 Introduction and Chapter 1 of the Wealth of Nations, Book II. Introduction In that rude state of society in which there is no division of labor, in which exchanges are seldom made, and in which every man provides everything for himself, it is not necessary that any stock should be accumulated or stored up beforehand in order to carry on the business of the society. Every man endeavors to supply, by his own industry, his own occasional wants as they occur. When he is hungry, he goes to the forest to hunt. When his coat is worn out, he clothes himself with the skin of the first large animal he kills. And when his hut begins to go to ruin, he repairs it as well as he can with the trees and the turf that are nearest it. But when the division of labor has once been thoroughly introduced, the produce of a man's own labor can supply it but a very small part of his occasional wants. The far greater part of them are supplied by the produce of other man's labor, which he purchases with the produce, or what is the same thing, with the price of the produce of his own. But this purchase cannot be made till such time as the produce of his own labor has not only been completed but sold. A stock of goods of different kinds therefore must be stored up somewhere sufficient to maintain him and to supply him with the materials and tools of his work till such time at least as both these events can be brought about. A weaver cannot apply himself entirely to his own peculiar business unless there is beforehand stored up somewhere, either in his own possession or in that of some other person, a stock sufficient to maintain him and to supply him with the materials and tools of his work till he has not only completed but sold his web. This accumulation must evidently be previous to his applying his industry for so long a time to such a peculiar business. As the accumulation of stock must, in the nature of things, be previous to the division of labor, so labor can be more and more subdivided in proportion only as stock is previously more and more accumulated. The quantity of materials which the same number of people can work up increases in a great proportion as labor comes to be more and more subdivided and as the operations of each workman are gradually reduced to a greater degree of simplicity. A variety of new machines come to be invented for facilitating and abridging those operations. As the division of labor advances therefore in order to give constant employment to an equal number of workmen, an equal stock of provisions, and a greater stock of materials and tools than what would have been necessary in a router state of things must be accumulated beforehand. But the number of workmen in every branch of business genuinely increases with the division of labor in that branch, or rather it is the increase of their number which enables them to class and subdivide themselves in this manner. As the accumulation of stock is previously necessary for carrying on this great improvement in the productive powers of labor, so that accumulation naturally leads to this improvement. The person who employs his stock and maintaining labor necessarily wishes to employ it in such a manner as to produce as great a quantity of work as possible. He endeavors therefore both to make among his workmen the most proper distribution of employment and to furnace them with the best machines which he can either invent or afford to purchase. His abilities and both these respects are generally in proportion to the extent of his stock, or to the number of people whom it can employ. The quantity of industry therefore not only increases in every country with the increase of the stock which employs it, but in consequence of that increase, the same quantity of industry produces a much greater quantity of work. Such are in general the effects of the increase of stock upon industry and its productive powers. In the following book I have endeavored to explain the nature of stock, the effects of its accumulation into capital of different kinds, and the effects of the different employment of those capitals. This book is divided into five chapters. In the first chapter I have endeavored to show what are the different parts or branches into which the stock, either of an individual or of a great society, naturally divides itself. In the second I have endeavored to explain the nature and operation of money considered as a particular branch of the general stock of the society. The stock which is accumulated into a capital may either be employed by the person to whom it belongs, or it may be lent to some other person. In the third and fourth chapters I have endeavored to examine the manner in which it operates in both these situations. The fifth and last chapter treats of the different effects which the different employments of capital immediately produce upon the quantity, both of national industry and of the annual produce of land and labor. CHAPTER I. OF THE DIVISION OF STOCK. When the stock which a man possesses is no more than sufficient to maintain him for a few days or a few weeks, he seldom thinks of deriving any revenue from it. He consumes it as sparingly as he can and endeavors by his labor to acquire something which may supply its place before it be consumed altogether. His revenue is, in this case, derived from his labor only. This is the state of the greater part of the laboring poor in all countries. But when he possesses stock sufficient to maintain him for months or years, he naturally endeavours to derive a revenue from the greater part of it, reserving only so much for his immediate consumption as may maintain him till his revenue begins to come in. His whole stock, therefore, is distinguished into two parts. That part which he expects is to afford him this revenue is called CHAPTER I OF THE DIVISION OF STOCK. When the stock which a man possesses is no more than sufficient to maintain him for a few days or a few weeks, he seldom thinks of deriving any revenue from it. He consumes it as sparingly as he can and endeavors by his labor to acquire something which may supply its place before it be consumed altogether. His revenue is, in this case, derived from his labor only. This is the state of the greater part of the laboring poor in all countries. But when he possesses stock sufficient to maintain him for months or years, he naturally endeavors to derive a revenue from the greater part of it, reserving only so much for his immediate consumption as may maintain him till his revenue begins to come in. His whole stock, therefore, is distinguished into two parts. That part which he expects is to afford him this revenue is called his CAPITAL. The other is that which supplies his immediate consumption and which consists, either first, in that portion of his whole stock which was originally reserved for this purpose, or secondly, in his revenue from whatever source derived as it gradually comes in, or thirdly, in such things as had been purchased by either of these informal years and which are not yet entirely consumed, such as a stock of clothes, household furniture, and the like. In one or other, or all of these three articles, consists the stock which men commonly reserve for their own immediate consumption. There are two different ways in which a capital may be employed so as to yield a revenue or profit to its employer. First, it may be employed in raising, manufacturing, or purchasing goods and selling them again with a profit. The capital employed in this manner yields no revenue or profit to its employer, while it either remains in his possession or continues in the same shape. The goods of the merchant yield him no revenue or profit till he sells them for money, and the money yields him as little till it is again exchanged for goods. His capital is continually going from him in one shape and returning to him in another, and it is only by means of such circulation or successive changes that it can yield him any profit. Such capitals therefore may be very properly be called circulating capitals. Secondly, it may be employed in the improvement of land in the purchase of useful machines and instruments of trade, or in such like things as yield a revenue or profit without changing masters or circulating any further. Such capitals therefore may very properly be called fixed capitals. Different occupations require very different proportions between the fixed and circulating capitals employed in them. The capital of a merchant, for example, is altogether a circulating capital. He has occasion for no machines or instruments of trade unless his shop or warehouse be considered as such. Some part of the capital of every master artificer or manufacturer must be fixed in the instruments of his trade. This part, however, is very small in some and very great in others. A master tailor requires no other instruments of trade but a parcel of needles. Those of the master shoemaker are a little, though but a very little, more expensive. Those of the weaver rise a good deal above those of the shoemaker. The far greater part of the capital of all such master artificers, however, is circulated either in the wages of their workmen or in the price of their materials and repaid with a profit by the price of the work. In other works a much greater fixed capital is required. In a great ironwork, for example, the furnace for melting the ore, the forge, the slit mill, are instruments of trade which cannot be erected without a very great expense. In co-works and minds of every kind the machinery necessary both for drawing out the water and for other purposes is frequently still more expensive. That part of the capital of the farmer which is employed in the instruments of agriculture is a fixed that which is employed in the wages and maintenance of his laboring servants is a circulating capital. He makes a profit of the one by keeping it in his own possession and of the other by parting with it. The price or value of his laboring capital is a fixed capital in the same manner as that of the instruments of husbandry. Their maintenance is a circulating capital in the same manner as that of the laboring servants. The farmer makes his profit by keeping the laboring cattle and by parting with their maintenance. Both the price and the maintenance of the cattle which are brought in and fattened not for labor but for sale are a circulating capital. The farmer makes his profit by parting with them. A flock of sheep or a herd of cattle that in a breeding country is brought in neither for labor nor for sale but in order to make a profit by their wool, by their milk, and by their increase is a fixed capital. The profit is made by keeping them. Their maintenance is a circulating capital. The profit is made by parting with it and it comes back with both its own profit and the profit upon the whole price of the cattle and the price of the wool, the milk, and the increase. The whole value of the seed, too, is properly a fixed capital. Though it goes backwards and forwards between the ground and the granary it never changes masters and therefore it does not properly circulate. The farmer makes his profit not by its sale but by its increase. The general stock of any country or society is the same with that of all its inhabitants or members and therefore naturally divides itself into the same three portions each of which has a distinct function or office. The first is that portion which is reserved for immediate consumption and of which the characteristic is that it affords no revenue or profit. It consists in the stock of food, clothes, household furniture, etc., which have been purchased by their proper consumers but which are not yet entirely consumed. The whole stock of mere dwelling houses, too, subsisting at any one time in the country, make a part of this first portion. The stock that is laid out in a house, if it is to be the dwelling house of the proprietor, ceases from that moment to serve in the function of a capital or to afford any revenue to its owner. A dwelling house as such contributes nothing to the revenue of its inhabitant and, though it is, no doubt, extremely useful to him, it is, as his clothes and household furniture are useful to him, which, however, make a part of his expense and not of his revenue. If it is to be let to a tenant for rent as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue, which he derives either from labor or stock or land. Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it. Clothes and household furniture, in the same manner, sometimes yield a revenue, and thereby serve in the function of a capital to particular persons. In countries where masquerades are common, it is a trade to let out masquerade dresses for a night. Upholsterers frequently let furniture by the month or by the year. Undertakers let the furniture of funerals by the day and by the week. Many people let furnished houses and get a rent, not only for the use of the house, but for that of the furniture. The revenue, however, which is derived from such things, must always be ultimately drawn from some other source of revenue. Of all parts of the stock, either of an individual or of a society reserved for immediate consumption, what is laid out in houses is mostly slowly consumed. A stock of clothes may last several years. A stock of furniture half a century or a century. But a stock of houses, well built and properly taken care of, may last many centuries. Though the period of their total consumption, however, is more distant, they are still as really a stock reserved for immediate consumption as either clothes or household furniture. The second of the three portions into which the general stock of the society divides itself is the fixed capital, of which the characteristic is that it affords a revenue or profit without circulating or changing masters. It consists chiefly of the four following articles. First, of all useful machines and instruments of trade which facilitate and abridge labor. Secondly, of all those profitable buildings, which are the means of procuring a revenue, not only to the proprietor who lets them for a rent, but to the person who possesses them and pays that rent for them, such as shops, warehouses, workhouses, farmhouses, with all their necessary buildings, stables, granaries, etc. These are very different from mere dwelling houses. They are a sort of instruments of trade and may be considered in the same light. Thirdly, of the improvements of land, of what has been profitably laid out in clearing, draining, enclosing, maneuvering, and reducing it into the condition most proper for tillage and culture. An improved farm may very justly be regarded in the same light as those useful machines which facilitate and abridge labor, and by means of which an equal circulating capital can afford a much greater revenue to its employer. An improved farm is equally advantageous and more durable than any of those machines, frequently requiring no other repairs than the most profitable application of the farmer's capital employed in cultivating it. Fourthly, of the acquired and useful abilities of all the inhabitants and members of the society. The acquisition of such talents by the maintenance of the acquirer during his education, study, or apprenticeship always costs a real expense, which is a capital fixed and realized as it were in his person. Those talents, as they make a part of his fortune, so do they likewise that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labor, and which, though it costs a certain expense, repays that expense with a profit. The third and last of the three portions into which the general stock of the society naturally divides itself is the circulating capital of which the characteristic is that it affords a revenue only by circulating or changing masters. It is composed likewise of four parts. First of the money, by means of which all the other three are circulated and distributed to their proper consumers. Secondly, of the stock of provisions which are in the possession of the butcher, the grazer, the farmer, the corn merchant, the brewer, etc., and from the sale of which they expect to derive a profit. Thirdly, of the materials, whether altogether rude or more or less manufactured, of clothes, furniture, and building which are not yet made up into any of those three shapes, but which remain in the hands of the growers, the manufacturers, the mercers, and drapes, the timber merchants, the carpenters and joiners, the brick makers, etc. Fourthly, and lastly, of the work which is made up and completed, but which is still in the hands of the merchant and manufacturer, and not yet disposed of or distributed to the proper consumers, such as the finished work which we frequently find ready made in the shops of the Smith, the cabinet maker, the goldsmith, the jeweler, the china merchant, etc. The circulating capital consists in this manner of the provisions, materials, and finished work of all kinds that are in the hands of their respective dealers and of the money that is necessary for circulating and distributing them to those who are finally to use or to consume them. Of these four parts, three provisions, materials, and finished work are either annually or in a longer or shorter period regularly withdrawn from it and placed either in the fixed capital or in the stock reserved for immediate consumption. Every fixed capital is both originally derived from and requires to be continually supported by a circulating capital. All useful machines and instruments of trade are originally derived from a circulating capital which furnishes the materials of which they are made and the maintenance of the workmen who make them. They require too a capital of the same kind to keep them in constant repair. No fixed capital can yield any revenue but by means of a circulating capital. The most useful machines and instruments of trade will produce nothing without the circulating capital which affords the materials they are employed upon and the maintenance of the workmen who employ them. Land, however improved, will yield no revenue without a circulating capital which maintains the laborers who cultivate and collect its produce. To maintain and augment the stock which may be reserved for immediate consumption is the sole end and purpose both of the fixed and circulating capitals. It is this stock which feeds, clothes, and lodges the people. Their riches or poverty depend upon the abundant or sparing supplies which those two capitals can afford to the stock reserved for immediate consumption. So great a part of the circulating capital being continually withdrawn from it in order to be placed in the other two branches of the general stock of the society it must in its turn require continual supplies without which it would soon cease to exist. These supplies are principally drawn from three sources, the produce of land, of mines, and the fisheries. These afford continual supplies of provisions and materials of which part is afterwards wrought up into finished work and by which are replaced the provisions, materials, and finished work continually withdrawn from the circulating capital. From mines, too, is drawn what is necessary for maintaining and augmenting that part of it which consists in money. For though in the ordinary course of business this part is not like the other three necessarily withdrawn from it in order to be placed in the other two branches of the general stock of the society it must however like all other things be wasted and worn out at last and sometimes, too, be either lost or sent abroad and must therefore require continual though no doubt much smaller supplies. Lands, mines, and fisheries require all both a fixed and circulating capital to cultivate them and their produce replaces with a profit not only those capitals but all the others in the society. Thus the farmer annually replaces to the manufacturer the provisions which he had consumed and the materials which he had wrought up the year before. And the manufacturer replaces to the farmer the finished work which he had wasted and worn out in the same time. This is the real exchange that is annually made between those two orders of people though it seldom happens that the rude produce of the one and the manufactured produce of the other are directly bartered for one another because it seldom happens that the farmer sells his corn and his cattle his flax and his wool to the very same person of whom he chooses to purchase the clothes, furniture, and instruments of trade which he wants. He sells therefore his rude produce for money with which he can purchase wherever it is to be had the manufactured produce he has occasion for. Land even replaces in part at least the capitals with which fisheries and mines are cultivated. It is the produce of land which draws the fish from the waters and it is the produce of the surface of the earth which extracts the minerals from its bowels. The produce of land, mines, and fisheries when their natural fertility is equal is in proportion to the extent and proper application of the capitals employed about them. When the capitals are equal and equally well applied it is in proportion to their natural fertility. In all countries where there is a tolerable security every man of common understanding will endeavor to employ whatever stock he can command in procuring either present enjoyment or future profit. If it is employed in procuring present enjoyment it is a stock reserved for immediate consumption. If it is employed in procuring future profit it must procure this profit either by staying with him or by going from him. In the one case it is a fixed in the other it is a circulating capital. A man must be perfectly crazy who where there is a tolerable security does not employ all the stock which he commands. Whether it be his own or borrowed of other people in some one or other of those three ways. In those unfortunate countries indeed where men are continually afraid of the violence of their superiors they frequently bury or conceal a great part of their stock in order to have it always at hand to carry with them to some place of safety in case of their being threatened with any of those disasters to which they consider themselves at all times exposed. This is said to be a common practice in Turkey and India and I believe in most other governments of Asia. It seems to have been a common practice among our ancestors during the violence of the feudal government. Treasure Trove was in these times considered as no contemptible part of the revenue of the greatest sovereigns in Europe. It consisted in such treasure as was found concealed in the earth and to which no particular person could prove any right. This was regarded in those times as so important an object that it was always considered as belonging to the sovereign and neither to the finder nor to the proprietor of the land unless the right to it had been conveyed to the latter by an express clause in his charter. It was put upon the same footing with gold and silver mines which without a special clause in the charter were never supposed to be comprehended in the general grant of the lands though mines of lead, copper, tin, and coal were as things of smaller consequence. End of Book 2, Chapter 1 Part 1 of Chapter 2 of Book 2 of The Wealth of Nations. This is a LibriVox recording. All LibriVox recordings are in the public domain. For more information or to volunteer, please visit LibriVox.org. Recording by Stephen Escalara. The Wealth of Nations by Adam Smith. Part 1 of Chapter 2 of Book 2 of Money considered as a particular branch of the general stock of the society or of the expense of maintaining the national capital. It has been shown in the first book that the price of the greater part of commodities resolves itself into three parts of which one pays the wages of the labor, another the profits of the stock, and the third the rent of the land which had been employed in producing and bringing them to market. That there are indeed some commodities of which the price is made up of two of those parts only, the wages of labor and the profits of stock, and the very few in which it consists altogether in one, the wages of labor, but that the price of every commodity necessarily resolves itself into some one or other or all of those three parts, every part of it which goes neither to rent nor to wages being necessarily profit to somebody. Since this is the case, it has been observed with regard to every particular commodity taken separately, it must be so with regard to all the commodities which compose the whole annual produce of the land and labor of every country taken complexly. The whole price or exchangeable value of that annual produce must resolve itself into the same three parts and be parceled out among the different inhabitants of the country, either as the wages of their labor, the profits of their stock, or the rent of their land. But though the whole value of the annual produce of the land and labor of every country is thus divided among and constitutes a revenue to its different inhabitants, yet as in the rent of a private estate we distinguish between the gross rent and the neat rent, so may we likewise end the revenue of all the inhabitants of a great country. The gross rent of a private estate comprehends whatever is paid by the farmer. The neat rent, what remains free to the landlord after deducting the expensive management of repairs and all other necessary charges, or what, without hurting his estate, he can afford to place in his stock reserved for immediate consumption or to spend upon his table, equipage, the ornaments of his house and furniture, his private enjoyments and amusements. His real wealth is in proportion not to his gross, but to his neat rent. The gross revenue of all the inhabitants of a great country comprehends the whole annual produce of their land and labor. The neat revenue, what remains free to them after deducting the expense of maintaining first, their fixed, and secondly, their circulating capital, or what, without encroaching upon their capital, they can place in their stock reserved for immediate consumption or spend upon their subsistence, conveniences, and amusements. Their real wealth, too, is in proportion not to their gross, but to their neat revenue. The whole expense of maintaining the fixed capital must evidently be excluded from the neat revenue of the society. Neither the materials necessary for supporting their useful machines and instruments of trade, their profitable buildings, et cetera, nor the produce of the labor necessary for fashioning those materials into the proper form, can ever make any part of it. The price of that labor may indeed make a part of it, as the workmen so employed may place the whole value of their wages and their stock reserved for immediate consumption. But in other sorts of labor, both the price and the produce go to the stock. The price to that of the workmen, the produce to that of other people, whose subsistence, conveniences, and amusements are augmented by the labor of those workmen. The intention of the fixed capital is to increase the productive powers of labor, or to enable the same number of laborers to perform a much greater quantity of work. In a farm where all the necessary buildings, fences, drains, communications, et cetera, are in the most perfect good order, the same number of laborers and laboring cattle will raise a much greater produce than in one of equal extent an equally good ground, but not furnished with equal conveniences. In manufacturers, the same number of hands assisted with the best machinery will work up a much greater quantity of goods than with more imperfect instruments of trade. The expense which is properly laid out upon a fixed capital of any kind is always repaid with great profit, and increases the annual produce by a much greater value than that of the support which such improvements require. This support, however, still requires a certain portion of that produce, a certain quantity of materials, and the labor of a certain number of workmen, both of which might have been immediately employed to augment the food, clothing, and lodging, the subsistence and conveniences of the society are thus diverted to another employment highly advantageous indeed, but still different from this one. It is upon this account that all such improvements in mechanics as enable the same number of workmen to perform an equal quantity of work with cheaper and simpler machinery than had been usual before are always regarded as advantageous to every society. A certain quantity of materials, and the labor of a certain number of workmen, which had before been employed in support in a more complex and expensive machinery, can afterwards be applied to augment the quantity of work which that or any other machinery is useful only for performing. The undertaker of some great manufacturing, who employs a thousand a year in the maintenance of his machinery, if he can reduce this expense to five hundred, will naturally employ the other five hundred in purchasing an additional quantity of materials, to be wrought up by an additional number of workmen. The quantity of that work therefore which his machinery was useful only for performing will naturally be augmented and with it all the advantage and convenience which the society can derive from that work. The expense of maintaining the fixed capital in a great country may very properly be compared to that of repairs in a private estate. The expense of repairs may frequently be necessary for supporting the produce of the estate and consequently both the gross and the neat rent of the landlord. When by a more proper direction however it can be diminished without occasioning any diminution of produce, the gross rent remains at least the same as before and the neat rent is necessarily augmented. But though the whole expense of maintaining the fixed capital is thus necessarily excluded from the neat revenue of the society, it is not the same case with that of maintaining the circulating capital. Of the four parts of which this latter capital is composed, money, provisions, materials, and finished work, the three last it has already been observed are regularly withdrawn from it and placed either in the fixed capital of the society or in their stock reserved for immediate consumption. Whatever portion of those consumable goods is not employed in maintaining the former goes all to the latter and makes a part of the neat revenue of the society. The maintenance of those three parts of the circulating capital therefore withdraws no portion of the annual produce from the neat revenue of the society besides what is necessary for maintaining the fixed capital. The circulating capital of a society is in this respect different from that of an individual. That of an individual is totally excluded from making any part of his neat revenue which must consist altogether in his profits. But though the circulating capital of every individual makes a part of that of the society to which he belongs it is not upon that account totally excluded from making a part likewise of their neat revenue. Though the whole goods in a merchant's shop must by no means be placed in his own stock reserved for immediate consumption they may in that of other people who from a revenue derived from other funds may regularly replace their value to them together with its profits without occasioning any diminution either of his capital or of theirs. Money therefore is the only part of the circulating capital of a society of which the maintenance can occasion any diminution in their neat revenue. The fixed capital and that part of the circulating capital which consists in money so far as they affect the revenue of the society bear a very great resemblance to one another. First as those machines and instruments of trade etc. require a certain expense first to erect them and afterwards to support them both which expenses though they make a part of the gross are deductions from the neat revenue of the society so the stock of money which circulates in any country must require a certain expense first to collect it and afterwards to support it. Both which expenses though they make a part of the gross are in the same manner deductions from the neat revenue of the society. A certain quantity of very valuable materials gold and silver and a very curious labor instead of augmenting the stock reserved for immediate consumption the subsistence conveniences and amusements of individuals is employed in supporting that great but expensive instrument of commerce by means of which every individual in the society has his subsistence conveniences and amusements regularly distributed to him in their proper proportions. Secondly as the machines and instruments of trade etc. which compose the fixed capital either of an individual or of a society make no part either of the gross or of the neat revenue of either. So money by means of which the whole revenue of the society is regularly distributed among all its different members makes itself no part of that revenue. The great wheel of circulation is altogether different from the goods which are circulated by means of it. The revenue of the society consists altogether in those goods and not in the wheel which circulates them. In computing either the gross or the neat revenue of any society we must always from the whole annual circulation of money and goods deduct the whole value of the money of which not a single farthing can ever make any part of either. It is the ambiguity of language only which can make this proposition appear either doubtful or paradoxical. When properly explained and understood it is almost self-evident. When we talk of any particular sum of money we sometimes mean nothing but the metal pieces of which it is composed and sometimes we include in our meeting some obscure reference to the goods which can be had in exchange for it or to the power of purchasing which the possession of it conveys. Thus when we say that the circulating money of England has been computed at 18 millions we mean only to express the amount of the metal pieces which some writers have computed or rather have supposed to circulate in that country. But when we say a man is worth 50 or 100 pounds a year we mean commonly to express not only the amount of the metal pieces which are annually paid to him but the value of the goods which he can annually purchase or consume. We mean commonly to ascertain what is or ought to be his way of living or the quantity and quality of the necessaries and conveniences of life in which he can with propriety indulge himself. When by any particular sum of money we mean not only to express the amount of the metal pieces of which it is composed but to include in its signification some obscure reference to the goods which can be had in exchange for them the wealth or revenue which it in this case denotes is equal only to one of the two values which are thus intimated somewhat ambiguously by the same word and to the latter more properly than to the former to the money's worth more properly than to the money. Thus if a guinea be the weekly pension of a particular person he can in the course of the week purchase with it a certain quantity of subsistence conveniences and amusements. In proportion as this quantity is great or small so are his real riches his real weekly revenue. His weekly revenue is certainly not equal both to the guinea and to what can be purchased with it but only to one or other of those two equal values and to the latter more properly than to the former to the guinea's worth rather than to the guinea. If the pension of such a person was paid to him not in gold but in a weekly bill for a guinea his revenue surely would not so properly consist in the piece of paper as in what he could get for it. A guinea may be considered as a bill for a certain quantity of necessaries and conveniences upon all the tradesmen in the neighborhood. The revenue of the person to whom it is paid does not so properly consist in the piece of gold as in what he can get for it or in what he can exchange it for. If it could be exchanged for nothing it would like a bill upon a bankrupt be of no more value than the most useless piece of paper. Though the weekly or yearly revenue of all the different inhabitants of any country in the same manner may be and in reality frequently is paid to them in money their real riches however the real weekly or yearly revenue of all of them taken together must always be great or small in proportion to the quantity of consumable goods which they can all of them purchase with this money. The whole revenue of all of them taken together is evidently not equal to both the money and the consumable goods but only to one or other of those two values and to the latter more properly than to the former. Though we frequently therefore express a person's revenue by the metal pieces which are annually paid to him it is because the amount of those pieces regulates the extent of his power of purchasing or the value of the goods which he can annually afford to consume. We still consider his revenue as consisting in this power of purchasing or consuming and not in the pieces which convey it. But if this is sufficiently evident even with regard to an individual it is still more so with regard to a society. The amount of the metal pieces which are annually paid to an individual is often precisely equal to his revenue and is upon that account the shortest and best expression of its value. But the amount of the metal pieces which circulate in a society can never be equal to the revenue of all its members. As the same guinea which pays the weekly pension of one man today may pay that of another tomorrow and that of a third the day thereafter the amount of the metal pieces which annually circulate in any country must always be of much less value than the whole money pensions annually paid with them. But the power of purchasing or the goods which can successively be bought with the whole of those money pensions as they are successively paid must always be precisely of the same value with those pensions as must likewise be the revenue of the different persons to whom they are paid. That revenue therefore cannot consist in those metal pieces of which the amount is so much inferior to his value but in the power of purchasing in the goods which can successfully be bought with them as they circulate from hand to hand. Money therefore the great wheel of circulation the great instrument of commerce like all other instruments of trade though it makes a part and a very valuable part of the capital makes no part of the revenue of the society to which it belongs and though the metal pieces of which it is composed in the course of their annual circulation distribute to every man the revenue which properly belongs to him they make themselves no part of that revenue. Thirdly and lastly the machines and instruments of trade etc. which compose the fixed capital bear this further resemblance to that part of the circulating capital which consists in money that as every saving in the expense of erecting and supporting those machines which does not diminish the introductory powers of labor is an improvement of the neat revenue of the society so every saving in the expense of collecting and supporting that part of the circulating capital which consists in money is an improvement of exactly the same kind. It is sufficiently obvious and it has partly too been explained already in what manner every saving in the expense of supporting the fixed capital is an improvement of the neat revenue of the society. The whole capital of the undertaker of every work is necessarily divided between his fixed and his circulating capital. While his whole capital remains the same the smaller the one part the greater must necessarily be the other. It is the circulating capital which furnishes the materials and wages of labor and puts industry into motion. Every saving therefore in the expense of maintaining the fixed capital which does not diminish the productive powers of labor must increase the fund which puts industry into motion and consequently the annual produce of land and labor the real revenue of every society. The substitution of paper in the room of gold and silver money replaces a very expensive instrument of commerce with one much less costly and sometimes equally convenient. Circulation comes to be carried on by a new wheel which it costs less both to erect and to maintain than the old one. But in what manner this operation is performed and in what manner it tends to increase either the gross or the neat revenue of the society is not altogether so obvious and may therefore require some further explication. There are several different sorts of paper money but the circulating notes of banks and bankers are the species which is best known in which seems best adapted for this purpose. When the people of any particular country have such confidence in the fortune property and prudence of a particular banker as to believe that he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him those notes come to have the same currency as gold and silver money from the confidence that such money can at any time be had for them. A particular banker lends among his customers his own promissory notes to the extent we shall suppose of a hundred thousand pounds. As those notes serve all the purposes of money his debtors pay him the same interest as if he had lent them so much money. This interest is the source of his gain. Though some of those notes are continually coming back upon him for payment part of them continue to circulate for months and years together. Though he has generally in circulation therefore notes to the extent of a hundred thousand pounds twenty thousand pounds in gold and silver may frequently be a sufficient provision for answering occasional demands. By this operation therefore twenty thousand pounds in gold and silver perform all the functions which a hundred thousand could otherwise have performed. The same exchanges may be made the same quantity of consumable goods may be circulated and distributed to their proper consumers by means of his promissory notes to the value of a hundred thousand pounds as by an equal value of gold and silver money. Eighty thousand pounds of gold and silver therefore can in this manner be spared from the circulation of the country. And if different operations of the same kind should at the same time be carried on by many different banks and bankers the whole circulation may thus be conducted with a fifth part only of the gold and silver which would otherwise have been requisite. Let us suppose for example that the whole circulating money of some particular country amounted at a particular time to one million sterling that some being then sufficient for circulating the whole annual produce of their land and labor. Let us suppose too that sometime thereafter different banks and bankers issued promise a particular banker lends among his customers his own promissory notes to the extent we shall suppose of a hundred thousand pounds. As those notes serve all the purposes of money his debtors pay him the same interest as if he had lent them so much money. This interest is the source of his gain. Though some of those notes are continually coming back upon him for payment part of them continue to circulate for months and years together. Though he has generally in circulation therefore notes to the extent of a hundred thousand pounds twenty thousand pounds in gold and silver may frequently be a sufficient provision for answering occasional demands. By this operation therefore twenty thousand pounds in gold and silver perform all the functions which a hundred thousand could otherwise have performed. The same exchanges may be made the same quantity of consumable goods may be circulated and distributed to their proper consumers by means of his promissory notes to the value of a hundred thousand pounds as by an equal value of gold and silver money. Eighty thousand pounds of gold and silver therefore can in this manner be spared from the circulation of the country. And if different operations of the same kind should at the same time be carried on by many different banks and bankers the whole circulation may thus be conducted with a fifth part only of the gold and silver which would otherwise have been requisite. Let us suppose for example that the whole circulating money of some particular country amounted at a particular time to one million sterling that some being then sufficient for circulating the whole annual produce of their land and labor. Let us suppose too that sometime thereafter different banks and bankers issued promissory notes payable to the bearer to the extent of one million reserving in their different coffers two hundred thousand pounds for answering occasional demands. There would remain therefore in circulation eight hundred thousand pounds in gold and silver and a million of bank notes or eighteen hundred thousand pounds of paper and money together. But the annual produce of the land and labor of the country had before required only one million to circulate and distribute it to its proper consumers and that annual produce cannot be immediately augmented by those operations of banking. One million therefore will be sufficient to circulate it after them. The goods to be bought and sold being precisely the same as before the same quantity of money will be sufficient for buying and selling them. The channel of circulation if I may be allowed such an expression will remain precisely the same as before. One million we have supposed sufficient to fill that channel. Whatever therefore is poured into it beyond this sum cannot run into it but must overflow. One million eight hundred thousand pounds are poured into it. Eight hundred thousand pounds therefore must overflow. That sum being over and above what can be employed in the circulation of the country. But though this sum cannot be employed at home it is too valuable to be allowed to lie idle. It will therefore be sent abroad in order to seek that profitable employment which it cannot find at home. But the paper cannot go abroad because at a distance from the banks which issue it and from the country in which payment of it can be exacted by law it will not be received in common payments. Gold and silver therefore to the amount of eight hundred thousand pounds will be sent abroad and the channel of home circulation will remain filled with a million of paper instead of a million of those metals which filled it before. But though so great a quantity of gold and silver is thus sent abroad we must not imagine that it is sent abroad for nothing or that its proprietors make a present of it to foreign nations. They will exchange it for foreign goods of some kind or another in order to supply the consumption either of some other foreign country or of their own. If they employ it in purchasing goods in one foreign country in order to supply the consumption of another or in what is called the carrying trade whatever profit they make will be in addition to the neat revenue of their own country. It is like a new fund created for carrying on a new trade. Domestic business being now transacted by paper and the gold and silver being converted into a fund for this new trade. If they employ it in purchasing foreign goods for home consumption they may either first purchase such goods as are likely to be consumed by idle people who produce nothing such as foreign wines foreign silks etc. Or secondly they may purchase an additional stock of materials tools and provisions in order to maintain and employ an additional number of industrious people who reproduce with a profit the value of their annual consumption. So far as it is employed in the first way it promotes puttogality increases expense and consumption without increasing production or establishing any permanent fund for supporting that expense and is in every respect hurtful to the society. So far as it is employed in the second way it promotes industry and though it increases the consumption of the society it provides a permanent fund for supporting that consumption. The people who consume reproducing with a profit the whole value of their annual consumption. The gross revenue of the society the annual produce of their land and labor is increased by the whole value which the labor of those workmen adds to the materials upon which they are employed and their neat revenue by what remains of this value after deducting what is necessary for supporting the tools and instruments of their trade. That the greater part of the gold and silver which being forced abroad by those operations of banking is employed in purchasing foreign goods for home consumption is and must be employed in purchasing those of this second kind seems not 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 may be 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 recompense 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 workmen 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 so ever 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 labor. 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 shelling 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 active parliament in 1695 and the other called the Royal Bank by Royal Charter in 1727. Whether the trade either of Scotland in general or 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 in 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 pounds 10 shillings 9-pence 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, manufacturers, 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 and 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 except 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 benefits 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 piecemeal 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 these 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 conveniences 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 may 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 it in order to answer the demands continually coming upon him for payment of the goods which he purchases upon credit. Let the ordinary amount of this sum be supposed five hundred pounds. The value of the goods in his warehouse must always be less by five hundred pounds than it would have been had he not been obliged to keep such a sum unemployed. Let us suppose that he generally disposes of his whole stock upon hand or of goods to the value of his whole stock upon hand once in the year. By being obliged to keep so great a sum unemployed he must sell in a year five hundred pounds worth less goods than he might otherwise have done. His annual profits must be less by all that he could have made by the sale of five hundred pounds worth more goods and the number of people employed in preparing his goods for the market must be less by all those that five hundred pounds more stock could have employed. The merchant and Edinburgh on the other hand keeps no money unemployed for answering such occasional demands. When they actually come upon him he satisfies them from his cash account with the bank and gradually replaces the sum borrowed with the money or paper which comes in from the occasional sale of his goods. With the same stock therefore he can without imprudence have at all times in his warehouse a larger quantity of goods than the London merchant and can thereby both make a greater profit himself and give constant employment to a greater number of industrious people who prepare those goods for the market. Hence the great benefit which the country has derived from this trade. End of Book Two Chapter Two Part One Part Two of Chapter Two of Book Two of the Wealth of Nations This is a LibriVox recording. All LibriVox recordings are in the public domain. For more information or to volunteer please visit LibriVox.org Recording by Stephen Escalera The Wealth of Nations by Adam Smith Part Two of Chapter Two of Book Two of money considered as a particular branch of the general stock of the society or of the expense of maintaining the national capital. The facility of discounting bills of exchange it may be thought indeed gives the English merchants a convenience equivalent to the cash accounts of the Scotch merchants. But the Scotch merchants it must be remembered can discount their bills of exchange as easily as the English merchants and have besides the additional convenience of their cash accounts. The whole paper money of every kind which can easily circulate in a country never can exceed the value of the gold and silver of which it supplies the place or which the commerce being supposed the same would circulate there if there was no paper money. If twenty shelling notes for example are the lowest paper money current in Scotland the whole of that currency which can easily circulate there cannot exceed the sum of gold and silver which would be necessary for transacting the annual exchanges of twenty shelling's value and upwards usually transacted within that country. Should the circulating paper at any time exceed that sum as the excess could neither be sent abroad nor be employed in the circulation of the country it must immediately return upon the banks to be exchanged for gold and silver. Many people would immediately perceive that they had more of this paper than was necessary for transacting their business at home. And as they could not send it abroad they would immediately demand payment for it from the banks. When this superfluous paper was converted into gold and silver they could easily find the use for it by sending it abroad. But they could find none while it remained in the shape of paper. There would immediately therefore be a run upon the banks to the whole extent of this superfluous paper and if they showed any difficulty or backwardness in payment to a much greater extent. The alarm which this would occasion necessarily increasing the run. Over and above the expenses which are common to every branch of trade such as the expense of house rent, the wages of servants, clerks, accountants, etc. The expenses peculiar to a bank consist chiefly in two articles. First, in the expense of keeping at all times in its coffers for answering the occasional demands of the holders of its notes a large sum of money of which it loses the interest. And secondly, in the expense of replenishing those coffers as fast as they are emptied by answering such occasional demands. A banking company which issues more paper than can be employed in the circulation of the country and of which the excess is continually returning upon them for payment ought to increase the quantity of gold and silver which they keep at all times in their coffers not only in proportion to this excessive increase of their circulation but in a much greater proportion. Their notes returning upon them much faster than in proportion to the excess of their quantity. Such a company therefore ought to increase the first article of their expense not only in proportion to this forced increase of their business but in a much greater proportion. The coffers of such a company too though they ought to be filled much fuller yet must empty themselves much faster than if their business was confined within more reasonable bounds and must require not only a more violent but a more constant and uninterrupted exertion of expense in order to replenish them. The coin too which is thus continually drawn in such large quantities from their coffers cannot be employed in the circulation of the country. It comes in place of a paper which is over and above what can be employed in that circulation and is therefore over and above what can be employed in it too. But as that coin will not be allowed to lie idle it must in one shape or another be sent abroad in order to find that profitable employment which it cannot find at home. And this continual exportation of gold and silver by enhancing the difficulty must necessarily enhance still farther the expense of the bank in finding new gold and silver in order to replenish those coffers which empty themselves so very rapidly. Such a company therefore must in proportion to this forced increase of their business increase the second article of their expense still more than the first. Let us suppose that all the paper of a particular bank which the circulation of the country can easily absorb and employ amounts exactly to forty thousand pounds and that for answering occasional demands this bank is obliged to keep at all times in its coffers ten thousand pounds in gold and silver. Should this bank attempt to circulate forty four thousand pounds the four thousand pounds which are over and above what the circulation can easily absorb and employ will return upon it almost as fast as they are issued. For answering occasional demands therefore this bank ought to keep at all times in its coffers not eleven thousand pounds only but fourteen thousand pounds. It will thus gain nothing by the interest of the four thousand pounds excessive circulation and it will lose the whole expense of continually collecting four thousand pounds in gold and silver which will be continually going out of its coffers as fast as they are brought into them. Had every particular banking company always understood and attended to its own particular interest the circulation never could have been overstocked with paper money. But every particular banking company has not always understood or attended to its own particular interest and the circulation has frequently been overstocked with paper money. By issuing too great a quantity of paper of which the excess was continually returning in order to be exchanged for gold and silver the Bank of England was for many years together obliged to coin gold to the extent of between eight hundred thousand pounds and a million a year or at an average about eight hundred and fifty thousand pounds. For this great coinage the bank in consequence of the worn and degraded state into which the gold coin had fallen a few years ago was frequently obliged to purchase gold bullion at a high price of four pounds an ounce which it soon after issued in coin at three pounds seventeen shillings ten and a half pence an ounce. The amount of money was spent between two and a half and three percent upon the coinage of so very large a sum. Though the bank therefore paid no seniority though the government was properly at the expense of this coinage this liberality of government did not prevent altogether the expense of the bank. The Scotch banks in consequence of an excess of the same kind were all obliged to employ constantly agents at London to collect money for them at an expense which was seldom below one and a half or two percent. The money was spent down by the wagon and insured by the carriers at an additional expense of three quarters percent or fifteen shillings on the hundred pounds. Those agents were not always able to replenish the coffers of their employers so fast as they were emptied. In this case the resource of the banks was to draw upon their correspondence in London bills of exchange to the extent of the sum which they wanted. When those correspondence afterwards drew upon them for the payment of the sum together with the interest and commission from the distress into which their excessive circulation had thrown them at sometimes no other means of satisfying this jot but by drawing a second set of bills either upon the same or upon some other correspondence in London. And the same sum or rather bills for the same sum would in this manner make sometimes more than two or three journeys. The debtor bank paying always the interest and commission upon the whole accumulated sum. Even those Scotch banks which never distinguished themselves by their extreme imprudence were sometimes obliged to employ this ruinous resource. 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 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 and to 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 and 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 money. 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 4, 5, 6, or 8 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 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 equal 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 unable 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 afforded. 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 with any moderate periods of time have equaled 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 were 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 convenience 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 banks 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 convenience 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 forage for example employs in erecting his forage and smelting houses his workhouses and warehouses the dwelling houses of his workmen etc. Of the capital which the undertaker of a mine employs in sinking his shafts and erecting engines for jarring out the water and making roads and wagon ways etc. Of the capital which the person who undertakes to improve land employs in clearing draining enclosing maneuvering and plowing waste and uncultivated fields and building farmhouses with all their necessary appendages of stables granaries etc. The return of the fixed capital are in almost all cases much slower than those of the circulating capital. In 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 convenience 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. Injustice to their creditors however their own capital ought in this case to be sufficient to ensure 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 proposed 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 stamp paper or of attorney's fees for joined 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 bank. 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 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 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 wish to get still more. The banks they seem to have thought could extend their credits to whatever some 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 which they seem to have thought were in honor 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 prophets 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 endeavor to explain it as distinctly as I can. 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 last two 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 successfully 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 endorsed, that is, written their names upon the back of the bill, each endorser 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 endorsers 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 traveler to himself, and will not stand very long, but it is a chance if it falls tonight, and I will venture, therefore, to sleep in it tonight. 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 percent in the year and the commission was never less than one half percent on each draw. 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 percent 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 percent 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 bills which A. and 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 bank 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 manufacturers. 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 endeavoring 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 most 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. In 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 clamor 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 banknotes. But those banknotes 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 percent only was paid up. This sum ought to have been paid in at several different installments. A great part of the proprietors when they paid in their first installment 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 installments. 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 draw 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 not withstanding 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 200,000 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 stopped amounted to upwards of 600,000 pounds. This bank therefore had in little more than the course of two years advanced to different people upwards of 800,000 pounds at 5%. Upon the 200,000 pounds which it circulated in bank notes this 5% might perhaps be considered as clear gain without any other deduction besides the expensive management. But upon upwards of 600,000 pounds for which it was continually drawing bills of exchange upon London it was paying in the way of interest and commission upwards of 8%. And was consequently losing more than 3% upon more than three fourths of all its dealings. End of Book 2 Chapter 2 Part 2