An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith (ebook reader with highlighter txt) 📖

only probable, but almost unavoidable. Though some

particular men may sometimes increase their expense very considerably,

though their revenue does not increase at all, we maybe assured that no

class or order of men ever does so; because, though the principles of

common prudence do not always govern the conduct of every individual, they

always influence that of the majority of every class or order. But the

revenue of idle people, considered as a class or order, cannot, in the

smallest degree, be increased by those operations of banking. Their expense

in general, therefore, cannot be much increased by them, though that of a

few individuals among them may, and in reality sometimes is. The demand of

idle people, therefore, for foreign goods, being the same, or very nearly

the same as before, a very small part of the money which, being forced

abroad by those operations of banking, is employed in purchasing foreign

goods for home consumption, is likely to be employed in purchasing those for

their use. The greater part of it will naturally be destined for the

employment of industry, and not for the maintenance of idleness.

 

When we compute the quantity of industry which the circulating capital of

any society can employ, we must always have regard to those parts of it only

which consist in provisions, materials, and finished work ; the other, which

consists in money, and which serves only to circulate those three, must

always be deducted. In order to put industry into motion, three things are

requisite ; materials to work upon, tools to work with, and the wages or

recompence for the sake of which the work is done. Money is neither a

material to work upon, nor a tool to work with ; and though the wages of the

workman are commonly paid to him in money, his real revenue, like that of

all other men, consists, not in the money, but in the money’s worth; not in

the metal pieces, but in what can be got for them.

 

The quantity of industry which any capital can employ, must evidently be

equal to the number of workmen whom it can supply with materials, tools, and

a maintenance suitable to the nature of the work. Money may be requisite for

purchasing the materials and tools of the work, as well as the maintenance

of the workmen ; but the quantity of industry which the whole capital can

employ, is certainly not equal both to the money which purchases, and to the

materials, tools, and maintenance, which are purchased with it, but only to

one or other of those two values, and to the latter more properly than to

the former.

 

When paper is substituted in the room of gold and silver money, the quantity

of the materials, tools, and maintenance, which the whole circulating

capital can supply, may be increased by the whole value of gold and silver

which used to be employed in purchasing them. The whole value of the great

wheel of circulation and distribution is added to the goods which are

circulated and distributed by means of it. The operation, in some measure,

resembles that of the undertaker of some great work, who, in consequence of

some improvement in mechanics, takes down his old machinery, and adds the

difference between its price and that of the new to his circulating capital,

to the fund from which he furnishes materials and wages to his workmen.

 

What is the proportion which the circulating money of any country bears to

the whole value of the annual produce circulated by means of it, it is

perhaps impossible to determine. It has been computed by different authors

at a fifth, at a tenth, at a twentieth, and at a thirtieth, part of that

value. But how small soever the proportion which the circulating money may

bear to the whole value of the annual produce, as but a part, and frequently

but a small part, of that produce, is ever destined for the maintenance of

industry, it must always bear a very considerable proportion to that part.

When, therefore, by the substitution of paper, the gold and silver

necessary for circulation is reduced to, perhaps, a fifth part of the former

quantity, if the value of only the greater part of the other four-fifths be

added to the funds which are destined for the maintenance of industry, it

must make a very considerable addition to the quantity of that industry,

and, consequently, to the value of the annual produce of land and labour.

 

An operation of this kind has, within these five-and-twenty or thirty years,

been performed in Scotland, by the erection of new banking companies in

almost every considerable town, and even in some country villages. The

effects of it have been precisely those above described. The business of the

country is almost entirely carried on by means of the paper of those

different banking companies, with which purchases and payments of all kinds

are commonly made. Silver very seldom appears, except in the change of a

twenty shilling bank note, and gold still seldomer. But though the conduct

of all those different companies has not been unexceptionable, and has

accordingly required an act of parliament to regulate it, the country,

notwithstanding, has evidently derived great benefit from their trade. I

have heard it asserted, that the trade of the city of Glasgow doubled in

about fifteen years after the first erection of the banks there; and that

the trade of Scotland has more than quadrupled since the first erection of

the two public banks at Edinburgh; of which the one, called the Bank of

Scotland, was established by act of parliament in 1695, and the other,

called the Royal Bank, by royal charter in 1727. Whether the trade, either

of Scotland in general, or of the city of Glasgow in particular, has really

increased in so great a proportion, during so short a period, I do not

pretend to know. If either of them has increased in this proportion, it

seems to be an effect too great to be accounted for by the sole operation of

this cause. That the trade and industry of Scotland, however, have increased

very considerably during this period, and that the banks have contributed a

good deal to this increase, cannot be doubted.

 

The value of the silver money which circulated in Scotland before the Union

in 1707, and which, immediately after it, was brought into the Bank of

Scotland, in order to be recoined, amounted to �411,117: 10: 9 sterling. No

account has been got of the gold coin ; but it appears from the ancient

accounts of the mint of Scotland, that the value of the gold annually coined

somewhat exceeded that of the silver. There were a good many people, too,

upon this occasion, who, from a diffidence of repayment, did not bring their

silver into the Bank of Scotland; and there was, besides, some English coin,

which was not called in. The whole value of the gold and silver, therefore,

which circulated in Scotland before the Union, cannot be estimated at less

than a million sterling. It seems to have constituted almost the whole

circulation of that country; for though the circulation of the Bank of

Scotland, which had then no rival, was considerable, it seems to have made

but a very small part of the whole. In the present times, the whole

circulation of Scotland cannot be estimated at less than two millions, of

which that part which consists in gold and silver, most probably, does not

amount to half a million. But though the circulating gold and silver of

Scotland have suffered so great a diminution during this period, its real

riches and prosperity do not appear to have suffered any. Its agriculture,

manufactures, and trade, on the contrary, the annual produce of its land and

labour, have evidently been augmented.

 

It is chiefly by discounting bills of exchange, that is, by advancing money

upon them before they are due, that the greater part of banks and bankers

issue their promissory notes. They deduct always, upon whatever sum they

advance, the legal interest till the bill shall become due. The payment of

the bill, when it becomes due, replaces to the bank the value of what had

been advanced, together with a clear profit of the interest. The banker, who

advances to the merchant whose bill he discounts, not gold and silver, but

his own promissory notes, has the advantage of being able to discount to a

greater amount by the whole value of his promissory notes, which he finds,

by experience, are commonly in circulation. He is thereby enabled to make

his clear gain of interest on so much a larger sum.

 

The commerce of Scotland, which at present is not very great, was still more

inconsiderable when the two first banking companies were established ; and

those companies would have had but little trade, had they confined their

business to the discounting of bills of exchange. They invented, therefore,

another method of issuing their promissory notes; by granting what they call

cash accounts, that is, by giving credit, to the extent of a certain sum

(two or three thousand pounds for example), to any individual who could

procure two persons of undoubted credit and good landed estate to become

surety for him, that whatever money should be advanced to him, within the

sum for which the credit had been given, should be repaid upon demand,

together with the legal interest. Credits of this kind are, I believe,

commonly granted by banks and bankers in all different parts of the world.

But the easy terms upon which the Scotch banking companies accept of

repayment are, so far as I know, peculiar to them, and have perhaps been the

principal cause, both of the great trade of those companies,and of the

benefit which the country has received from it.

 

Whoever has a credit of this kind with one of those companies, and borrows a

thousand pounds upon it, for example, may repay this sum piece-meal, by

twenty and thirty pounds at a time, the company discounting a proportionable

part of the interest of the great sum, from the day on which each of those

small sums is paid in, till the whole be in this manner repaid. All

merchants, therefore, and almost all men of business, find it convenient to

keep such cash accounts with them, and are thereby interested to promote the

trade of those companies, by readily receiving their notes in all payments,

and by encouraging all those with whom they have any influence to do the

same. The banks, when their customers apply to them for money, generally

advance it to them in their own promissory notes. These the merchants pay

away to the manufacturers for goods, the manufacturers to the farmers for

materials and provisions, the farmers to their landlords for rent; the

landlords repay them to the merchants for the conveniencies and luxuries

with which they supply them, and the merchants again return them to the

banks, in order to balance their cash accounts, or to replace what they my

have borrowed of them ; and thus almost the whole money business of the

country is transacted by means of them. Hence the great trade of those

companies.

 

By means of those cash accounts, every merchant can, without imprudence,

carry on a greater trade than he otherwise could do. If there are two

merchants, one in London and the other in Edinburgh, who employ equal stocks

in the same branch of trade, the Edinburgh merchant can, without imprudence,

carry on a greater trade, and give employment to a greater number of people,

than the London merchant. The London merchant must always keep by him a

considerable sum of money, either in his own coffers, or in those of his

banker, who gives him no interest for