<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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: 10�d. 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 �3,375,027:17:10�d.</p>
<p>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.</p>
<p>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. 10�d.; 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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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. value.</p>
<p>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.</p>
<p>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
payment.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
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