. The promissory notes of those banking companies
constituted, at that time, the far greater part of the currency of
Scotland, which this uncertainty of payment necessarily degraded below
value of gold and silver money. During the continuance of this abuse
(which prevailed chiefly in 1762, 1763, and 1764), while the exchange
between London and Carlisle was at par, that between London and Dumfries
would sometimes be four per cent. against Dumfries, though this town is
not thirty miles distant from Carlisle. But at Carlisle, bills were paid
in gold and silver; whereas at Dumfries they were paid in Scotch bank
notes; and the uncertainty of getting these bank notes exchanged for
gold and silver coin, had thus degraded them four per cent. below the
value of that coin. The same act of parliament which suppressed ten and
five shilling bank notes, suppressed likewise this optional clause,
and thereby restored the exchange between England and Scotland to its
natural rate, or to what the course of trade and remittances might
happen to make it.

In the paper currencies of Yorkshire, the payment of so small a sum as
6d. sometimes depended upon the condition, that the holder of the note
should bring the change of a guinea to the person who issued it; a
condition which the holders of such notes might frequently find it very
difficult to fulfil, and which must have degraded this currency below
the value of gold and silver money. An act of parliament, accordingly,
declared all such clauses unlawful, and suppressed, in the same manner
as in Scotland, all promissory notes, payable to the bearer, under 20s.

The paper currencies of North America consisted, not in bank notes
payable to the bearer on demand, but in a government paper, of which
the payment was not exigible till several years after it was issued; and
though the colony governments paid no interest to the holders of this
paper, they declared it to be, and in fact rendered it, a legal tender
of payment for the full value for which it was issued. But allowing the
colony security to be perfectly good, 100, payable fifteen years hence,
for example, in a country where interest is at six per cent., is worth
little more than 40 ready money. To oblige a creditor, therefore, to
accept of this as full payment for a debt of 100, actually paid down
in ready money, was an act of such violent injustice, as has scarce,
perhaps, been attempted by the government of any other country which
pretended to be free. It bears the evident marks of having originally
been, what the honest and downright Doctor Douglas assures us it was, a
scheme of fraudulent debtors to cheat their creditors. The government
of Pennsylvania, indeed, pretended, upon their first emission of paper
money, in 1722, to render their paper of equal value with gold and
silver, by enacting penalties against all those who made any difference
in the price of their goods when they sold them for a colony paper,
and when they sold them for gold and silver, a regulation equally
tyrannical, but much less, effectual, than that which it was meant
to support. A positive law may render a shilling a legal tender for a
guinea, because it may direct the courts of justice to discharge the
debtor who has made that tender; but no positive law can oblige a person
who sells goods, and who is at liberty to sell or not to sell as he
pleases, to accept of a shilling as equivalent to a guinea in the price
of them. Notwithstanding any regulation of this kind, it appeared,
by the course of exchange with Great Britain, that 100 sterling was
occasionally considered as equivalent, in some of the colonies, to 130,
and in others to so great a sum as 1100 currency; this difference in
the value arising from the difference in the quantity of paper emitted
in the different colonies, and in the distance and probability of the
term of its final discharge and redemption.

No law, therefore, could be more equitable than the act of parliament,
so unjustly complained of in the colonies, which declared, that no paper
currency to be emitted there in time coming, should be a legal tender of

Pennsylvania was always more moderate in its emissions of paper money
than any other of our colonies. Its paper currency, accordingly, is
said never to have sunk below the value of the gold and silver which
was current in the colony before the first emission of its paper money.
Before that emission, the colony had raised the denomination of its
coin, and had, by act of assembly, ordered 5s. sterling to pass in the
colonies for 6s:3d., and afterwards for 6s:8d. A pound, colony currency,
therefore, even when that currency was gold and silver, was more than
thirty per cent. below the value of 1 sterling; and when that currency
was turned into paper, it was seldom much more than thirty per cent.
below that value. The pretence for raising the denomination of the
coin was to prevent the exportation of gold and silver, by making equal
quantities of those metals pass for greater sums in the colony than they
did in the mother country. It was found, however, that the price of all
goods from the mother country rose exactly in proportion as they raised
the denomination of their coin, so that their gold and silver were
exported as fast as ever.

The paper of each colony being received in the payment of the provincial
taxes, for the full value for which it had been issued, it necessarily
derived from this use some additional value, over and above what it
would have had, from the real or supposed distance of the term of its
final discharge and redemption. This additional value was greater or
less, according as the quantity of paper issued was more or less above
what could be employed in the payment of the taxes of the particular
colony which issued it. It was in all the colonies very much above what
could be employed in this manner.

A prince, who should enact that a certain proportion of his taxes should
be paid in a paper money of a certain kind, might thereby give a certain
value to this paper money, even though the term of its final discharge
and redemption should depend altogether upon the will of the prince. If
the bank which issued this paper was careful to keep the quantity of it
always somewhat below what could easily be employed in this manner, the
demand for it might be such as to make it even bear a premium, or sell
for somewhat more in the market than the quantity of gold or silver
currency for which it was issued. Some people account in this manner for
what is called the agio of the bank of Amsterdam, or for the superiority
of bank money over current money, though this bank money, as they
pretend, cannot be taken out of the bank at the will of the owner. The
greater part of foreign bills of exchange must be paid in bank money,
that is, by a transfer in the books of the bank; and the directors of
the bank, they allege, are careful to keep the whole quantity of bank
money always below what this use occasions a demand for. It is upon this
account, they say, the bank money sells for a premium, or bears an agio
of four or five per cent. above the same nominal sum of the gold and
silver currency of the country. This account of the bank of Amsterdam,
however, it will appear hereafter, is in a great measure chimerical.

A paper currency which falls below the value of gold and silver coin,
does not thereby sink the value of those metals, or occasion equal
quantities of them to exchange for a smaller quantity of goods of any
other kind. The proportion between the value of gold and silver and that
of goods of any other kind, depends in all cases, not upon the nature
and quantity of any particular paper money, which may be current in any
particular country, but upon the richness or poverty of the mines,
which happen at any particular time to supply the great market of the
commercial world with those metals. It depends upon the proportion
between the quantity of labour which is necessary in order to bring
a certain quantity of gold and silver to market, and that which is
necessary in order to bring thither a certain quantity of any other sort
of goods.

If bankers are restrained from issuing any circulating bank notes, or
notes payable to the bearer, for less than a certain sum; and if they
are subjected to the obligation of an immediate and unconditional
payment of such bank notes as soon as presented, their trade may, with
safety to the public, be rendered in all other respects perfectly free.
The late multiplication of banking companies in both parts of the united
kingdom, an event by which many people have been much alarmed, instead
of diminishing, increases the security of the public. It obliges all
of them to be more circumspect in their conduct, and, by not extending
their currency beyond its due proportion to their cash, to guard
themselves against those malicious runs, which the rivalship of so
many competitors is always ready to bring upon them. It restrains the
circulation of each particular company within a narrower circle, and
reduces their circulating notes to a smaller number. By dividing the
whole circulation into a greater number of parts, the failure of any
one company, an accident which, in the course of things, must
sometimes happen, becomes of less consequence to the public. This
free competition, too, obliges all bankers to be more liberal in their
dealings with their customers, lest their rivals should carry them
away. In general, if any branch of trade, or any division of labour, be
advantageous to the public, the freer and more general the competition,
it will always be the more so.

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