3^ 
 
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Digitized by the Internet Archive 
 
 in 2007 with funding from 
 
 IVIicrosoft Corporation 
 
 http://www.archive.org/details/enquiryintonaturOOthorrich 
 
AN 
 
 EJVQiU'I'RY 
 
 INTO 
 
 THE NATURE AND EFFECTS 
 
 of 
 
 THE FAFER CJREBI 
 
 OP 
 
 GREAT BRITAIN. 
 
 Printed by Knight and Coaptoc, 
 Cloth Fair, 
 
AN 
 
 ' EJWqUIRY 
 
 INTO 
 
 THE NATURE AND EFFECTS 
 
 • of 
 
 THE PAPER CREDIT 
 
 OS 
 
 GREAT BRITAIN. 
 
 BY 
 
 HENRY THORNTON, ESQ. 
 
 M. P. 
 
 VNIVERsrTY 
 or 
 ■Jiomi^ LONDON: 
 
 PRINTED lOR J. IIATCHAllD, BOOKSELLER TO THE QUEEN, 
 
 ( Opposite Yerk House ) 
 
 PICCADILLY ; 
 
 AND MESSRS. F. AND C. RIVINGTON, 
 
 ST. Paul's church yard. 
 
 1802 
 
^<^ 
 
 
 ^"^"lERAl 
 
INTRODUCTION. 
 
 JL HE first intention of the Writer of the 
 following pages was merely to expose some popular 
 errors which related chiefly to the suspension of the 
 " cash payments of the Bank of England, and to the 
 influence of our paper currency on the price of pro- 
 visions. But in pursuing his purpose, many ques- 
 tions occurred which it seemed important to discuss, 
 partly on account of their having some bearing on 
 the topics under consideration, and partly because 
 they appeared to be of general importance, ^nd had 
 either been left unexplained, or had been inaccu- 
 rately stated by those English writers who have 
 treated of paper credit. This work has, therefore, 
 assumed, in some degree, the character of a gene- 
 ral treatise. 
 
 The first Chapter contains a few preliminary 
 ^ observations on commercial credit. The object 
 of the two following Chapters is distinctly to de- 
 cribe the several kinds of paper credit ; to lay down 
 some general principles respecting it; and, in par 
 ticular, to point out the important consequences 
 which result from the different degrees of rapidity 
 in the circulation of diflferent kinds of circulating 
 medium, and also in the circulation of the same 
 medium at different periods of time. 
 
 A • '** The 
 
 1^5049 
 
The nature of the institution of the Bank of 
 England is then explained ; the necessity ot main- 
 taining the accustomed, or nearly the accustomed, 
 quantity of its notes, however great may be the fluc- 
 tuations of its cash, is insisted on; and the suspen- 
 sion of its cash payments is shewn to have resulted 
 neither from a deficiency in its resources, nor from 
 a too great extension of its loans to government, nor 
 from rashness or improvidence in its directors, but 
 from circumstances which they had little power of 
 controuling: this event being one to which a na- 
 tional establishment, like the Bank of England, is, 
 in some situations of the country, unavoidably 
 subject. 
 
 The manner in which an unfavourable balance 
 of trade affects the course of exchange, and . in 
 which an unfavourable exchange creates an excess 
 of the market price above the mint price of gold, 
 and a profit on the exportation of our coin, are the 
 subjects of a succeeding Chapter. 
 
 The circumstances, also, which have led to the 
 multiplication of our country banks, and the seve- 
 ral advantages and disadvantages of those institu- 
 tions, are fully stated. 
 
 The earlier parts of the work having tended to 
 shew the evil of a too great and sudden diminution 
 of our circulating medium, some of the latter Chap- 
 ters are employed in pointing out the consequences 
 of a too great augmentation of it. The limitation 
 of the amount of the notes of the Bank of England 
 
 is 
 
Vll 
 
 is shewn to be the means of restricting the quantity 
 of the circulating paper of the kingdom, of pre- 
 venting a rise in the price of commodities in Great 
 Britain, and of thus extending our exports and re- 
 straining our imports, and rendering the exchange 
 more favourable. Some objections to the limita- 
 tion of the Bank of England paper arc likewise 
 stated and answered. 
 
 The last Chapter treats of the influence of paper 
 credit on the price of all the articles of Hfe : a sub- 
 ject, the difficulties of which are in some degree 
 removed by the antecedent discussions. 
 
 In the course of this enquiry, several passages in 
 the work of Dr. A. Smith on the Wealth of Na- 
 tions are animadverted on, as are also some obser- 
 vations made by Mr. Hume in his Essays on Mo- 
 ney and on the Balance of Trade, and by Sir James 
 Stewart in his. book on Political (Economy, as well 
 as some remarks in the writings of Locke and Mon- 
 tesquieu. 
 
 The mode in which the subjects of coin, of pa- 
 per credit, of the balance of trade, and of exchanges 
 (subjects intimately connected with each other), 
 have been treated by those writers, was suggested 
 by the circumstances of more early times: and we 
 ought not to be surprised, if, in treatises necessarily 
 In some degree theoretical, or written for the purpose 
 of establishing a particular truth, certain incidental 
 observations should not be just, nor even if some 
 
 A 2 main 
 
yiu 
 
 main principles should h^vfi been laid down in 
 terms not sufficiently guarded. 
 
 A person who presumes to differ from the autho- 
 rities which have been mentioned, and who pro- 
 poses to correct the public opinion on the important 
 subject of our paper credit, ought, undoubtedly, to 
 be very cautious lest he should propagate new er- 
 rors while he is endeavouring to remove the old. 
 A sense of the duty of mature consideration has 
 caused some delay in the publication of the follow- 
 ing work. That its leading doctrines are just, the 
 writer feels a confident persuasion. That it may 
 have imperfections, and some, perhaps, which 
 greater care on his part might have corrected, he 
 cannot doubt. But he trusts, that a man who is 
 much occupied in the practical business of life, 
 will be excused by the public, if he should present 
 to them a treatise less elaborate, and, in many re- 
 spects, more incomplete, than those on which he 
 has found it necessary to remark. Future en- 
 quirers may possibly pursue, with advantage, some 
 particular topics on which he has felt a certain de- 
 gree of distrust. 
 
 It may not be irrelavant or improper to observe, 
 that the present work has been written by a per- 
 son whose situation in life has supplied information 
 on several of the topics under discussion, and that 
 much use has been made of those means of correct- 
 ing the errors of forriier writers which recent events 
 have afforded. 
 
 CONTENTS. 
 
JX 
 
 CONTENTS. 
 ' CHAP. I. 
 
 OF Commercial Credit', — of Paper Credit,-: v,.:^:^ 
 as arising out of it, — Of Commercial Ca^ 
 pital — — — 13 
 
 CHAP.^ii: 
 
 Of Trade by Barter. — Of Money .—Of Bills 
 of Exchange and H^otes.- — Of Bills and 
 Notes, considered as- discountable Articles^ 
 •^•-Of Fictitious Bills, or Bills of Acco7n< 
 modation — — ^ 23 
 
 CHAP. III. 
 
 Of circulating Paper. — Of Bank Notes. — Of, 
 Bills considered as circulating Paper, -r^ 
 Of the different Degrees of Rapidity 'tri 
 the Circulation of different Sorts of circu- 
 lating Medium^ at different Times. — Er- 
 ror of Dr. A. Smith. — Difference in the 
 Quantity wanted for effecting the Payments 
 of a Country in Consequence of this Differ- 
 ence of Rapidity: — Proof of this taken 
 from Events of 1793. — Fallacy involved 
 in the Supposition that Paper Credit might 
 be abolished — — — 37 
 
 CHAP. 
 
CHAP. IV. 
 
 Pag< 
 
 Observation of Dr. Smithy respecting the 
 Bank of Engla nd : — Of the Nature of that 
 Institution : — Reasons for never greatly 
 diminishing its Notes : — its Liability to 
 be exhausted of Guineas : — the SuspeU" 
 sion of its Cash Payments not owing to too 
 great Issue of Paper ^ — nor to too great 
 Loans. — Propriety of Parliamentary In- 
 terference — — 57 
 
 CHAP. V. 
 
 Of the Bahmce of Trade, — Of the Course of 
 Exchange : — Tendency of an unfavourable 
 Exchange to take away Gold: — of the 
 Probability of the Return of Gold : — of 
 the Manner in which it may be supposed 
 that the exported Gold is employed on the 
 Continent. — Reasons for having reneived 
 the Law for suspending the Cash Pay- 
 ments of the Bank of England. 1 1 5 
 
 CHAP. VI. 
 
 Error of imagining that Gold can be pro- 
 vided at the Time of actual Distress. — 
 
 Reasons 
 
Xi 
 
 Page 
 Reasons for not admitting the Presumption 
 that the Directors of the Bank must have 
 been to blame, for not makingy beforehand, 
 a more adequate Provision — 144? 
 
 CHAP. VII. 
 
 Of Country Banks : — their Advantages and 
 Disadvantages. — . — 154 
 
 CHAP. VIII. 
 
 Of the Tendency of a too great Issue of Bank 
 Paper to produce an Excess of the Market 
 Price above the Mint Price of Gold: — of 
 the Means by which it creates this Excess, 
 viz. by its Operation on the Price of Goods, 
 and on the Course of Exchange. — Errors 
 of Dr. A, Smith on the Subject of Exces- jj/ifj^) 
 sive Paper. — Of the Manner in zvhich the '■■ 
 Limitation of the 2ua?itity of the Bank of 
 E?igland Paper serves to limit the Quan- 
 tity , and sustain the Value of all the Paper 
 in the Kingdom — — • 192 
 
 CHAP. IX. 
 
 Of the Circumstances which cause the Paper 
 of the Bank of England, as well as all the 
 other Paper of the Country, to fail of hav- 
 
Xll 
 
 Page 
 ing their Value regulated according to any 
 exact Proportion to the Quantity of Bank 
 of England Notes •— — i 222 
 
 CHAP. X. 
 
 Objections to the Doctrine of the two preced- 
 ing Chapters answered. — Of the Circum- 
 stances which render it necessary that the 
 Bank should impose its own Limit on the 
 2ua7itity oj its Paper. — Effect of the Lata 
 against Usury. — Proof of the Necessity of 
 restricting the Bank Loans, drawn from 
 the Case of the Transfer of Capital to 
 Foreign Countries — 249 
 
 CHAP. XI. 
 
 Of the Influence of Paper Credit on the Price 
 of Commodities.— Observations on some 
 Passages of Montesquieu and Hume* — 
 Conclusion. — — 292 
 
 AN 
 
AN ENQFERY 
 
 ^TO THE 
 
 NATURE AND EFFECTS 
 
 of the 
 
 PAPER CREDIT OF GREAT BRITAIN. 
 
 ■■««i w;/|ji;WiTi^? .o#;i 5|::::X'JM;ii i — I — 
 
 CHAP. L 
 
 Of commercial Credit,— Of Paper Credit^ as arising 
 out of it^-^Of commercial Capital, 
 
 C/OMMERCIAL credit may be defined 
 to be that confidence which subsists among com- 
 mercial men in respect to their mercantile affairs. 
 This confidence operates in several ways. It dis- 
 poses them to lend money to each other, to bring 
 themselves under various pecuniary engagements 
 by the acceptance and indorsement of bills, and 
 •also to sell and deliver goods in consideration of 
 an equivalent promised to be given at a subsequent 
 period. Eveji in that early and rude state of 
 
 B society. 
 
14 
 
 society, in which neither bills nor money are as 
 yet known, it may be assumed, that if there be 
 commerce, a certain degree of commercial cre- 
 dit will also subsist. In the interchange, for ex- 
 ample, of commodities between the farmer and the 
 manufacturer, the manufacturer, probably, will 
 sometimes deliver goods to the farmer on the credit 
 of the growing crop, in confidence that the farmer 
 will come into possession of the fruits of his labour, 
 and will be either compelled by the law of the 
 land, or induced by a sense of justice, to fulfil his 
 part of the contract when the harvest shall be over. 
 In a variety of other cases it must happen, even in 
 the infancy of society, that one man will deliver 
 property to his neighbour without receiving, on the 
 spot, the equivalent which is agreed to be given in 
 return. It will occasionally be the interest of the 
 one party thus to wait the other*s convenience: for 
 he that reposes the confidence will receive in the price 
 an adequate compensation for the disadvantages in- 
 curred by the risk and the delay. In a society in 
 which law and the sense of moral duty are* weak, 
 and property is consequently insecure, there will, 
 of course, be little confidence or credit, and there 
 wilfalso be little commerce. 
 
 This commercial credit is the foundation of 
 paper credit; paper serving to express that confi- 
 dence which is in the mind, and to reduce to 
 writing those engagements to pay, which might 
 
 otherwise 
 
15 
 
 Otherwise be merely verbal. It will hereafter be 
 . explained in what manner, and to how very great 
 a degree, paper credit also spares the use of the 
 expensive article of gold; and how the multipli- 
 cation of paper securities serves to enlarge, con- 
 firm, and diffuse that confidence among traders, 
 which, in some measure, existed independently 
 of paper, and would, to a certain degree, remain, 
 though paper should be abolished. 
 
 If there may be a convenience in giving cre- 
 dit in the infancy of society, when the interchange 
 of commodities is small, there may be, at least, the 
 same convenience when goods begin to be multi- 
 plied, when wealth is more variously distributed, and 
 society is advanced. 
 
 The day on which it suits the British merchant to 
 purchase and send away a large quantity of goods, 
 may not be that on which he finds it convenient to 
 pay for them. If it is made necessary for him to give 
 ready money in return, he must always have in his 
 hands a very large stock of money; and for the ex- 
 pence of keeping this fund (an expence consisting 
 chiefly in the loss of interest) he must be repaid in the 
 price of the commodities in which he deals. He 
 avoids this charge, and also obtains time for preparing 
 and adjusting his pecuniary concerns, by buying on 
 credit ; that is to say, by paying for his goods not 
 by money, but by the delivery of a note in which he 
 promises the money on a future day. He is thus 
 
 B2 set 
 
 k 
 
1^ 
 
 s^t m6re at liberty in his speculations : his judge- 
 ment as to the propriety of buying or not buying, or 
 of selling or not selling, and also as to the time of 
 doing either, may be more freely exercised. 
 
 The general principle, according to which the 
 length of the customary credit in different trades has 
 adjusted itself, seems clearly to have been that of 
 mutual advantage and convenience. For example? 
 if we suppose the merchant importers of any parti- 
 cular article for home consumption to be generally 
 rich, and the retailers of it to be poor — that is, to have 
 a capital insufficient to enable them to keep the as- 
 sortment and stock of goods necessary in their retail 
 commerce — the credit customarily given by the im- 
 porters, and taken by the retail traders, will natu- 
 rally be long. In other words, it will be the custom 
 of the importers to lend part of their capital to the 
 retail dealers, in consideration of an advantage in 
 the price proportionate to the benefit conferred by 
 the loan. Sometimes two or more customs prevail, 
 as to the period of credit, in the same trade ; and 
 to each custom there are individual exceptions. 
 The deviations from the rule obviously arise out of 
 that principle of mutual advantage arid convenience 
 on which the rule itself has been founded. 
 
 The option of buying and af selling on longer or 
 shorter credit, as it multiplies the number of persons 
 able to buy and to sell, promotes free competition, 
 and thus contributes to lower the price of articles. 
 
 A variety 
 
A variety of degrees in the length of credit which 
 is afforded, tends more especially to give to some 
 of the poorer traders a greater power of purchasing, 
 and cherishes that particular sort of competition 
 most adapted to lower prices, namely, the com- 
 petition of dealers likely to be contented with a very 
 moderate rate of gain. Opulent merchants some- 
 times complain of the intrusion of dealers who pos- 
 sess a small capital and take long credit, for this 
 very reason, that such dealers reduce the profits of 
 trade. j 
 
 But the custom of taking and giving long ere* 
 dit has its inconveniences as well as its advan- 
 tages. It encreases the amount of the bad debts 
 incurred in the course of commercial transactions. 
 The apprehension of loss, is, therefore, continually 
 operating on the mind of the lender as a restraint 
 on the custom of giving credit, while the compen- 
 sation he receives for the use of the capital which he 
 supplies, acts as an encouragement to the practice. 
 The subsisting state of credit may, in general, be 
 considered as resulting out of a comparison made 
 both by lenders and borrowers of the advantages 
 and disadvantages which each discover that they 
 derive from giving and taking credit. 
 
 Mercantile confidence, however, is not always 
 dealt out in that proportion in which there is rea- 
 sonable ground for it. At some periods it has risen 
 to a most unwarrantable height, and has given 
 
 B 3 occasion 
 
18 
 
 occasion to the most extravagant and hurtful 
 speculations. Of these the cases of the Ayr bank, 
 and of the South Sea scheme, are instances. Evils 
 of this kind, hov^ever, have a tendency to correct 
 themselves. In a country possessed of commercial 
 knowledge and experience, confidence, in most in- 
 stances, will not be misplaced. 
 
 Some persons are of opinion, that, when the cus- 
 tom of buying on credit is pushed very far, and a 
 great quantity of individual dealings is in conse- 
 quence carried on by persons having comparatively- 
 little property, the national commerce is to be con- 
 sidered as unsupported by a proper capital ; and that 
 a nation, under such circumstances, whatever may 
 be its ostensible riches, exhibits the delusive ap- 
 pearance of wealth. 
 
 It must, however, be remembered, that the prac- 
 tice of buying on credit, in the internal commerce 
 of the country, supposes the habit of selling on 
 credit also to subsist; and to prevail, on the whole, 
 jn an exactly equal degree. In respect to the fo- 
 reign trade of a country, the practice of dealing 
 on credit indicates poverty or riches, in proportion 
 as the credit generally taken is longer or shorter 
 than the credit given. The custom which trades- 
 men have of selling to the consumers on credit, 
 is also an indication of wealth in the commer- 
 cial world : the traders must possess a surplus of 
 wealth, either their own or borrowed, whi^h bears 
 
 an 
 
19 
 
 an exact proportion to the amount of debts due to 
 them by the consumers. Thus that practice of trading 
 on credit which prevails among us, so far as it subsists 
 between trader and trader, is an indication neither 
 of wealth nor of poverty in the mercantile body j so 
 far as it respects our transactions with foreign coun- 
 tries, is an indication of extraordinary wealth be- 
 longing to the merchants of Great Britain i and so 
 far as it respects the trade between the retailer and 
 the consumer, implies a deficiency of wealth in the 
 consumers, and a proportionate surplus of it among 
 commercial men. The existing customs imply, that, 
 on the whole, there is among our traders a great 
 abundance of wealth. 
 
 It may conduce to the prevention of error, in 
 the subsequent discussions, to define, in this place, 
 what is meant by commercial capital. This consists, 
 first, in the goods (part of them in the course of 
 manufacture) which are in the hands of our manu- 
 facurers and dealers, and are in their way to con- 
 sumption. The amount of these is necessarily larger 
 or smaller in proportion as the general expenditure 
 is more or less considerable, and in proportion, also, 
 as commodities pass more or less quickly into the 
 hands of the consumer. It further consists in the 
 ships, buildings, machinery, and other dead stock 
 maintained for the purpose of carrying on our ma- 
 nufactures and commerce, under which head may 
 be included the gold found necessary for the pur- 
 
 B 4 poses 
 
poses of commerce, but at all times forming a very 
 small item in this great account. It comprehends 
 also the debts due to our traders for goods sold and 
 delivered by them on credit ; debts finally to be 
 discharged by articles of value given in return. 
 
 Commercial capital, let it then be understood, 
 consists not in paper, and is not augmented by the 
 multiplication of this medium of payment. In 
 6ne sepse, indeed, it may be encreased by paper. I 
 mean, that the nominal value of the existing goods 
 may be enlarged through a reduction which is caused 
 by paper in the value of that standard by which all 
 property is estimated. The paper itself forms no 
 part of the estimate. 
 
 ^This mode of computing the amount of the na- 
 tional capital engaged in commerce, is substantially 
 the same with that in which each commercial man 
 estimates the value of his own property. Paper 
 constitutes, it is true, an article on the credit side 
 of the books of some men; but it forms an ex- 
 actly equal item on the debit side of the books of 
 others. It constitutes, therefore, on the whole, 
 neither a debit nor a credit The banker who issues 
 twenty thousand pounds in notes, and lends in con- 
 sequence twenty thousand pounds to the mer- 
 chants on the security of bills accepted by them, 
 states himself in his books to be debtor to the va- 
 rious holders of his notes to the extent of the sum 
 in question ; and states himself to be the creditor 
 of the accepters of the bills in hi? possessioj(i to the 
 
 same 
 
21 
 
 same amount. His valuation, therefore, of his own 
 property, is the same as if neither the bills nor the 
 bank notes had any existence. Again ; the mer- 
 chants, in making their estimate of property, deduct 
 the bills payable by themselves which are in the 
 drawer of the banker, and add to their estimate 
 the notes of the banker which are in their own 
 drawer ; so that the valuation, likewise, of the ca- 
 pital of the merchants is the same as if the paper 
 had no existence. The use of paper does not,, 
 therefore, introduce any principle of delusion into 
 that estimate of property which is made by indivi- 
 duals. The case of gold, on the other hand, differs 
 from that of paper inasmuch as the possessor of gold 
 takes credit for that for which no man debits himself. 
 The several commercial capitals of traders, as esti- , .. 
 mated in their books, would, unquestionably, be' '-^ ' 
 found, if deducted from their other property and 
 added together, to correspond, in amount, with a 
 general estimate of the commercial stock of the 
 country, calculated under the several heads already 
 stated. 
 
 It is true, that men, in estimating their share in 
 the public funds of the country, add to their esti- 
 mate a debt due to them which no individual de- 
 ducts from his valuation. On this head, it may be 
 observed, that the nation is the debtor. But the 
 commercial capital, which has been described, exists 
 independently of capital in the public funds. The 
 man in trade has property in trade. If he has pro- 
 perty 
 
22 
 perty in the stocks, he has the property in trade in 
 addition to it. In speaking, therefore, of the com- 
 mercial capital, whether of the nation or of an indi* 
 vidual, the idea that any part of it is composed either 
 of the paper credit or of the stocks of the country, 
 is to be totally excluded. 
 
 CHAP, 
 
23 
 
 CHAP. 11. 
 
 Of Trade by Barter.— Of Money .--'Of Bills of 
 Exchange and Notes. — Of Bills and Notes, con- 
 sidered as discountable Articles .'^Of fictitious 
 Bills, or Bills of Accommodation, 
 
 Society, in its rudest state, carries on 
 its trade by the means only of barter. When most 
 advanced, it still conducts its commerce on the same 
 principle ; for gold and silver coin, bankers' notes, 
 and bills of exchange, may be considered merely as 
 instruments employed for the purpose of facilitating 
 the barter. The object is to exchange such a quan- 
 tity of one sort of goods for such a quantity of ano- 
 ther, as may be deemed, under all circumstances, 
 a suitable equivalent *, 
 
 Barter 
 
 * By the term suitable equivalent. Is not intended that equivalent 
 which an impartial umpire, determining according to the strict rule 
 of equity, might dictate. The eqiiivalent obtained by men deaU 
 ing in the way of barter is not exactly of this sort ; for that power 
 which the proprietors of a scarce and necessary commodity have over 
 tbfc consumers of it, will always lead them to demand a much higher 
 price than the production of it may have cost. 
 
 In Africa, for example, where the mode of barter prevails, the 
 price of rice is at some times equal to about two pounds, and at 
 others to about sixteen pounds per ton. It cannot be supposed 
 
 that 
 
24 
 
 Barter being soon felt to be inconvenient, the 
 precious metals are resorted to as a measure of va- 
 lue, they being, at once, portable, steady in their 
 price, and capable of subdivisions. The state fixes 
 a stamp upon them, in order thus to certify the 
 quantity and fineness of each piece. 
 
 The precious metals, when uncoined (or in the 
 state of bullion), are themselves commodities 3 but 
 when converted into money they are to be consi- 
 dered merely as a measure of the value of other 
 articles. They may, indeed, be converted back into 
 commodities; and it is oae recommendation of their 
 use as coin, that they are capable of this conver- 
 sion. 
 
 We shall now advert to some of the simplest 
 forms in which it may be supposed that paper cre- 
 dit will first exist. 
 
 To speak first of bills of exchange. 
 
 It is obvious, that, however portable gold may 
 be in comparison of any other article which might 
 be made a measure of value, to c^rry it in quanti- 
 ties to a great distance must prove incommodious. 
 Let it be supposed, that there are in London ten 
 manufacturers who sell their article to ten shop- 
 keepers in York, by whom it is retailed ; and that 
 •there are in York ten manufacturers of another 
 
 that the variations in the crops of different seasons can bear any pro- 
 portion to this variation of prices. Monopoly also is an Svil which 
 is incident to trade as trade. It is, indeed, more particularly apt to 
 exist in the infancy of commerce. 
 
 com* 
 
25 - 
 
 commodity, ^^ho sell it to ten shopkeepers In Lon- 
 don. There would be no occasion for the ten shop- 
 keepers In London to send yearly to York, guineas for 
 the payment of the York manufactures, and for the 
 ten York shopkeepers to send yearly as many gui- 
 neas to London. It would only be necessary for 
 the York manufacturers to receive from each of the 
 shopkeepers, at their own door, the money in ques- 
 tion (for we may assume a sufficient quantity to be 
 usually circulating in the place) : giving in return 
 letters which should acknowledge the receipt of it 3 
 and which should also direct the money, lying ready 
 in the hands of their debtors in London, to be paid 
 to the London shopkeepers, so as to cancel the 
 debt in London in the same manner as that at 
 York. The expence and the riskof all'transmissiort 
 of money would thus be saved; and the traders in 
 question would of course be, on the whole, enabled 
 to sell their article at a price proportionably lower 
 than that which they would otherwise require. Let- 
 ters ordering the transfer of the debt, are termed, in 
 the language of the present day, bills of exchange- 
 They are bills by which the debt of one person 
 is exchanged for the debt of another; and the debt, 
 perhaps, which is due in one place for the debt due 
 in another. 
 
 To speak next o^ Pro7nisso7y Notes, 
 
 When goods are delivered in consideration of 
 an equivalent in money to be received at a sub- 
 sequent period, it becomes desirable that, for the 
 
 sake 
 
26 
 sake of precisely recording the day on which 
 payment is to be made, and the exact amount o 
 the sum, a note, expressing each of these particu^ 
 lars, should be given. The term. " value received" 
 is introduced into the note, as also into every bill of 
 exchange ; that expression being deemed necessary 
 in law to make the bill or the note binding. 
 
 Bills of exchange and notes have been hitherto 
 considered as created only for those simple pur- 
 poses for which they seem originally to have been 
 drawn, and which are professed by the form always 
 used in drawing them. Both these sorts of paper 
 must now be spoken of as possessing an additional 
 character, namely, that of being Discountable Arti- 
 cleSy or articles which there is an opportunity of 
 converting, at any time, into money ; sucH a dis- 
 count or deduction from the amount of the bill or 
 note as is equal to the interest upon it, during the 
 period for which it has to run, being paid as the 
 price of the conversion. The bills of exchange, • 
 which were described as drawn from York on Lon- 
 don, and as serving to transfer debts, would equally 
 answer that purpose at whatever date they might be 
 payable. It is customary, however, to make almost 
 all bills payable at a period somewhat distant. 
 Country bankers, for instance, and shopkeepers, 
 who often act in this respect as bankers, indemnify 
 themselves for the trouble and expence attending 
 the drawing of bills, not by a commission, but by 
 a protraction of the time at which the bills are to 
 
 become 
 
sr7 
 
 become payable. Thus is created a paper credit, 
 which shall remain in existence for perhaps one or 
 more months, and may serve, during any part of 
 that time, as a discountable article. 
 
 Promissory notes were before represented as 
 drawn on the occasion of the sale of goods, and 
 made payable at a distant period. In returning to 
 the more careful consideration of them, we shall 
 discover the existence of the same disposition to 
 multiply paper credit. 
 
 When a merchant in this country sells his goods 
 on credit, it is, perhaps, not very important to him 
 that he should receive from the buyer a promissory 
 note (or an accepted bill, which is the same thing), 
 if the only object of taking the note or bill is the 
 ascertainment of the exact amount of the debt, and 
 of the period of payment. It is true that the law 
 gives superior facility to the recovery of debts for 
 which promissory notes have been given. Never- 
 theless, if the sum be small, and the party in credit, 
 all these advantages, in the present high state of 
 confidence, would, in many cases, be thought 
 scarcely to compensate even the trifling expence of 
 the note stamp. The debt will be a book debt, if 
 no note be taken -, and, as such, may be sufficiently 
 secure. 
 
 Notes, even for goods sold and delivered, are 
 therefore to be considered as given chiefly for the 
 sake of a convenience of another kind, which the 
 seller finds in having them. The note, like the bill 
 
 of 
 
28 
 
 of exchange just spoken of, is a discountable ar- 
 ticle. It may be turned, if circumstances require, 
 into money, or into banknotes, which answer the 
 same purpose. It is not, perhaps, fully intended 
 to turn the note or bill into money ; they are taken 
 rather as a provision against a contingency. The 
 holder is rendered secure against the effect of dis- 
 appointments in the receipt of cash. It is in this 
 manner that his credit is fortified, and that he is 
 enabled to fulfil with punctuality his pecuniary en- 
 gagements; for there is a certain sort and quantity 
 of bills and notes, on the turning of which into mo- 
 tley, at the common rate of discount, the holder, if 
 he be a man of credit, may almost as confidently 
 rely on the changing of a bank note into guineas, or 
 of a guinea into silver. 
 
 The interest which traders have in being always 
 possessed of a number of notes and bills, has natu- 
 rally led to a great multiplication of them; and not 
 only to the multiplication of notes given for goods 
 sold, or of regular bills of exchange, but to the 
 creation of numerous other notes and bills. Of 
 these, some are termed notes and bills of accommo- 
 dation: and the term fictitious is often applied to 
 them. It may be useful to describe them particu- 
 larly. 
 
 It was before shewn, that the principal motive 
 for fabricating what must here be called the real 
 jiote, that is, the note drawn in consequence of a 
 real sale of goods, is the wish to have the means of 
 
 turning 
 
29 
 
 turning it into money. The seller, therefore, who 
 desires to have a note for goods sold, may be con- 
 sidered as taking occasion to ingraft on the trans- 
 action of the sale, the convenieat condition of re* 
 ceiving from the buyer a discountable note of the 
 same amount with the value of the goods. A fic- 
 titious note, or note of accommodation, is a note 
 drawn for the same purpose of being discounted ; 
 though it is not also sanctioned by the circumstance 
 of having been drawn in consequence of an ac- 
 tual sale of goods. Notes of accommodation are, 
 indeed, of various kinds. The following descrip-» 
 tion of one may suffice. 
 
 A, being in want of 100/., requests B to accept a 
 note or bill drawn at two months, which B, thereforci 
 on the face of it, is bound to pay ; it is understood, 
 however, that A will take care either to discharge 
 the bill himself, or to furnish B with the means of 
 paying it. A obtains ready monfey for the bill on the 
 jeint cre^iit of the two parties. A fulfils his promise 
 of paying it when due, and thus concludes the trans* 
 action. This service rendered by B to A is, how- 
 ever, not unlikely to be requited at a more or less 
 distant period by a similar acceptance of a bill on 
 A, drawn and discounted for B's convenience. 
 
 Let us now compare such a bill with a real bill. 
 Let us consider in what points they differ, or seem 
 to differ -, and in what they agree. 
 
 They agree, inasmuch as e^ch is a discountable 
 article i each has also Been created for the purpose 
 
 C of 
 
•80 
 of being discounted ; and each Is, perhaps, dis?* 
 counted in fact. Each, therefore, serves equally to 
 supply means of speculation to the merchant. So 
 far, moreover, as bills and notes constitute what is 
 called the circulating medium, or paper currency, 
 of the country (a topic which shall not be here an- 
 ticipated), and prevent the use of guineas, the fic- 
 titious and the real bill are upon an equality; and 
 if the price of commodities be raised in proportion 
 to the quantity of paper currency, the one contri- 
 butes to that rise exactly in the same manner as the 
 other. 
 
 Before we come to the points in which they differ* 
 let us advert to one point in which they are com- 
 monly supposed to be unlike ; but in which they 
 cannot be said always or necessarily to differ. 
 
 " Real notes," it is sometimes said, " represent 
 *' actual property. There are actual goods in ex- 
 *' istence, which are the counterpart to every real 
 *' note. Notes which are not drawn, in consequence 
 1*^ of a sale of goods, are a species of false wealth, 
 *' by which a nation is deceived. These supply 
 ** only an imaginary capital ; the others indicate one 
 « that is real." 
 
 In answer to this statement it may be observed^ 
 first, that the notes given in consequence of a real 
 sale of good§ cannot be considered as, on that ac* 
 count, certainly representing any actual property. 
 Suppose that A seUs one hundred pounds worth of 
 goods to B at six months credit, and takes a bill at 
 
 six 
 
K SIX months for it ; and that B, within a month after, 
 sells the same goods, at a like credit, to C, taking a 
 like bill ; and again, that C, after another month, 
 sells them to D, taking a like bill, and so on. There 
 may then, at the end of six months, be six bills of 
 100/. each existing at the same time ; and every 
 ; one of these may possibly have been discounted. 
 Of all these bills, then, one only represents any ac- 
 tual property. 
 
 In the next place it is obvious, that the number 
 of those bills which are given in consequence of 
 sales of goods, and which, nevertheless, do not re^ 
 present property, is liable to be encreased through 
 the extension of the length of credit given on the 
 sale of goods. If, for instance, we had supposed 
 the credit given to be a credit of twelve months 
 instead of six, 1,200/. instead of 600/. would have 
 been the amount of the bills drawn on the occasion 
 of the sale of goods ; and 1,100/. would have been 
 the amount of tl^at part of these which would re- 
 present no property. 
 
 In order to justify the supposition that a real bill 
 (as it is called) represents actual property, there 
 ought to be some power in the bill-holder to prevent 
 the property which the bill represents, from being 
 turned to other purposes than that of paying the 
 bill in question. No such power exists ; neither 
 the man who holds the real bill, nor the man 
 who discounts it, has any property in the spe- 
 cific goods for which it was given : he as much 
 
 C. 2 trusts 
 
52 
 trusts to the general ability to p^f of the giver of 
 the bill, as the holder of any fictitious bill does. 
 The fictitious bill may, in many cases, be a bill 
 given by a person having a large and know^n ca- 
 pital, a part of which the fictitious bill may be said, 
 in that case, to represent. The supposition that 
 real bills represent property, and that fictitious bills 
 do not, seems, therefore, to be one by which more 
 than justice is done to one of these species of bills, 
 and something less than justice to the other. 
 
 We come next to some points in which they 
 differ. 
 
 First, the fictitious note, or note of accommo- 
 dation, is liable to the objection that it professes to 
 be what it Ts not. This objection, however, lies 
 only against those fictitious bills which are passed 
 as real. In many cases, it is sufficiently obvious 
 what they are. Secondly, the fictitious bill is, in 
 general, less likely to be punctually paid than the 
 real one. There is a general presumption, that the 
 dealer in fictitious bills is a man who is a more ad- 
 venturous speculator than he who carefully abstains 
 from them. It follows, thirdly, that fictitious bills, 
 besides being less safe, are less subject to limitation 
 as to their quantity. The extent of a m«n's actual 
 sales form some limit to the amount of his real 
 notes ; and, as it is highly desirable in commerce 
 that credit should be dealt out to all persons in some 
 sort of regular and due proportion, the measure of a 
 man's actual sales, certified by the appearance o£ 
 
 his 
 
53 
 
 his bills drawn In virtue of those sales, is some rule 
 in the case, though a very imperfect one in many- 
 respects. 
 
 A fictitious bill, or bill of accommodation, is 
 evidently, in substance, the same as any common 
 promissory note ; and even better, in this respect, — 
 that there is but one security to the promissory note, 
 whereas, in the case of the bill of accommodation, 
 there are two. So much jealousy subsists lest traders 
 should push their means of raising money too far, 
 that paper, the same in its general nature with that 
 which is given, being the only paper which can be 
 given, by men out of business, is deemed somewhat 
 discreditable when coming from a merchant. And 
 because such paper, when in the merchant's hand, 
 necessarily imitates the paper which passes on the 
 occasion of a sale of goods, the epithet fictitious 
 has been cast upon it ; an epithet which has seemed 
 to countenance the confused and mistaken notion^ 
 that there is something altogether false and delusive 
 in the nature of a certain part both of the paper 
 and of the apparent wealth of the country. 
 
 Bills of exchange are drawn upon London to a 
 great amount, from all parts, not only of Great 
 Britain, but of the world ; and the grounds on which 
 they have been drawn in a great degree elude ob- 
 servation. A large proportion of them, no doubt 
 partakes of the nature of bills of accommodation. 
 They have, however, in general, that shape com- 
 C 3 municated 
 
34 
 
 municated to them, whatever it may be, which is 
 thought likely to render th^m discountable ; and it 
 is not difficult, as the preceding observations will 
 have shewn, to make use of some real, and, at the 
 same time, of many seeming, transactions of com- 
 merce as a ground for drawing, and as a means of 
 multiplying such bills. 
 
 The practice of creating a paper credit, by draw- 
 ing and re-drawing, has been particularly described 
 by Dr. Adam Smith ; and is stated by him to have 
 a tendency which is very ruinous to the party re- 
 sorting to it. This practice, however, is often car- 
 ried on at much less e^cpence to those engaged in it 
 than Dr. Smith imagines. A, for instance, of Lon- 
 don, draws a bill at two months on B, of Amster- 
 dam, and receives immediate money for the bill. 
 B enables himself to pay the bill by drawing, when 
 it is nearly due, a bill at two months on A for the 
 same sum, which bill he sells or discounts ; and A 
 again finds the means of payment by again drawing 
 a bill, at two months, on B. The transaction is, in 
 substance, obviously the same as if A and B had bor- 
 rowed, on their joint security, the sum in question 
 for six months. The ground on which transactions 
 of this sort have been stated by Dr. Adam Smith 
 to be ruinous is, that of the heavy expence of a 
 Commission on every bill drawn, which is paid by 
 him who raises money in this manner. If, for in- 
 stance, one-half per. cent is the commission, and 
 .the bilLs nrc drawn at two months, and a discount 
 
 of 
 
35 
 
 of five per cent, per annum is paid, the money 
 is raised at an interest of eight per cent. Such 
 transactions, however, are often carried on alter- 
 nately for the benefit of each of the two parties ; 
 that is to say, at one time the transaction is on the 
 account of A, who pays a commission to B ; at 
 another it is on the account of B, who pays a com- 
 mission to A. Thus each party, on the whole, 
 gains about as much as he pays in the shape of such 
 commissions ; and the discount in turning the bill 
 into money, which is the same as that on any other 
 bill, may, therefore, be considered as the whole 
 expence incurred. Money may be raised in this 
 manner at an interest of only five per cent. In the 
 case recently proposed, the drawing and re-draw- 
 ing were imagined to be only between A, of Lon- 
 don, and B, of Amsterdam. This practice, how- 
 ever, is often carried on between three or more 
 parties drawing from three or more places. In such 
 case, the draft is drawn on the place on which the 
 existing course of exchange shews that it will best 
 answer to draw it. An operation of this sort may 
 obviously be carried on partly for the purpose of 
 raising money, and partly for that of profiting by 
 a small turn in the exchange. Transactions which 
 are the converse to this, are, on the other hand, 
 entered into by those who happen to possess ready 
 money. They remit, if the exchange seems to 
 favour their remittance, and draw in consequence 
 of having remitted. To determine what bills are 
 
 C 4 fictitious. 
 
is 
 
 fictitious, or bills ot accommodation, and what are 
 real, is often a point of difficulty. Even the draw- 
 ers and remitters themselves frequently either do 
 not know, or do not take the trouble to reflect, 
 "whether the bills ought more properly to be con- 
 sidered as of the one class or of the other ; and the 
 private discounter, or banker, to whom they are 
 offered, still more frequently finds the credit of the 
 bills to be the only rule which it is possible to fol- 
 low in judging whether he ought to discount them. 
 
 CHAP. 
 
37 
 
 CHAP. III. 
 
 Of circulaling Paper — of Bank Nofes — of Bills 
 considered as circulating Paper — different De- 
 grees cf Rapidity in the Circulation of different 
 Sorts of circulating Medium^ and of the same 
 Sort of circulating Medium at different Times — • 
 Error of Dr. A, Smith — Difference in the Qua7i- 
 titles wanted for effecting the Payments of a 
 Country in Consequence oj this Difference of Ra- 
 pidity — Proof of this taken from Events of 1193- 
 — Fallacy involved in the Supposition that Paper ^ 
 Credit might he aboiished. 
 
 E proceed next to speak of circu- 
 lating paper, and first of Notes payable to Beaj-er 
 on Demand, whether issued by a pubhc bank or by 
 a private banker. 
 
 When confidence rises to a certain height in a 
 country, it occurs to some persons, that profit raay 
 be obtained by issuing notes, which purport to be 
 exchangeable for money ; and which, through the 
 known facility of thus exchanging them, may cir- 
 culate in its stead ; a part only of the money, of 
 which the notes supply the place, being kept in 
 store as a provision for the current payments. Oa 
 tile remainder interest is gained, and this interest 
 
 consti- 
 
 OfTMC ^ 
 
 VW;V£R8(TY 
 
S8 
 
 constitutes the profit of the issuer. Some power- 
 ful and well accredited company will probably be 
 the first issuers of paper of this sort, the numerous 
 proprietors of the company exerting their influence, 
 for the sake of the dividends which they expect, 
 in giving currency to the new paper credit. The 
 establishment of a great public bank has a ten- 
 dency to promote the institution of private banks. 
 The public bank, obliged to provide itself largely 
 with money for its own. payments, becomes a reser- 
 voir of gold to which private banks may resort with 
 little difficulty, expence, or delay, for the supply of 
 their several necessities. 
 
 Dr. A. Smith, in his chapter on Paper Credit, 
 considers the national stock of money in the same 
 light with thofe machines and instruments of trade 
 which require a certain expence, first, to erect, and 
 afterwards to support them. And he proceeds to 
 observe, that the substitution of paper, in the room 
 of gold and silver coin, serves to replace a very 
 expensive instrument of commerce with one much 
 less costly, and sometimes equally convenient. 
 " Thus,'* he says, " a banker, by issuing 100,000/. 
 *' in notes, keeping 20,000/. in hand for his cur- 
 " rent payments, causes 20,000/. in gold and silver 
 *' to perform all the functions which 100,000/. 
 " would otherwise have performed ; in consequence 
 *' of which, 80,000/. of gold and silver can be 
 <* spared, which will not fail to be exchanged for 
 
 " foreign 
 
39 
 *^ foreign goods, and become a rcw fund for a new 
 **^ trade, producing profit to the country.'** 
 
 Dr. Smith, although he discusses at some length 
 the subject ^of Paper Circulation, does not at all 
 advert to the tendency of bills of exchange to spare 
 the use of bank paper, or to their faculty of sup- 
 plying its place in many cases. 
 
 In the former Chapter it was (hewn that bills, 
 though professedly drawn for the purpose of ex- 
 changing a debt due to one person for a debt due 
 to another, are, in fact, created rather for the sake 
 of serving as a discountable article, and of forming 
 a provision against contingencies ; and that, by 
 being at any time convertible into cash (that is, into 
 cither money or bank notes) they render that sup- 
 
 * Dr. Smith, in confirmation of this, remarks how greatly Scot- 
 land had been enriched in the twenty-five or thirty years preceding 
 the time at which he wrote, by the erection of new banks in almost 
 every considerable town, and even in some country villages, the 
 effects having been, as he affirms, precisely those which he had 
 described. The trade of Glasgow he states to have been doubled in 
 about fifteen years after the erection of its first bank, and the trade 
 of Scotland to be thought to have been more than quadrupled since 
 the first erection of its two first public banking companies. This 
 eifect, indeed, he conceives to be too great to be accounted for by 
 that cause alone ; though he deems it indisputable, that the banks 
 have essentially contributed to the augmentation of the trade and 
 induftry of Scotland. The gold and silver of Scotland, circu- 
 lating before the union, is estimated by him at full a million ; the 
 quantity since the union at less than half a million ; and the paper 
 circulating in Scotland since the union at about one million and a 
 half. 
 
 ply 
 
40 
 
 ply of casK which is necessary to be kept in stor<^ 
 much less considerable. 
 
 But they not only spare the use of ready money; 
 they also occupy its place in m^ny ca§es. Let us 
 imagine a farmer in the country to discharge a debt 
 of 10/. to his neighbouring grocer, by giving to 
 him a bill for that sum, drawn on his cornfactor in 
 London for grain sold in the metropolis; and the 
 grocer to transmit the bill, he having previously 
 indorsed it, to a neighbouring sugar-baker^^ in dis- 
 charge of a like debt ; and the sugar-baker to send 
 it, when again indorsed, to a West India merchant 
 in an outport, and the West India merchant to 
 deliver it to his country banker, who also indorses 
 k, and sends it into further circulation. The bill 
 in this case will have effected five payments exactly 
 as if it were a 10/. note payable to bearer on de- 
 mand. It will, however, have circulated in conse- 
 quence chiefly of the confidence placed by each 
 receiver of it in the last indorser, his own corres- 
 pondent in trade ; whereas, the circulation of a 
 bank note is owing rather to the circumstance of 
 the name of the issuer being so w^ell known as to 
 give to it an universal credit. A multitude of bills 
 pass between trader and trader in the country 
 in the manner wbiich has been described ; and they 
 evidently form, in the strictest sense, a part of the 
 
 circulatins: medium of the kin2:dom*. 
 
 Bills, 
 
 * Mr. Boyd, In his publication addressed to Mr. Pitt on the 
 -Subjedt of the Bank of England iflues, propagates the fame error 
 
 into 
 
41 
 
 Bills, however, and especially those which are 
 drawn for large sums, may be considered as in 
 general circulating more slowly than either gold or 
 bank notes, and for a reason which it is material 
 to explain. Bank notes, though they yield an 
 interest to the issuer, afford none to the man 
 who detains them in his possession; they are to 
 him as unproductive as guineas. The possessor of 
 a bank note, therefore, makes haste to part with it. 
 The possessor of a bill of exchange possesses, on 
 the contrary, that which is always growing more 
 valuable. The bill, when it is first drawn, is worth 
 something less than a bank note, on account of its 
 not being due until a distant day; and the first 
 receiver of it may be supposed to obtain a com- 
 pensation for the inferiority of its value- in the price 
 
 into which many others have fallen, of considering bills as no par8 
 of the circulating medium of the country. He says, " by' the words 
 «* means of circulation," " circulating medium/* and <' currency," 
 ** (which are ufed as synonymous terms in this Letter) I understand 
 ♦' always ready money, whether consisting of bank notei or specie, in 
 «* contradiction to bills of exchange^ navy bills, exchequer bills, or 
 ** any negotiable paper which form no part of the circuLuing medium, 
 ** as I have aUvays underftood that term. The latter is the circula- 
 ** tor; the former are merely objects of circulation. "...See note^ 
 to the first page of Mr. Boyd's Letter to Mr. Pitt. 
 
 It will be seen, in the progress of this work, that it Mras necessary 
 to clear away much confusion which has arisen from the want of a 
 sufficiently full acquaintance with the several kinds of paper credit ; 
 and, in particular, to remove, by a ctfhsiderable detail, the prevailing 
 errors respecting the nature of bills, before it could be possible to 
 rkaj^n properly upon the effects of paper credit. 
 
 of 
 
42 
 
 of the article with which the bill is purchased. 
 When he parts with it, he may be considered as 
 granting to the next receiver a hke compensation, 
 which is proportionate to the time which the bill 
 has still to run. Each holder of a bill has, there- 
 fore, an interest in detaining it. 
 
 Bills, it is truci generally pass amoilg traders in 
 • the country without there being any calculation or 
 regular allowahce of discount ; the reasdn of which 
 circumstance is, that there is a generally understood 
 period of time for which those bills may have to 
 run, which, according to the custom of traders, 
 are accepted as current payment. If any bill given 
 in payment has a longer time than usual to run, 
 he who receives it is considered as so far favouring 
 the person from whom he takes it ; and the fa- 
 voured person has to compensate for this advantage, 
 not, perliaps, by a recompence of the same kind 
 accurately calculated, but in the general adjust^ 
 ment of the pecuniary affairs of the two parties. 
 
 This quality in bills of exchange (and it might be 
 added of interest notes, &:c.) of occupying the 
 place of bank paper, and of also throwing the in- 
 terest accruing during their detention into the 
 pocket of the holder, contributes greatly to the use 
 of them. The whole trading world may be con- 
 sidered as having an interest in encouraging them. 
 To possess some article which, so long as it is de- 
 tained, shall produce a regular interest, which shall 
 be subject to no fluctuations in price, which, by the 
 
 custom 
 
4Sx 
 custom of commerce, shall pass in certain cases as 
 a payment, and shall likewise be convertible into 
 ready money by the sacrifice of a small discount, is 
 the true policy of the merchant. Goods will not 
 serve this purpose, because they do not grow more 
 valuable by detention 3 nor stocks, because, though 
 they yield an interest, they fluctuate much in value j 
 and, also, because the expence of brokerage is in- 
 curred in selling them, not to mention the incon- 
 veniences arising from the circumstance of their 
 being transferable only in the bpoks of the Bank of 
 England. Stocks, however, by being at all times 
 a saleable and ready money article, are, to a certain, 
 degree, held by persons in London on the same 
 principle as bills, and serve, therefore, in some mea- 
 sure, like bills, if we consider these as a discounta- 
 ble article, to spare the use of bank notes. Ex- 
 chequer bills will not fully answer the purpose, 
 because there is a commission on the sale of these, 
 as on the sale of stocks ; and because, not to speak 
 of some other inferior objections to them, they 
 fluctuate, in some small degree, in price. 
 
 Bills, since they circulate chiefly among the trad- 
 ing world, come little under the observation of the 
 public. The amount of bills in existence may yet, 
 perhaps, be at all times greater than the amount of 
 all the bank notes of every kind, and of all the 
 
 circulating guineas*. 
 
 The 
 
 * Liverpool and Manchester effect the whole of thoir larger mer- 
 canyle payments not by country bank notes^ of which cone are issued 
 
 by 
 
44 
 
 The amount of what is called the circulating 
 medium of a country has been supposed by some 
 to bear a regular proportion to the quantity of trade 
 and of payments. It has, however, been shewn, 
 that such part of the circulating medium as yields 
 an interest to the holder will effect much fewer 
 payments, in proportion to its am.ount, than the 
 part which yields to the holder no interest. A 
 number of country bank notes, amounting to 100/., 
 may, for instance, effect on an average one pay- 
 ment in three days; while a bill of 100/. may, 
 through the disposition of each holder to detain it, 
 effect only one payment in nine days. 
 
 There is a passage in the w^ork of Dr. Adam 
 Smith which serves to inculcate the error of w^hich 
 I have been speaking ; a passage on which it may 
 be useful to comment with some particularity. 
 
 He says, " The whole paper money o^ every kind 
 <* which can easily circulate in any country, never 
 " can exceed the value of the gold and silver of 
 ** which it supplies the place, or which (the com- 
 " merce being supposed the same) would circulate 
 " there, if there was no paper money." 
 
 Does Dr. Smith mean to include, in his idea of 
 ** the ivJiole paper money of every kind which can 
 
 fcy the banks of those places, but by bills at one or two months date, 
 drawn on London. The bills annually drawn by the banks of each 
 of those towns amount to many millions. The banks obtain a small 
 commission on Aese bills. 
 
 " easily 
 
45 
 
 ** easily circulate," all the bills of exchange of a 
 country, or does he not ? And does he also include 
 interest notes, exchequer bills, and India bonds, 
 and those other articles which very much resemble 
 bills of exchange ? In an earlier part of his chapter, 
 he has this observation — " There are different sorts 
 " of paper money ; but the circulating notes of 
 " banks and bankers are the species which is best 
 " known, and which seems best adapted for this 
 *f purpose." We are led to judge by this passage, 
 and also by the term " paper money of every kind!^ 
 in the passage before quoted, that it was his purpose 
 to include bills of exchange; on the other hand, if 
 all the bills of exchange of a country are to be 
 added to the bank notes which circulate, it becomes 
 then so manifest, that the whole of the paper must 
 be more than equal to the amount of the money 
 which would circulate if there were no paper, that 
 we feel surprised that the erroneouSness of the po- 
 sition did not strike Dr. Smith himself. He intro- 
 duces, indeed, the qualifying word " easily j" he 
 speaks of " the whole paper money of every kind 
 " which can easily circulate.*' But this term, as I 
 apprehend, is meant only to refer to an easy, in 
 contradistinction to a forced, paper circulation ; 
 for it is on the subject of a forced circulation that a 
 great part of his observations turn. He seems, on 
 the other hand, to have paid no regard to the dis- 
 
 D tinction 
 
46 
 tinction on which 1 have dwelt, of a more slow and 
 a more rapid circulation; a thing which is quite 
 different from an easy and a difficult circulation. 
 He appears, in short, not at all to have reflected 
 how false his maxim is rendered (if laid down in 
 the terms which he has used) both by the different 
 degrees of rapidity of circulation which generally 
 belong to the two different classes of paper of which 
 I have spoken, and also by the different degrees of 
 rapidity which may likewise belong to the circu- 
 lation of the same kinds of paper, and even of the 
 same guineas, at different times. ' 
 
 The error of Dr. Smith, then^ is this: — he repre- 
 sents the whole paper, which caii easily circulate 
 when there are no guineas, to be the same in quan- 
 tity with the guineas which would circulate if there 
 were no paper; whereas, it is the quantity not of 
 *' the thing which circulates," that is, of the thing 
 which is capable of circulation, but of the actual 
 circulation which should rather be spoken of as the 
 same in both cases. The quantity of circulating 
 paper, that is, of paper capable of circulation, may 
 be great, and yet the quantity of actual circulation 
 may be small, or vice versa. The same note may 
 either effect ten payments in one day, or one pay- 
 ment in ten days; and one note, therefore, will 
 effect the same payments in the one case, which it 
 Would require a hundred notes to effect in the 
 other. 
 
 I have 
 
47 
 
 I have spoken of the different degrees of rapidity 
 in the circulation of different kinds of paper, and of 
 the consequent difference of the quantity of each 
 which is wanted in order to effect the same pay- 
 ments. I shall speak next of the different degrees 
 of rapidity in the circulation of the same medium at 
 different times : and, first, of bank notes. 
 
 The causes which lead to a variation in the rapidity 
 of the circulation of bank notes may be several. In 
 general, it may be observed, that a high state of con- 
 fidence serves to quicken their circulation; and this 
 happens upon a principle which shall be fully ex- 
 plained, it must be premised, that by the phrase 
 a more or less quick circulation of notes, will be 
 meant a more or less quick circulation of the whole 
 of them on an average. Whatever encreases that 
 reserve, for instance, of Bank of England notes 
 which remains in the drawer of the London banker 
 as his provision against contingencies, contributes 
 to what will here be termed the less quick circula- 
 tion of the whole. Now a high state of confidence 
 contributes to make men provide less amply against 
 contingencies. At such a time, they trust, that if 
 the demand upon them for a payment, which is now 
 doubtful and contingent, should actually be made, 
 they shall be able to provide for it at the moment ; 
 and they are loth to be at the expertce of selling an 
 article, or of getting a bill discounted, in order to 
 
 D 2 make 
 
48 
 rnake the provision much before the period at which 
 it shall be wanted. When, on the contrary, a sea- 
 son of distrust arises, prudence suggests^ that the 
 loss of interest arising from a detention of notes for 
 a few additional days should not be regarded. 
 
 It is well known that guineas are hoarded, in 
 times of alarm, on this principle. Notes, it is 
 true, are not hoarded to the same extent ; partly be- 
 cause notes are riot supposed equally likely, in the 
 event of any general confusion, to find their value, 
 and partly because the class of persons who are the 
 holders of notes is less subject to weak and extra- 
 vagant alarms. In difficult times, however, the dis- 
 position to hoard, or rather to be largely provided 
 with Bank of England notes, will, perhaps, prevail 
 in no inconsiderable degree. 
 
 This remark has been applied to Bank of Eng- 
 land notes,, because these are always in high credit; 
 and it ought, perhaps, to be chiefly confined to these. 
 They constitute the coin in which the great mercan- 
 tile payments in London, which are payments on ac- 
 count of the whole country, are effected. If, there- 
 fore, a difficulty in converting bills of exchange into 
 notes- is apprehended, the effect both on bankers, 
 merchants, and tradesmen, is somewhat the same 
 as the effect of an apprehension entertained by the 
 lower class of a difficulty in converting Bank of 
 England notes or bankers' notes into guineas. The 
 apprehension of the approaching difficulty makes 
 
 men 
 
49 
 
 men eager to do that to-day, which otherwise they^ 
 would do to-morrow. 
 
 The truth of this observation, as applied to Bank. 
 of England notes, as well as the importance of at- 
 tending to it, may be made manifest by adverting to 
 the events of the year 1793, when, through the 
 failure of many country banks, much general dis- 
 trust took place. The alarm, the first material one 
 of the kind which had for a long time happened, 
 was extremely great. It does not appear that the 
 Bank of England notes, at that time in circulation, 
 were fewer than usual. It is certain, however, 
 that the existing number became, at the period of 
 apprehension, insufficient for giving punctuality to 
 the payments of the metropolis ; and it is not to be 
 doubted, that the insufficiency must have arisen, in 
 some measure, from that slowness in the circula- 
 tion of notes, naturally attending an alarm, whicl^ 
 has been just described. Every one fearing lest 
 he should not have his notes ready when the day of 
 payment should come, would endeavour to provide 
 himself with them somewhat beforehand. A few 
 merchants, from a natural though hurtful timidity, 
 would keep in their own hands some of those notes, 
 which, in other times, they would have lodged with 
 their bankers j and the effisct would be, to cause 
 the same quantity of bank paper to transact fewer 
 payments, or, in other words, to lessen the rapidity 
 
 D 3 of 
 
50 
 
 of the circulation of notes on the whole, and thus 
 to encrease the number of notes wanted. Probably, 
 also, some Bank of England paper would be used 
 as a substitute for country bank notes suppressed. 
 
 The success of the remedy which the parliament 
 administered, denotes what was the nature of the 
 evil. A loan of exchequer bills was directed to 
 be made to as many mercantile persons, giving 
 proper security, as should apply. It is a fact, wor- 
 thy of serious attention, that the failures abated 
 greatly, and mercantile credit began to be restored, 
 not at the period when the exchequer bills were 
 actually delivered, but at a time antecedent to that 
 aera. It also deserves notice, that though the failures 
 had originated in an extraordinary demand for gui- 
 neas, it was not any supply of gold which effected 
 the cure. That fear of not being able to obtain 
 guineas, which arose in the country, led, in its con- 
 sequences, to an extraordinary demand for bank 
 notes in London; and the want of bank notes in 
 London became, after a time, the chief evil. The 
 very expectation of a supply of exchequer bills, 
 that is, of a supply of an article which almost any 
 trader might obtain, and which it was known that 
 he might then sell, and thus turn into bank notes, 
 and after turning into bank notes might also con- 
 vert into guineas, created an idea of general sol- 
 vency. This expectation cured, in the first in- 
 stance. 
 
51 
 stance, the distress of London, and it then lessened 
 the demand for guineas in the country, through that 
 punctuahty in effecting the London payments which 
 it produced, and the universal confidence which it 
 thus inspired. The sum permitted by parliament 
 to be advanced in exchequer bills was five millions, 
 of which not one half was taken. Of the sum 
 taken, no part was lost. On the contrary, the 
 small compensation, or extra interest, which was 
 paid to government for lending its credit (for it was 
 mere credit, and not either money or bank notes 
 that the government advanced), amounted to some- 
 thing more than was necessary to defray the charges, 
 and a small balance of profit accrued to the public. 
 For this seasonable interference, a measure at first 
 not well understood and opposed at the time, chiefly 
 on the ground of constitutional jealousy, the mer- 
 cantile as well as the manufacturing interests of 
 the country were certainly much indebted to the 
 parliament, and to the government *. 
 
 That 
 
 * The commissioners named in the act state in their report,*" that 
 *' the knowledge that loans might have been obtained, sufficed, in 
 ** several instances, to render them unnecessary; that the whole 
 ** number of applications was three hundred aad thirty-two, 
 «* for sums amounting to £, 3,855,624; of which two hundred an^l 
 <* thirty-eight were granted, amounting to £. 2,202,000; forty-fivp 
 " for sums to the amount of £^, 1,215,100 were withdrawn;^ and 
 *^ forty-nine were rejected for various reasons. That the whole 
 
 D4 *• smn 
 
52 
 That a state of distrust causes a slowness in the 
 circulation of guineas^ and that at such a time a 
 greater quantity of money will be wanted in order 
 to effect only the same money payments, is a position 
 which scarcely needs to be proved. Some obser- 
 vations, however, on this subject may not be use- 
 less. When a season of extraordinary alarm arises, 
 and the money of the country in some measure dis- 
 appears, the guineas, it is commonly said, are 
 hoarded. In a certain degree this assertion may 
 be literally true. But the scarcity of gold pro- 
 bably results chiefly from the circumstance of 
 a considerable variety of persons, country bank- 
 ers, shopkeepers, and others, augmenting, some in 
 a smaller and some in a more ample measure, that 
 supply which it had been customary to keep by 
 them. The stock thus enlarged is not a fund which 
 
 ** sum advanced on loans was paid, a considerable part before it was 
 ** due, and the remainder regularly at the stated periods, without 
 ** apparent difficulty or distress." ^ 
 
 They observe that, *' the advantages of this measure were evinced 
 *' by a speedy restoration of confidence in mercantile transactions, 
 '* which produced a facility in raising money that was presently 
 *'■ felt, not only in the metropolis, but through the whole extent of 
 •* Great Britain. Nor was the operation of the act less beneficial 
 <* with respect to a variety of eminent manufacturers, who, having in 
 *' a great degree suspended their ivorks^ were enabled to resume them, 
 ** and to a'fford employment to a number of workmen who must 
 ** otherwise have been thrown on the public." 
 
 its 
 
53 
 
 its possessor purposes, in no case, to diminish, but a 
 fund which, if he has occasion to lessen it, he en- 
 deavours, as he has opportunity, to replace. It is 
 thus that a more slow circulation of guineas is oc- 
 casioned j and the slower the circulation, the greater 
 the quantity wanted, in order to effect the same 
 number of money payments. 
 
 Thus, then, it appears, that the sentiment which 
 Dr. Smith leads his readers to entertain, namely, 
 that there is in every country a certain fixed quan- 
 tity of paper, supplying the place of gold, which is 
 all that " can easily circulate" (or circulate without 
 hting forced into circulation), and which is all (for 
 such, likew^ise, seems to be the intended inference) 
 that should ever be allowed to be sent into circula- 
 tion, is, in a variety of respects, incorrect. The 
 existence of various hoards of gold in the coffers of 
 bankers, and of the Bank of England, while there 
 are no corresponding hoards of paper, would of 
 itself forbid any thing like accurate comparison be- 
 tween them. Many additional, though smaller, 
 circumstances might be mentioned as contributing 
 to prevent the quantity of notes which will circu- 
 late from being the same as the quantity of gold 
 which would circulate if there were no notes j such 
 as their superior convenience in a variety of re- 
 spects, the facility of sending them by post, the 
 faculty which they have of being either used as 
 
 guineas. 
 
54 
 guineas, or of supplying the place of bills of ex- 
 change, and furnishing a remittance to distant 
 places. 
 
 There is a further objection to the same remark 
 of Dr. Smith. It would lead an uninformed per- , 
 son to conceive, that the trade of a country, and 
 of this country in particular, circumstanced as it 
 now is, might be carried on altogether by guineas, 
 if bank notes of all kinds were by any means anni- 
 hilated. It may already have occurred, that if bank 
 paper were abolished, a substitute for it would be 
 likely to be found, to a certain degree, in bills of 
 exchange ; and that these, on account of their 
 slower circulation, must, in that case, be much 
 larger in amount than the notes of which they would 
 take the place. But further; if bills and bank notes 
 were extinguished,other substitutes than gold would 
 unquestionably be found. Recourse would be had to 
 devices of various kinds by which men would save 
 themselves the trouble of counting, weighing, and 
 transporting guineas, in all the larger operations 
 of commerce, so that the amount of guineas brought 
 into use would not at all correspond with the amount 
 of the bills and notes suppressed. Banks would be 
 instituted, not of the description which now exist, 
 but of that kind and number which should serve 
 best to spare both the trouble of gold, and the ex- 
 pence incurred by the loss of interest upon the 
 
 quantity 
 
quantity of it in possession. Merely by the trans- 
 fer of the debts of one merchant to another, in the 
 books of the banker, a large portion of what are 
 termed cash payments is effected at this time with- 
 out the use of any bank paper*, and a much larger 
 sum would be thus transferred, if guineas were the 
 only circulating medium of the country. Credit 
 would still exist-; credit in books, credit depending 
 on the testimony of witnesses, or on the mere verbal 
 promise of parties. It might not be paper credit; 
 
 ♦ The following custom, now prevailing among the hankers within 
 the city of London, may serve to illustrate this observation, and 
 also to shew the strength of the disposition which exists in those who 
 are not the issuers of bank notes to spare the use both of paper and 
 guineas. It is the practice of each of these bankers to send a 
 clerk, at an agreed hour in the afternoon, to a room provided for 
 their use. Each clerk there exchanges the drafts on other bankers 
 received at his own house, for the drafts on his own house received 
 at the houses of other bankers. The balances of the several bankers 
 are transferred in the same room from one to another, in a manner 
 which it is unnecessary to explain in detail, and the several balances 
 are finally wound up by each clerk into one balance. The difference 
 between the whole sum which each banker has to pay to all other 
 city bankers, and the whole sum which he has to receive of all 
 other city bankers, is, therefore, all that is discharged in bank notes 
 or money ; a difference much less in its amount than the /^wra/ dif- 
 ferences would be ec^ual to. This device, which serves to spare the 
 use of bank notes, may suggest the practicability of a great variety 
 of contrivances for sparing the use of gold, to which men havin<T 
 confidence in each other would naturally resort, if we could suppose 
 bank paper to be abolished. 
 
 but 
 
66 
 
 but still it might be such credit as would spare, 
 more or less, the use of guineas. It might be cre- 
 dit of a worse kind, less accurately dealt out in pro- 
 portion to the desert of different persons, and there- 
 fore, in some instances, at least, still more extended; 
 it might be credit less contributing to punctuality 
 of payments, and to the due fulfilment of engage- 
 ments ; less conducive to the interests of trade, and 
 to the cheapening of articles ; and it would, per- 
 haps, also be credit quite as liable to interruption 
 on the occasion of any sudden alarm or material 
 change in the commercial prospects and circum- 
 stances of the country. 
 
 CHAP, 
 
ol 
 
 CHAP. IV. 
 
 Observation of Dr, Smith respecting the Bank of 
 England — of the Nature of that Institution-^ 
 Reasons for never greatly diminishing its Notes 
 — its Liability to be exhausted of Guineas — the 
 Suspension of its Cash Payments not owing to too 
 great Issue of Paper — ?ior to too great LoanS''^ 
 Propriety of pailiamentary Interference, 
 
 JLi'R. Adam Smith, after laying down the 
 principle which has been lately animadverted on, 
 " that the quantity of paper which can easily cir- 
 *' culate in a country never can exceed the gold and 
 ** silver which would circulate if there were no 
 *' paper," proceeds to observe, that the Bank of 
 England, " by issuing too great a quantity of 
 *' paper, of which the excess was continually 
 " returning, in order to be exchanged for gold and 
 ** silver, was, for many years together, obliged to 
 " coin gold to the extent of between eight hun- 
 " dred thousand pounds and a million a year. For 
 *^ this great coinage the bank was frequently obliged 
 " to purchase gold bullion at 4/. an ounce, which 
 *^ it soon after issued in coin at 3/, lis, I0\d. an 
 
 ** ounccj 
 
58 
 
 " ounce, losing two and a half and three per cent. 
 " on the coinage." Dr.. Smith probably could 
 Hot be acquainted with the secret of the actual 
 quantity of those bank notes, of the number of 
 which he complains ; he must, therefore, have taken 
 it for granted, that they were what he terms ex-* 
 cessive, on the ground of the price of gold being 
 high^ and the coinage great. He does not pro- 
 ceed, in any respect, to guard or to limit the ob- 
 servation in question; an observation which, when 
 thus unqualified, may lead the reader to suppose, 
 that whenever the bank finds itself subjected to 
 any great demand for gold in consequence of a high 
 price of bullion, the cause of this evil is an excess 
 of circulating paper, and the remedy a reduction of 
 bank notes. There is also danger, lest it should be 
 conceived, that if the remedy should appear to 
 fail, it can fail only because the reduction is not 
 sufficiently great. 
 
 The point of which we are speaking is of great 
 importance, and will be the subject of much future 
 discussion. One object of the present and succeed- 
 ing Chapter will be to shew, that, however just may 
 be the principle of Dr. Smith when properly limited 
 and explained, the reduction of the quantity of 
 Bank of England paper is by no means a measure 
 which ought to be resorted to on the occasion of 
 every demand upon the bank for guineas arising 
 
 from 
 
59 
 
 from the high price of bullion, and that such re- 
 duction may even aggravate that sort of rise which 
 is caused by an alarm in the country. 
 
 It will be proper, first, to describe the nature of 
 the institution of the Bank of England, and the re- 
 lation in which it stands to the public ; in this de- 
 tail, the event of the late stoppage of its cash pay- 
 ments will be particularly noticed. 
 
 Bills are drawn on London from every quarter of 
 the kingdom, and remittances are sent to the me- 
 tropolis to provide for them, while London draws 
 no bills, or next to none, upon the country. Lon- 
 don is, in this respect, to the whole island, in some 
 degree, what the centre of a city is to the suburbs. 
 The traders may dwell in the suburbs, and lodge 
 many goods there, and they may carry on at home 
 a variety of smaller payments, while their chief cash 
 account is with the banker, w^ho fixes his residence 
 among the other bankers, in the heart of the city. 
 London also is become, especially of late, the trad- 
 ing metropolis of Europe, and, indeed, of the 
 whole world ; the foreign drafts, on account of 
 merchants living in our out-ports and other trading 
 towns, and carrying on business there, being made, 
 with scarcely any exceptions, payable in London. 
 The metropolis, moreover, through the^ extent of 
 its'own commerce, and the greatness of its wealth 
 and population, has immense receipts and payments 
 
 on 
 
60 
 on its own account; and the circumstance of Its 
 being the seat of government, and the place where 
 the public dividends are paid, serves to encrease 
 its pecuniary transactions. The practice, indeed, 
 of transferring the payments of the country to Lon- 
 don being once begun, was likely to extend itself. 
 For, in proportion as the amount and number of 
 payments and receipts is augmented in any one par- 
 ticular place, the business of paying and receiving 
 is more easily and cheaply transacted, the necessary 
 guineas becoming fewer in proportion to the sums 
 to be received and paid, and fhe bank notes want- 
 ed, though encreasing on the whole, becoming 
 fewer in proportion also. On the punctuality with 
 which the accustomed payments of London are 
 effected, depends, therefore, most essentially the 
 the whole commercial credit of Great Britain. The 
 Target London payments are effected exclusively 
 through the paper of the Bank of England; for the 
 
 superiority of its credit is suchj that, by common 
 agreement among the bankers, whose practice, in 
 
 this respect, almost invariably guides that of other 
 persons, no note of a private house will pass in pay- 
 ment as a paper circulation in London. 
 
 The bank has a capital of near twelve millions, to 
 which it has added near four millions of undivided 
 profits or savings : all this capital and savings must 
 be lost before the creditors can sustain any loss. 
 
 The 
 
61 
 
 The Bank of England is quite independent of the 
 executive government. It has an interest, un- 
 doubtedly (of the same kind with that of many pri- 
 vate individuals), in the maintenance of our finan- 
 cial as well as commercial credit. It is also in the 
 habit of lending out a large portion of its ample 
 funds on government securities of various kinds, a 
 comparatively small part only, though a sum not small 
 in itself, being lent to the merchants in the way 
 of discount. The ground on which the bank lends 
 so much to government is dearly that of mutual 
 convenience, as well as long habit. It is the only 
 lender in the country on a large scale -, the govern- 
 ment is the only borrower on a scale equally ex- 
 fended ; and the two parties, like two wholesale 
 traders in a town, the one the only great buyer, 
 and the other the only great seller of the same ar- 
 ticle, naturally deal much with each other, and 
 have comparatively small transactions with those 
 who carry on only a more contracted business. The 
 bank, moreover, in time of peace, is much bene- 
 fited by lending to government. It naturally, 
 therefore, continues those loans, during war, which 
 it had been used to grant at alt antecedent periods. 
 It occasionally furnishes a considerable sum to the 
 East India company. If, iijdeed, it lent more to 
 the merchants during war, and less to the govem- 
 ment, the difference would not be so great as 
 
 E might 
 
62 
 mrght, perhaps, at first view be supposed. If, for 
 instance, it furnished a smaller sum on the security 
 of exchequer bills, that article might then be sup- 
 posed to fall in price, or, in other words, to yield 
 a higher and more tempting interest; and the 
 bankers, in that case, would buy more exchequer 
 bills, and would grant less aid to the merchants ; 
 they would, at least, in some degree, take up 
 whichever trade the Bank of England should re- 
 linquish. The preference given by the bank to the 
 government securities, is, therefore, no symptom of 
 a want of independence in its directors : they are 
 subject, in a much greater degree, to their own 
 proprietors than to any administration. The strong 
 manner in which the directors of the bank * at 
 the time antecedent to the suspension of their 
 cash payments, insisted on having four millions 
 and a half paid up to them by the government — a 
 payment which, though demanded at a very in- 
 convenient time, was accordingly made-T-may be 
 mentioned as one sufficiently striking mark of the 
 independence of that company. There is, how- 
 ever, another much more important circumstance 
 to be noticed, which is conclusive on this subject. 
 The government of Great Britain is under little 
 
 * Sec the correspondence of the bank on this subject, in the Ap- 
 pendix to the Report of the House of Commons respecting the or- 
 4er of council for authorising the suspension of the cash payments of 
 the b;ink« 
 
 or 
 
63 
 
 Of no temptation either to dictate to the Bank of 
 England, or to lean upon it in any way which is 
 inconvenient or dangerous to the bank itself. The 
 minister has been able to raise annually, without 
 the smallest difficulty, by means of our funding 
 system, the sum of no less than between twenty 
 atid thirty millions-. The government, therefore, 
 is always able to lessen, by a loan from the public, 
 if it should be deemed .necessary, the amount of 
 its debt running with the bank. To suppose that 
 bank notes are issued to excess, with a view to 
 furnish means of lending money to the minister, 
 is, in a high degree, unreasonable. The utmost 
 sum which he could hope to gain in the way of 
 loan from the bank, by means of an extraordinary 
 i^sue of bank notes, could hardly be more than 
 four or five millions; and it is not easy to believe, 
 that a government which can raise at once twenty 
 or thirty millions, will be likely, for the sake of 
 only four or iivo, millions (for the loan of which 
 it must pay nearly the same interest as for a loan 
 from the public), to derange the system, distress 
 the credit, or endanger the safety of the Bank of 
 England*. This banking company differs in this 
 most important point from every one of those national 
 banks, which issue paper, on the continent. I under- 
 
 ♦ The same remark has been made in a short psynphlet lately pub* 
 Hshed by Sir Francis Baring* 
 
 Stand 
 
64 
 Stand that the banks df Petersburgh, Copenhagen, 
 Stockholm, Vienna, Madrid, and Lisbon, each of 
 which issues circulating notes, which pass as cur- 
 rent payment, are all in the most direct artd 
 strict sense government banks*. It is also well 
 known, that the governments residing in these se- 
 veral places have not those easy means of raising 
 money, by a loan from the people, which the mi- 
 nister of Great Britain so remarkably possesses. 
 Those governments, therefore, have, in times even 
 of moderate difficulty, no other resource than that 
 of extending the issue of the paper of their own 
 
 * The bank of Amsterdam did not issue circulating notes, but 
 was a mere bank for deposits, the whole of which it was supposed by 
 somfc to keep always in specie. It was discovered, however, when 
 the French possessed themselves of Holland, that it had been used 
 privately to lend a certain part of them to the city of Amsterdam, 
 and a part to the old Dutch government. These loans ought cer- 
 tainly rather to have been furnished in that open manner in ^hich 
 those of our bank are made. Neither of the two debts, as I under- 
 stand, have yet been discharged. The bank of Amsterdam had no 
 capital of its own. 
 
 In whatever way we may suppose the property of the bank of 
 Amsterdam, or that of any other public bank or private individual, 
 to be employed, it is not easy to imagine that it can altogether 
 escape the hands of a needy and successful invader. If the pro- 
 perly of a public bank is kept in money, a rapacious enemy may 
 sfeize that money. If lent to the merchants, the enemy, by their 
 requisitions, may draw it from the merchants ; and by thus inca- 
 pacitating the merchants to pay their debts to the baokj may cause 
 the failure of th« bank, 
 
 banka; 
 
65 . 
 banks ; which extension of issue naturally produced 
 a nearly correspondent depreciation of the value of 
 the notes, and a fall in the exchange with other coun- 
 tries, if computed at the paper price. The notes, 
 moreover^ being once thus depreciated, the govern- 
 ment, even supposing its embarrassments to cease, 
 is seldom disposed to bring them back to their 
 former limits, to do which implies some sacrifice on 
 their part at the time of effecting the reduction ; 
 but it contents itself, perhaps^ with either a little 
 lessening, or with not further adding tOi the evil; 
 The expectation of the people on the continent^ 
 therefore, generally is, that the paper, which is fall- 
 ing in value, will, in better times, only cease to 
 fall, or, if it fises^ will experience only an immate- 
 rial rise, and this expectation serves of course to 
 accelerate its fall. Hence it has happened, that 
 in all the places of Europe, of which nlention 
 has been made, there exists a great and esta- 
 blished, and, generally^ an increasing discount or 
 agio between the current coin and the paper money 
 of the kingdom. Nor, indeed, is this all: several 
 of the governments of Europe have not only ex* 
 tended their paper in the manner which has been 
 described, but have, besides this^ depreciated, from 
 time to time, their very coin; and thus there has 
 been a two-fofd cau^e for a rise in the nominal price 
 of their corAi^odities when exchanged with the cur- 
 rent paper. There is^ therefore, a fundamental dif- 
 ference between the nature of the paper of the 
 
 F Bank 
 
66 
 
 Bank of England, and that of all the national or 
 government banks on the continent. No one sup- 
 poses that the English guinea contains less and 
 less gold than heretofore, through frauds practised 
 by government in the coinage ; and as little is it 
 to be suspected that the Bank of England paper 
 is about to be depreciated by an excessive issue 
 either ordered or needed by the government. There 
 is, moreover, at present, this further ground for 
 assuming that the issue of Bank of England notes 
 is not likely to be excessive, — that it has lately 
 become a practice to make the number of them 
 public. Their quantity, as it now appears, has ne- 
 ver, in any short time, varied very greatly ; has 
 seldom, in late years, been below ten or eleven 
 millions, even when no one pound and two pound 
 notes were issued 3 and has at no moment ex- 
 ceeded the sum of about fifteen millions and a 
 half, including two millions and a half of one 
 pound and two pound notes. It is not impossible 
 that the discredit into which the paper of the go- 
 vernment banks of the continent of Europe has 
 fallen, into which also the paper of the American 
 banks sunk at the time of the American war, 
 through the same extension of its issues by the then 
 American government ; and also that the total an- 
 nihilation of the paper issued by the successive 
 French revolutionary governments, may have, in 
 some degree, contributed, though most unjustly, to 
 
 that 
 
67 
 
 that fall in the exchange which Great Britain has 
 experienced. Foreigners not adverting to that in** 
 dependence of the Bank of England, the grounds of 
 which have been stated, and misled possibly by the 
 abundant misrepresentations which have taken 
 place in this country, may have thought that it was 
 the government which, by its loans, involved the 
 bank in difficulties (a point which shall be discussed 
 presently), and that the bank is merely an instrument 
 in the hands of the government; an instrument 
 which may be turned, as the government banks on 
 the continent have been, to the purpose of issuing 
 n(^es to an extravagant extent. If such should, in 
 any degree, be their sentiment, it would be just in 
 them to infer from thence, that the Bank of Eng- 
 land notes are not unlikely to fall in their value in the 
 same manner as the notes of the continental banks. 
 An unwillingness to leave in this country whatever 
 sums they may have a right to draw from us (sums 
 probably small in the whole) may have been the 
 consequence of this fear, and a great unwillingness 
 to trust with us even a small quantity of property, 
 may happen to cause, under certain circumstances, 
 a considerable fall in the exchange. 
 
 It may be mentioned as an- additional ground of 
 confidence in the Bank of England, and as a cir- 
 cumstance of importance in many respects, that the 
 numerous proprietors who chuse the directors, and 
 have the power of controlling them (a power of 
 
 F 2 which 
 
68 
 
 which they have prudently forborne to make any 
 frequent use), are men whose general stake in the 
 country far exceeds that particular one which they 
 have in the stock of the company. They are men, 
 therefore, who feel themselves to be most deeply 
 interested not merely in the increase of the divi- 
 dends or in the maintenance of the credit of the 
 Bank of England, but in the support of comm.er- 
 cial as well as of public credit in general. There 
 is, indeed, both among them and among the whole 
 commercial world, who make so large a portion 
 of this country, a remarkable determination to sus- 
 taiii credit, and especially the credit of the bank ; 
 and this general agreement to support the bank 
 is one of the pillars of its strength, and one pledge 
 of its safety. The proprietors of it themselves are 
 not likely to approve of any dangerous extension 
 even of their own paper j both they and the di- 
 rectors know the importance of confining the bank 
 paper, generally speaking, within its accustomed 
 limits, and must necessarily be supposed to prefer 
 its credit, and the paper credit of the nation, to 
 the comparatively trifling consideration of a small 
 increase in their own dividends ; an increase which 
 would prove delusory, if it should arise from that 
 extravagant issue of bank notes which would have 
 the effect of depreciating all the circulating me- 
 dium of the country, since it would thus raise upon 
 the proprietors of bank stock, as well as on others, 
 
 the 
 
69 
 the price of all the articles of life*. While the pro- 
 prietors and directors of the bank have thus an 
 interest, on the one hand, in limiting the quantity of 
 paper issued, they are also naturally anxious, on the 
 other, in common with the whole commercial world, 
 to give the utmost possible credit to it; and al- 
 though an opinion should prevail, even to some ex- 
 tent, among persons out of business, that the ap- 
 pearance of gold is the only test of wealth, and that 
 the absence of it, however temporary, implies great 
 danger to the country, the mercantile interest, and 
 in particular the bank proprietors, the bankers, and 
 the traders of London, by whose transactions the 
 value of the London paper is upheld, may be con- 
 sidered as combined in the support of a juster sen- 
 timent. The bank itself is known to have expe- 
 rienced, at former times (as appears from the evi- 
 dence of the directors given to parliament), very 
 great fluctuations in its cash; and, in one period of 
 returning peace and prosperity, a reduction of it be- 
 low that which took place at the time of the late 
 
 * If the bank notes were increased even five millions, the addi- 
 tional profit which would accrue to the proprietors would not be 
 more than two per cent. A proprietor qualified to vote in the bank 
 court (that is, having 500/. stock) would, therefore, gain by this ex» 
 travagant issue, supposing it to be maintained for a year, the sum of 
 le/. A large proportion of the bank proprietors do not hold more 
 than 1000/. stock. The gain of each of these would not be more 
 than 20/. J a sum perfectly insignificant, compared with the interest 
 which they have in the maintenance of the general commercial credit 
 of the country. 
 
 F 3 suspension 
 
70 
 
 suspension of its cash payments : the amount of 
 gold in the bank, at any one particular asra, is, per- 
 haps, therefore, on the ground of this experience, not 
 now considered by the commercial world as having 
 all that importance which was given to it when the 
 bank affairs were involved in greater mystery. It 
 is perfectly well understood among all commercial 
 men, that gold coin is not an article in which all 
 payments (though it is so promised) are at any time 
 intended really to be made 5 that no fund ever was 
 or can be provided by the bank which shall be suffi- 
 cient for such a purpose^ and that gold coin is to 
 be viewed chiefly as a standard by which all bills 
 and paper money should have their value regulated 
 as exactly as possible 5 and that the main, and, in- 
 deed, the only, point is to take all reasonable care 
 that money shall in fact serve as that standard. 
 
 This is the great maxim to be laid down on the 
 subject of paper credit. Let it, then, be next 
 considered what is necessary, in order sufficiently to 
 secure that, whatever the circulating paper may 
 be, gold shall be the standard to which the value 
 of that paper shall conform itself. It is no doubt 
 important, that there should be usually in the coun-- 
 try a certain degree of interchange of gold for pa- 
 per, for this is one of the means which will 
 serve to fix the value of the latter. Whether 
 the interchange wanted to produce this effect must 
 be more or less large and frequent, depends much 
 on th^ habits and dispositions of the country, and, 
 
 in 
 
71 
 
 in particular, on the degree of knowledge of the 
 nature of paper credit generally prevailing, and on 
 the degree of confidence in it. 
 
 In order to secure that this interchange shall at all 
 times take place, it is important that, generally speak- 
 ing, a considerable fund of gold should be kept in the 
 country, and there is in this kingdom no other de- 
 pository for it but the Bank of England. This 
 fund should be a provision not only against the 
 common and more trifling fluctuations in the de- 
 mand for coin, but also against the two following 
 contingencies. First, it should serve to counteract 
 the effects of an unfavourable balance of trade, for 
 this infallibly will sometimes occur, and it is what 
 one or more bad harvests cannot fail to cause. 
 It is also desirable, secondly, that the reserve of 
 gold should be sufficient to meet any extraordinary 
 demand at home, though a demand in this quarter, 
 if it should arise from great and sudden fright, may 
 undoubtedly be so unreasonable and indefinite as to 
 defy all calculation. If, moreover, alarm should 
 ever happen at a period in which the stock of gold 
 should have been reduced by the other great cause 
 of its reduction, namely, that of a call having been 
 recently made for gold to discharge an unfavourable 
 balance of trade, the powers "of any bank, however 
 ample its general provision should have been, may 
 easily be supposed to prove insufficient for this 
 double purpose. 
 
 F4 To 
 
72 
 To revert, then, to the Bank of England. A. 
 short time before the suspension of its cash pay- 
 ments, the gold in its coffers had been reduced 
 materially through an unfavourable balance of trade. 
 The exchange with Europe had, however, so far 
 improved for some time preceding the suspension, 
 as to have caused gold to begin again to flow 
 into the country. When it was thus only be- 
 ginning to return, the fear of an invasion took 
 place, and it led to the sudden failure of some 
 country banks in the north of England. Other 
 parts felt the influence of the alarm, those in Scot- 
 land, in a gTeat measure, excepted, where, through 
 long use, the confidence of the people, even in paper 
 money of a guinea value, is so great (a circumstance 
 to which the peculiar respectability of the Scotch 
 banks has contributed), that the distress for gold was 
 little felt in that part of the island. A great de> 
 mand on the Bank of England for guineas was 
 thus created, a demand which every one who can 
 possess himself of a bank note is entitled to make 
 by the very terms in which the note is expressed. 
 In London, it is observable that much distress was 
 beginning to arise, which w^as in its nature some- 
 what different from that in the country. In London, 
 confidence in the Bank of England being high, and 
 its notes maintaining their accustomed credit, its 
 guineas were little called for with a view to the 
 mere object of London payments. The guineas ap- 
 plied for by persons in London, was, generally speak- 
 
73 
 
 ing, on the account of people in the country. The 
 distress arising in London, like that which took 
 place in 1793, was a distress for notes of the Bank 
 of England. So great was the demand for notes, 
 that the interest of money, for a few days before the 
 suspension of the payments of the bank, may be 
 estimated (by calculating the price of exchequer 
 bills, the best test that can be referred to, as well as 
 by comparing the money price of stocks with their 
 time price) to have been about sixteen or seventeen 
 per cent, per ann. The bank, on this occasion, 
 pursued, though only in a small degree, the path 
 which a reader of Dr. Smith would consider him to 
 prescribe, as in all cases the proper and effectual 
 means of detaining or bringing back guineas. They 
 lessened the number of their notes, which, having 
 been for some years before near eleven millions, 
 and having been reduced, for some time, to be- 
 tween nine and ten millions, were at this particular 
 
 . moment brought down to between eight and nine 
 millions. 
 
 It has been shewn already, that, in order to 
 effect the vast and accustomed payments daily 
 
 ' made in London, payments which are most of them 
 promised beforehand, a circulating sum in bank 
 notes, nearly equal to whatever may have been 
 its customary amount, is necessary. But a much 
 more clear idea of this subject will be gained by en- 
 tering into some detail. 
 
 There 
 
74 
 There are in London between sixty and seventy 
 bankers, and it is almost entirely through them that 
 the larger payments of London are effected. It may 
 be estimated (though the conjecture is necessarily 
 a loose one) that the sums paid daily by the bankers 
 of London may not be less than four or five 
 millions. The notes in their hands form, pro- 
 bably, a very large proportion of the whole circu- 
 lating notes in the metropolis. It is certain, at least, 
 that only a very small proportion of Bank of Eng- 
 land notes circulate far from London, and that it is 
 to the metropolis itself that all the larger ones are 
 confined. The amount of the bank notes in the 
 hands of each banker, of course, fluctuates consi- 
 derably; but the amount in the hands of all pro- 
 bably varies very little; and this amount cannot 
 be much diminished consistently with their ideas 
 of what is necessary to the punctuality of their 
 payments, and to the complete security of their 
 houses. Thus there is little room for reduction as 
 to the whole of that larger part of the notes of the 
 Bank of England which i^ in the hands of the Lon- 
 don bankers : the notes which may chance to circu- 
 late among other persons, especially among persons 
 carrying on any commerce, if we suppose the usual 
 punctuality of payments to be maintained, and the 
 ordinary system of effecting them to proceed, can 
 admit also of little diminution. A deficiency of 
 notes in London is a very different thing from a de- 
 ficiency either of country bank notes or of coin in 
 
 the 
 
75 
 
 the country. A large proportion of the London 
 payments are payments of bills accepted by consi- 
 derable houses, and a failure in the punctuality of 
 any one such payment is deemed an act of insol- 
 vency in the party. The London payments are, 
 moreover, carried on by a comparatively small 
 quantity of notes -, and they, perhaps, cannot easily 
 be effected, w^ith due regularity, by a much sm.aller 
 number, so complete has been the system of eco- 
 nomy in the use of them which time and experience 
 have introduced among the bankers. There is, 
 moreover, no substitute for them. They have an 
 exclusive, though limited, circulation. They serve, 
 at the same time, both to sustain and regulate the 
 whole paper credit of the country. It is plain, 
 from the circumstances which have just been stated, 
 that any very great and sudden diminution of Bank 
 of England notes would be attended with the most 
 serious effects both on the metropolis and on the 
 whole kingdom. A reduction of them which may 
 seem moderate to men who have not reflected on this 
 subject — a diminution, for instance, of one-third or 
 two-fifths, might, perhaps, be sufficient to produce a 
 very general insolvency in London, of which the 
 effect would be the suspension of confidence, the 
 derangement of commerce,' and the stagnation of 
 manufactures throughout the country. Gold, in 
 such case, would unquestionably be hoarded through 
 the great consternation which would be excited; 
 and it would, probably, not again appear until con- 
 fidence 
 
76 
 
 fidence should be restored by the previous intro- 
 duction of some additional or some new paper cir- 
 culation. 
 
 The case which has been put, is, however, merely 
 hypothetical 5 for there is too strong and evident an 
 interest in every quarter to maintain, in some way or 
 other, the regular course of London payments, to 
 make it probable that this scene of confusion should 
 occur ', or, even if it should arise, that it should 
 continue. Whether there might chance to be much 
 or little gold in the country, steps would be taken 
 to induce the bank to issue its usual quantity of 
 paper, or measures would be resorted to for provid- 
 ing, by some other means, a substitute for it. The 
 credit, however, of even the best substitute, would 
 be far inferior to that of the old and known Bank of 
 England notes ; for the new paper would be guaran- 
 teed by a capital probably far less ample than that of 
 the Bank of England : it would also be just as im- 
 possible for the issuers of it to procure, at the time 
 in question, a supply of guineas to be given in pay- 
 ment of it, as it would for the Bank of England to 
 provide a supply of guineas for payment of their 
 notes. The new paper, then, though it should be 
 the same in its general nature, would be inferior to 
 that of the bank. It would yield, indeed, a pro- 
 fit to the issuers, a profit which the bank would lose 
 the opportunity of gaining; and the defire of this 
 profit might co-operate in producing a disposition 
 in new bodies of men to proceed to the creation of 
 
 it. 
 
77 
 
 it. If we suppose it to be created, and to form one 
 part of the current circulating medium of the metro- 
 polis ; and if we suppose, also, as we necessarily 
 must, a reduced quantity of Bank of England notes 
 to continue current at the same time, the new paper 
 would then be easily exchangeable for the Bank of 
 England paper; and every holder of the new paper 
 would, therefore, be able, by first exchanging it for 
 the bank paper, to draw gold out of the bank. The 
 directors of the bank, therefore, by proceeding to 
 such a reduction of their notes, as should create a 
 necessity for the bankers and merchants to create a 
 new paper among themselves, would only increase 
 the general paper circulation in London. They have 
 now, by their exclusive power of furnishing a cir- 
 culating medium to the metropolis, the means of, in 
 some degree, limiting and regulating its quantity; a 
 power of which they would be totally divested, if, 
 by exercising it too severely, they should once cause 
 other paper to become cui-rent in the same manner 
 as their own. Projects for the introduction of a new 
 circulating medium into the metropolis have, at dif- 
 ferent times, been formed ; all such schemes, how- 
 ever, must necessarily fail, as long as there continues 
 to be an unwillingness among the bankers to unite 
 in giving currency to the new paper. This unwil- 
 lingness would, of course, diminish in proportion as 
 the pressure should become general and severe. 
 
 The idea which some persons have entertained 
 of its being at all times a paramount duty of the 
 
 Bank 
 
78 
 
 Bank of England to diminish its notes, in some sort 
 of regular proportion to that diminution which it 
 experiences in its gold, is, then, an idea which is 
 merely theoretic. It miist be admitted, however, 
 to be very natural. 
 
 It has been supposed by some, that the pressure 
 on the mercantile world which a great diminution 
 of notes must cause, would, especially if it were 
 a severe one, induce the merchants to send for gold 
 from abroad, in order to supply their own w^ant of 
 money. The supposition, when thus put, is stated 
 in much too vague a manner to be susceptible of 
 that close examination which I wish to give to it. 
 There can be no doubt that we shall find it alto- 
 gether false, when pushed to the extent of assum- 
 ing that the extreme severity of the pressure is to 
 be the remedy. Let us consider this point in as 
 practical a way as possible. 
 
 It was supposed that the difficulty of obtaining 
 bank notes would cause the merchants to send 
 abroad for gold, in order to effect their payments. 
 But xi)hat merchants ? Certainly not those merchants 
 whose goods are unfit for a foreign market, and are 
 in no demand there. They must first exchange 
 these unsuitable goods for goods which are suit- 
 able, that is, they must sell them ; and if they sell 
 them, they must sell them, in the first instance, for 
 money, or what passes as money, and answers, 
 in their view, all. the same purposes. Thus they 
 get possession of the very thing, to supply their 
 
 want 
 
79 
 
 want of which they are supposed to send abroad. 
 The trader acts, in this respect, like any one who 
 is not a trader. If distressed for the means of 
 effefting what is called a cash payment, he no 
 more turns his thoughts to a foreign country for a 
 supply of gold, than the farmer or landed gentleman 
 who is equally pressed. He considers only what 
 part of his property he can turn into bank notes. 
 These he sees to be at hand; of the gold which is 
 in foreign countries he knows nothing. 
 
 It will be allowed, then, that it is not on our 
 traders in general that the pressure will so ope- 
 rate as to induce them to send for gold from the 
 continent. It will, perhaps, however, be said to 
 operate on our foreign merchants : but we must 
 now distinguish, also, between one foreign mer- 
 chant and another. The export trade to foreign 
 countries is, generally speaking, one trade ; the 
 trade of importing from foreign countries is a se- 
 cond ; the trade of sending out and bringing home ■ 
 bulHon, in order to pay or receive the difference be- 
 tween the exports and imports, may be considered 
 as a third. This third trade is carried on upon tlie 
 same principles with any other branch of commerce, 
 that is, it is entered into just so far as it is lucrative 
 to the speculator in bullion, and no farther. The 
 point, therefore, to be enquired into is clearly this, 
 — whether the pressure arising from a scarcity of 
 bank notes tends to render the importation of bul- 
 lion a more profitable speculation. 
 
 In 
 
80 
 
 In solving this question, there is not, perhaps, all 
 the difficuhy which might be supposed; for it is. 
 obvious that, generally speaking, it will answer to 
 import gold into a country just in proportion as the 
 goods sent out of it, in the way of trade (that is, the 
 goods which must be paid, for), are greater in value 
 than the goods which are, in the way of trade^ 
 brought into it. We may, therefore, now dismiss 
 also the case of the mere dealer in bullion from our 
 consideration. We have only to examine in w^hat 
 way the pressure arising from the suppression of 
 bank notes will affect the quantity of goods which 
 are in the way of trade either exported or imported* 
 
 That a certain degree of pressure will urge the 
 British merchants in general who buy of the manu- 
 facturers, as well as the manufacturers themselves, 
 to sell their goods in order to raise money ; that it 
 will thus have some influence in lowering prices at 
 home ; and that the low prices at home may tempt 
 merchants to export their articles in the hope of a 
 better price abroad, is by no means an unrea- 
 sonable supposition. But, then, it is to be ob^ 
 served on the other hand, first, that this more 
 than ordinary eagerness of all our traders to sell, 
 which seems so desirable, is necessarily coupled with 
 a general reluctance to buy, which is exactly pro- 
 portionate to it : it must be obvious, that, when the 
 general body of merchants, being urged by the pecu- 
 niary difficulties of the time, are selling their goods 
 in order to raise money, they will naturally also delay 
 
 making 
 
81 
 
 making the accustomed purchases of the manu- 
 facturer. They require of him, at least, that he shall 
 give them a more than usually extended credit; but 
 the manufacturer, experiencing the same difficulty 
 with the merchants, is quite unable to give this 
 credit. The sales of the manufacturer are, there- 
 fore, suspended ; but though these are stopped, his 
 daily and v^eekly payments continue, provided his 
 manufacture proceeds. In other words, his money 
 is going out while no money is coming in; and this 
 happens at an aera when the general state of credit is 
 such, that he is not only not able to borrow, in order 
 to supply his extraordinary need, but when he is also 
 "pressed for a prompter payment than before of all 
 the raw materials of his manufacture. Thus the 
 manufacturer, on account of the unusual scarcity of 
 money, may even, though the selling price of bis 
 article should be profitable, be absolutely compelled 
 by necessity to slacken, if not suspend, his opera- 
 tions. To inflict such a pressure on the mercantile 
 world as necessarily causes an intermission of manu- 
 facturing labour, is obviously not the way to in- 
 crease that exportable produce, by the excess of 
 which, above the imported articles, gold is to be 
 brought mto the country. ^ ; 
 
 But, secondly, that very diminution in \h.Q price 
 of manufactures which is supposed to cause them 
 to be exported, may also, if carried very far, pro- 
 duce a suspension of the labour of those who fabri- 
 cate them. The masters naturally. Xtf^P.O^Aeir 
 
 G ' hands 
 
 ^ 
 
82 
 hands when they find their article selling exceed- 
 ingly ill. It is true, that if we could suppose the 
 diminution of bank paper to produce permanently 
 t diminution in the value of all articles whatsoever, 
 and a diminution, as it would then be fair that it 
 should do, in the rate of wages also, the encourage- 
 ment to future manufactures would be the same, 
 though there would be a loss on the stock in hand. 
 The tendency, however, of a very great and sud- 
 den reduction of the accustomed number of bank 
 notes, is to create an unusual and f.n)i/wrari/ distress, 
 and a fall of price arising from that distress. But a 
 fall arising from temporary distress, will be attended 
 probably with no correspondent fall in the rate of 
 wages ; for the fall of price, and the distress, will 
 be understood to be temporary, and the rate of 
 wages, we know, is not so variable as the price of 
 goods. There is reason, therefore, to fear that the 
 unnatural and extraordinary low price * arising from 
 
 the 
 
 • It may, perhaps, be supposod, that a diminution of the quan- 
 tity of Bank of England notes, if j)crmanent, would produce that 
 permanent diminution of the price of articles which is so much 
 desired, and the observation made above may be thought to givo 
 some countenance to this :>upposition. Such permtncnt reduction in 
 the price of commodities could not, however, as I apprehend, bo by 
 any such means cffoctcd. The general .md permanent value of bank 
 notes must be the same as the general and permanent value of that 
 gold for which thry arc exchangeable, and the value of gold in 
 England is regulated by the general and pcrmununt value of it all 
 over the world } and, therefore, although it is admitted that a great 
 and sudden reduction of bank notes may produce a groat local and 
 
 temporary 
 
Of T«f \ 
 VNJYERSfTY i 
 
 t^e sort of distress of which we no^Ttp^k^ would 
 occasion much discouragement of the fabrication 
 of manufactures. /rsfh i- 
 
 Thirdly, a great diminution of notes prevents 
 much of that industry of the country which had been 
 exerted from being so productive as it would other- 
 wise be. When a time either of multiplied failures, 
 or even of much disappointment in the expected 
 means of effecting payments arises, plans of com- 
 merce and manufacture, as well as of general im- 
 provement of every kind, which had been entered 
 upon, are changed or suspended, and part of the 
 labour which had been bestowed proves, therefore, 
 to have been throwii away. If, for instance, ex- 
 
 . temporary fall in the price of articles (a fall, that is to say, even in 
 their gold price, for we are here supposing gold and paper to be in- 
 terchanged), the gold price must, in a short time, find its level with 
 the gold price over the rest of the world. The continuance of the 
 great limitation of the number of bank notes would, therefore, lead 
 either, as has already been observed, to the creation of some new 
 London paper, or possibly to some new modes of economy in the 
 use of the existing notes ; the effect of which economy on prices 
 would be the same, in all respects, as tha.t of the restoration of the 
 usual quantity of bank notes. What seems most probable, is, that 
 the continuance of any great limitation of the number of bank notes 
 would lead to the transfer of the present cash payments of London 
 to some other place or places in which the means of effecting pay- 
 ments should not be obstructed through the too limited exercise of 
 that exclusive power of furnishing a paper circulation with which the 
 Bank of England has, by its charter, been invested. This subject of 
 the influence of paper credit on prices will be more fully entered 
 into in a future chapter. 
 
 G 2 pensive 
 
84 
 pensive machinery had been erected, under an ex- 
 pectation of regular employment for it, a pressing 
 want of the means of effecting payments may cause 
 that machinery to stand idle. The goods xvhich 
 bught to form part ot the assortment of the factor 
 br the shopkeeper, and to be occupying their pre- 
 mises, are loading the warehouse of the manufac- 
 turer *, and, perhaps, are suffering damage by too 
 
 long 
 
 * When an interruption of the usual credit arises, it naturally 
 happens that the individuals having the least property, and the fewest 
 resources, are the most pressed ; and it is sometimes assumed by the 
 public, rather too readily, that those who suffer are justly punished 
 for the too great extent of their speculations. It is true, undoubt- 
 edly, that those who prove to be the first to fail, have probably been 
 men of too eager and adventurous a spirit. Let the spirit of adven- 
 ture among traders, however, have been either more or less, the 
 interruption of the usual credit cannot fail to cause distress ; and that 
 distress will fall upon those who have merely been, comparatively y 
 the more adventurous part of the trading world. It is often also as- 
 sumed by the public (and without the least foundation) that the want 
 not of gold merely but of honafde mercantile capital in the country is 
 betrayed by a failure of paper credit. The error of this supposition 
 is not only plain, from the general principles laid down in the first 
 chapter of this work, but it is also distinctly proved by the circumstance 
 stated above, that while the premises of the factor and of the shopkeeper 
 are becoming empty of goods, the warehouse of the manufacturer is 
 growing proportionably full. The time soon comes, indeed, when that 
 suspension of labour (which, it should be remembered, is the conse- 
 quence of the suspension of credit) causes the general stock of goods 
 (or the mercantile capital of the country) to be diminished. The 
 ev"il, therefore, consists not in the want q^ bona fide c^c^wA^ but in the 
 want pf such a quantity of the circulating medium as shall be suffi- 
 cient, at the time, to furnish the means of transferring the goods of 
 
 the 
 
S5 
 
 long detention. On the other hajid, some sales are 
 forced; and thus the goods prepared for one mar- 
 ket, and best suited to . it^ are sold at another. 
 There cease, at such a time, to be that regularity 
 and exactness in proportioning and adapting the 
 supply to the consumption, and that dispatch in 
 bringing every article from the hands of the fabri- 
 cator into actual use, which are some of the great 
 means of rendering industry productive, and of 
 adding to the general substance of a country. Every 
 great and sudden check given to paper credit not 
 only operates as a check to industry, but leads also 
 to much of this misapplication of it. Some diminu- 
 tion of the general property of the country must fol- 
 low from this cause; and, of course, a deduction also 
 from that part of it which forms the stock for ex- 
 portation. It can hardly be necessary to repeat, 
 that on the quantity of exported stock depends the 
 quantity of gold imported from foreign countries. 
 
 It will be supposed, perhaps, that the limitation 
 of bank notes, by lessening the means of payment 
 of the importing merchant, may induce him to 
 suspend his imports; and that, since it is the excess 
 
 the manufacturer from his own warehouse to that of the factor and 
 the shopkeeper. The quantity wanted to be empldyed in the circu- 
 lation, and especially the quantity of gold, becomes more, as was . 
 observed in the third chapter, when confidence is less, because the 
 rapidity of the circulation is less. The substitution of gold for paper, 
 and of better paper for that which is worse, and some temporary 
 increase of the gold and good paper actually circulating, are ob- 
 viously the remedy. 
 
 G 3 of 
 
86 
 
 of exports above the imports which causes gold to 
 enter the country, the limitation of paper may, with 
 a view to the diminution of imports, be very de- 
 sirable. There is, probably, some justice in thi.^ 
 supposition. It should, however, be observed on 
 this subject, that Great Britain, at that period of 
 an unfavourable balance which we are now suppos- 
 ing, may be considered as importing chiefly either, 
 first, corn, of which no one would wish to check 
 the import by a limitation of paper; or, secondly, 
 that class of articles which are brought from one 
 country in order to be transported to another ; ar- 
 ticles which come chiefly from very distant parts, 
 and of which the payment cannot be declined, it 
 having been promised long before hand ; articles, 
 also, which soon serve to swell the exports in a 
 somewhat greater degree than they had increased 
 the imports ; or, thirdly, that rude produce of other 
 countries which forms the raw materials of our own 
 manufacture, and serves, after a short time, to supply 
 exportable articles to a very increased amount. 
 
 The limitation of credit at home will chiefly be 
 of use by urging the exporting merchant to press 
 the sale of the goods whicl^ he has abroad, and to 
 direct them to be sold, if he can, at a short cre-r 
 dit; and also by its urging, in like manner, the 
 importing merchant to delay buying abroad, as long 
 as he can, and to buy at a long credit. In other 
 wqfds, it may be of use in leading English mer* 
 chants, in their dealings with foreigners, to antici- 
 pate 
 
8t 
 
 pate their receipts, and to delay their payments ; on 
 the other hand, it is carefully to be remembered, 
 that an anticipation of receipts, and a delay of pay- 
 ments, are only a temporary benefit ; while a sus- 
 pension of manufactures operates, as far as it goes, 
 as so much permanent and entire loss to the country. 
 It is, moreover, to be borne in mind, that a very se- 
 vere pressure is sure to produce a suspension of 
 manufactures, while it is not sure to cause British 
 merchants to obtain an extension of credit from fo- 
 reigners. Any very extraordinary suppression of 
 bank notes must produce distrust abroad through- 
 the failures at home, to which it is known abroad 
 to give rise. It, therefore, indisposes foreign mer- 
 chants to lend money to England, and it induces 
 those foreigners, who have debts due to them from 
 Englishmen, to urge the payment of those debts. 
 England, during the prevalence of any great dis- 
 trust, is obliged to send abroad manufactures not 
 for the payment of goods imported, or for the pur- 
 chase of gold, but for the extinction of debt. 
 
 Although, therefore, it may possibly admit of a 
 doubt whether some moderate restriction of the pa- 
 per of the bank may not be expedient with a view 
 to mend for the time an unfavourable balance, it 
 seems sufficiently clear that any very sudden and 
 violent reduction of bank notes must tend, by the 
 convulsion to which it will lead, to prevent gold 
 from coming into the country rather than to invite 
 it, and thus to increase the danger of the bank itself. 
 G 4 The 
 
88 
 The observation; which was before made may, there- 
 fore, be repeated, that it is 7iot the severity of the 
 pressure xvhich is to be the remedy. It is, indeed, 
 in every respect plain that it must be important to 
 maintain, and to maintain carefully, the credit of the 
 country, at that time in particular, when its guineas 
 are few, and are also leaving it ; that is the time 
 "Whenour own funds.are necessarily low, when the 
 rriost j-egular ijidustry should by every means be pro- 
 iwjiltedi, aqiJ when tbel".e;is the most need of the aid 
 both of oiirTdpmestieand foreign credit; and it be- 
 longs to the Bank of England, in particular, to 
 guard and to superintend the interests of the coun- 
 try in this, respect. The very policy of the bank 
 differs-, rn this particular, from that ot the individual 
 counVy banker, whose own share of the evil re- 
 sukmg to the country, from the sudden suppression 
 of his own notes, is small ; who may trust, moreover, 
 t^i^t there will be a substitution either of guineas or 
 of other paper in the place of his own paper which 
 is suppressed; and who, it may be remarked, sup- 
 pHes himself with the means of discharging his own 
 notes by obtaining guineas from the Bank of Eng- 
 land. 
 
 But the Bank of England has no bank to which 
 it can resort for a supply of guineas proportioned to 
 its wants in the same manner in which it is resorted 
 to by the country banks ; nor have the bankers and 
 traders in London, to whom at present is transferred 
 the business of effecting the great cash payments of 
 
 the 
 
89 
 
 the whole country, the same resource in case Bank 
 (^England notes are suppressed which traders in 
 the country, have, supposing country bank notes to 
 be withdrawn. The country payments being not 
 strictly promised before hand, may, many of them, 
 l)ear to be postponed. Bills of exchange on London 
 may also form some substitute for country bank notes, 
 an<i may pass as such in the manner which was 
 some time ago described ^ but if Bank of England 
 notes are suppressed, and are suppressed, as we 
 have been^ supposing them to be, in consequence of 
 guineas being scarce, there then remain no means 
 whatever of effecting the London payments. There 
 can be no doubt that the extinction or very great di- 
 minutiop of bank notes would be a far greater evil, 
 in the present circumstances of the metropohs, than 
 the disappearing of guineas. If guineas disappear, 
 notes may be substituted in their place; and through 
 that general confidence which may be inspired by 
 the agreement of bankers and other leading persons 
 to take them, they will not fail, provided the issues 
 are moderate, and the balance of trade is not very 
 unfavourable to the country, to maintain exactly the 
 gold price. The punctuality thus introduced into 
 all the larger operations of commerce, will facilitate 
 contrivances for effecting the smaller payments. 
 
 Differences of opinion, undoubtedly, may exist as 
 to the exact degree in which the notes of the Bank 
 of England ought, under any given circumstances, 
 to be diminished. It may be hoped, however, that 
 
 . at 
 
90 
 
 at least one point has now been fully and completely 
 established, namely, that there may be an error on the 
 side of too much diminishing bank notes, as well as 
 on the side of too much increasing them. There 
 is an excessive limitation of them, as every one 
 must admit, which will produce failure^ ; failures 
 must cause consternation, and consternation must 
 lead to a run upon the bank for guineas. There 
 must, in short, then, be some point at w^hich the 
 bank must stop in respect to the reduction of its 
 notes, however progressive may be the drain upon 
 it for guineas. 
 
 But if its notes are not lessened, or if even they are 
 lessened, but are not entirely extinguished, it is then 
 in the power of any one who can possess himself of 
 a bank note to possess himself also of guineas, as 
 long as the bank pays in guineas ; and it will be 
 found to follow, moreover, that the bank is thus 
 rendered liable to be totally exhausted of guineas. 
 I mean, that it is liable to be totally exhausted 
 of them, however great their number may have 
 been, if it determines to maintain even the smallest 
 number of notes. By maintaining, that is to say, 
 ^vt millions, or two millions, or even one million, 
 of notes, the bank cannot avoid being exhausted 
 (supposing the alarm to rise high enough to do it) 
 of even five millions, or ten millions, or, if it had 
 them, of twenty or fifty millions of guineas. It 
 will depend, in such case, on the degree of alarm, 
 and not on the maintenance of the greater- or of 
 
 the 
 
91 
 
 the less quantity of notes, whether the guineas 
 shall be more or less rapidly called for from the 
 bank; or, in other words, the bank may be as 
 much exhausted of guineas if it maintains five mil- 
 lions of notes as if it maintains ten millions, provided 
 the alarm is only the same in the one case as in the 
 other. If, therefore, the maintenance of the five 
 millions of notes is sure to produce more alarm than 
 the maintenance of ten, then the maintenance of 
 the larger quantity of notes will serve to diminish 
 the demand for guineas, and the maintenance of the 
 smaller number to increase it. 
 
 The following is the manner in which that opera- 
 tion, which is finally to exhaust all the guineas of the 
 bank, may be supposed to proceed. A, for instance, 
 the holder of a note of 1000/. (and it is what any man 
 may obtain by selling goods) carries it to the bank 
 rxr.d demands ICOO/. in gold. The bank gives the gold ; 
 which gold, let it be remarked, either goes abroad to 
 pay for an unfavourable balance of trade, or, as we 
 are now rather supposing, fills a void in the circula- 
 tion of the country, occasioned by the withdrawing 
 of country bank notes in consequence of alarm, or 
 serves as an addition to the fund of country banks, 
 or forms a hoard in the hands of individuals. The 
 1000/. in gold, thus furnished by the bank, does not 
 supply, in any degree, the place of the 1000/. note 
 for which it was given; for the 1000/. note had 
 been employed in London in making the larger 
 payments. It is hardly ever, in almost any degree, 
 
 as 
 
92 
 
 as a substitute for Bank of England notes, that the 
 gold taken from the bank is wanted. The bank, 
 therefore, having paid away this 1000/. in gold, and 
 having received for it their own note for 1000/. must 
 now re-issue this note, if they are resolved to main- 
 tain the amount of their paper circulation. How, 
 then, is the bank to issue it ? The only means which 
 the bank, on its part, is able to take for the exten- 
 sion of its paper circulation, is to enlarge its loans. 
 It must, therefore, re-issue the 1000/. note, in the 
 shape of a loan, to some person who offers a bill to 
 discount. It receives, therefore, a bill of 1000/. and 
 gives a note of 1000/. in return for it. For the 
 same note, thus re-issued, we may suppose 1000/. 
 in money to be again demanded, and to be again 
 paid. The paper circulation of the bank is now 
 again diminished 1000/. and, therefore, there arises 
 a necessity for issuing the same 1000/. note, or some 
 other note or notes to like amount, a third time, in 
 order to maintain the amount of notes in circulation. 
 The like transaction, or rather a number of such 
 transactions, may be supposed to be repeated either 
 five, or fifty, or a hundred, or a thousand times. 
 Even if we should suppose the bank to bring down 
 its paper circulation to one hundred thousand 
 pounds, and to maintain it at that siimy it is ob- 
 vious that this same operation might be so reite- 
 rated, from day to day, as to extract at length from 
 the bank even the greatest imaginable number of 
 guineas. Thus, then, the bank is rendered liable 
 
 to 
 
95 
 to be exhausted of its guineas, by its determination 
 to maintain the number of its notes, whether that 
 number be greater or smaller 3 and here, also, let it 
 be remarked by the way (a point on which more shall 
 be said presently), that the bank, in consequence 
 of its determination to maintain a given number of 
 notes, is placed under an absolute necessity of in- 
 creasing its loans to the very same extent to which 
 it is deprived of its guineas. The bank, let it be 
 remembered, was stated to lend an additional 1000/. 
 on the occasion of each reiterated demand upon it 
 for 1000/. in guineas. It thus clearly appears that 
 the Bank of England is placed, by the very nature of 
 its institution, in a situation in which it may not 
 be possible to avoid a temporary failure in the regu- 
 larity of its cash payments. 
 
 An idea has, indeed, prevailed, than which no- 
 thing can be more natural, that because an indivi- 
 dual merchant is presumed to be blameable if he is 
 not able to make good his payments, therefore, 
 also, a national bank, in case of failure, may be pre- 
 sumed to be censurable in like manner; and, on 
 account of the greater importance of its transactions, 
 to be censurable even in a still higher degree. But 
 the total disparity in the circumstances of the two 
 cases should be taken into consideration. Private 
 houses may, in general, be fairly presumed to be in 
 fault if they fail in the punctuality of their cash 
 payments, supposing the bank of England to pay 
 in money, -because, if they have made on their part 
 
 a tolerably 
 
9i^ 
 a tolerably prudent provision, they maybe in general 
 considered as having in the bank a sure resource* 
 Take away from them that resource, and they vi^ill 
 then be not only as liable as the Bank of'England to 
 the like accident, but they will be much more so, 
 their means of supplying themselves with guineas 
 becoming then exceedingly precarious. It may be 
 apprehended, also, that, if instead one national 
 bank two or more should be instituted, each having 
 a small capital ; each would then exercise a separate 
 judgment ; each would trust in some measure to the 
 chance of getting a supply of guineas from the 
 other, and each would allow itself to pursue its own 
 particular interest, instead of taking upon itself the 
 superintendance of general credit, and seeking its 
 own safety through the medium of the safety of the 
 public ; unless, indeed, we should suppose such a 
 good understanding to subsist between them as to 
 make them act as if they were one body, and re- 
 semble, in many respects, one single institution. 
 
 The accident of a failure in the means of making 
 the cash payments of a country, though it is one 
 against which there can be no security which is 
 complete, seems, therefore, to be best provided 
 against by the establishment of one principal bank. 
 It, however, becomes the public not to judge the 
 bank, which is thus rendered its servant, and is 
 completely subjected to its interests, by the same 
 rules by which it judges of smaller banking and 
 
 commercial 
 
95 
 
 commercial establishments, but to advert to the 
 peculiarity of its case. 
 
 If there has been any fault in the conduct of the 
 Bank of England, the fault, as I conceive, has ra- 
 ther been, as has just been stated, on the side of too 
 much restricting its notes in the late seasons of 
 alarm, than on that of too much enlarging them. 
 In doing this, it has happened to act (though but 
 in part) according to what seems likely to have been 
 the advice of Dr. A. Smith in the case. It has also 
 taken that course which is the natural one for smaller 
 banks, and which might, perhaps, have been the 
 proper one for the Bank of England itself, in the 
 infancy of its establishment, when the country was 
 less dependent upon it for the means of effecting 
 its payments. It has, probably, pursued a prin- 
 ciple which had been acted upon, by its own di- 
 rectors, in all former times. It has also followed 
 what was, at the very period in question, the com- 
 mon opinion of the pubHc on the subject. It has, 
 moreover, only diminished those notes, perhaps, in 
 too great a degree, which there might possibly be 
 found to be some argument for restraining with a 
 more gentle hand. I venture, however, with de- 
 ference, to express a suspicion that the bank may 
 have, in some measure, aggravated, perhaps, rather 
 than lessened, the demand upon itself for guineas 
 through the suppression of too many notes at the 
 time preceding the suspension of its cash pay- 
 ments ; and I will hazard an opinion, that it might 
 
 also, 
 
96 
 
 also, with propriety, have somewhat extended the 
 temporary issue of its paper in the year 1793, when 
 that alarm, arising from the failure of country banks, 
 which has been already spoken of, took place. It 
 is clear, at least, that it did not, in the more recent 
 instance, succeed by the diminution of its notes in 
 curing the evil which it thus aimed to remedy. 
 
 A suspicion prevailed, at the time of which 
 we have been chiefly speaking, that the loans af- 
 forded by the bank to the government had caused 
 the distress of the bank. But the government, 
 it should be remembered, has no supply of gui- 
 neas with which it can discharge any debt. It 
 is circumstanced, in this respect, like any other 
 debtor of the bank. It must, if forced to pay its 
 debt, pay it in bank notes, an article which the 
 bank cannot refuse to take. And the govern- 
 ment must collect these notes wherever they are to 
 be obtained ; that is, from the bankers and traders, 
 and other persons in possession of them, to whom 
 it must, in return, give new stock or exchequer bills, 
 which it may, at all times, easily create , though, 
 at a period of mercantile distress, this would be 
 done at a somewhat unfavourable price. We learn, 
 from the evidence given to parliament, that the go- 
 vernment w^as urged by the bank to pay up four 
 and a half millions of existing debt a short time be- 
 fore the period in question, and that it complied 
 with the demand ; that is, the govenment collected 
 som.e of the bank notes which were in circulation, 
 
 and 
 
97 
 
 and paid them into the bank ; and then a part, but 
 only a partj of the notes so paid in were re-issued to 
 the merchants. If the whole of the notes paid into 
 the bank by the government had been immediately 
 re-issued in loans to private traders, then the sum of 
 notes in circulation would have been the same. 
 The government is only one large borrower from the 
 bank; the merchants are a number of similar, though 
 smaller, borrowers. Whether, therefore, the bank 
 lent more to individuals and less to government, or 
 less to government and more to individuals, the ef- 
 fect as to the number of notes allowed to be 
 in circulation, must have been equal. The Exche- 
 quer, after receiving notes from the bank^ almost 
 as quickly pays them away, and thus sends them 
 into the common circulation as the merchant doesj 
 and it is the total quantity of circulating notes, and , 
 not the manner in which they come into circulation, 
 that is the material point. 
 
 It may be thought, indeed, that commerce would 
 be encouraged, and commercial creditj as well as 
 general paper credit, would be supported in a much 
 greater degree by the bank sending their notes into 
 circulation, through the medium of a loan to the 
 merchants, than through that of a loan to govern- 
 ment. But the difference would not, as I appre- 
 hend, be so great as many commercial men them- 
 selves at that time imagined. Those merchants w»ho 
 obtained an increase of the accustomed advances 
 from the bank, would, some of them, probably in- 
 
 H vest. 
 
98 
 vest, in the new exchequer bills which were created, 
 a part of that very sum with which the bank fa- 
 voured them. The merchants in higher credit, of 
 course, would have the preference at the bank ; 
 and they were certainly under a very strong tempta- 
 tion to borrow of the bank at five per cent, in- 
 terest for the sake of investing the sum so bor- 
 rowed in exchequer bills, yielding five and a half 
 or six, or, for a time, even seven or eight per cent. 
 or more. As far as this was the case, it is obvious 
 that the bank, instead of lending to the govern- 
 ment, would only lend to those who lent to the 
 government, the government paying an addi- 
 tional interest, and the merchants receiving it. 
 Where this did not take place, that might happen 
 which would be exactly equivalent. The bankers 
 finding that the merchants were, many of them, al- 
 lowed to become larger borrowers at the bank than 
 before, would think it less necessary to lend to 
 them, and would, therefore, add to the sum which 
 they themselves kept in exchequer bills, the great 
 profit on that article tempting them, at the same 
 time, to do this. The bank, on this supposition, 
 would lend to the merchants, who would forbear 
 to borrow of the banker (which is the same thing for 
 the present purpose as lending to the banker), 
 w^ho would lend to the government. But let us put 
 a third case. Let us imagine it to be a gentleman 
 in the country who invested the property in the^ 
 ?iew exchequer bills. That property would pro- 
 bably 
 
99 
 
 bably, since we must suppose it easily applicable to' 
 such investment, have been lying in some private 
 hand at interest. Let us imagine it to consist of 
 100/. which had been in the hands of a country 
 banker; the country banker, in this case, would 
 draw upon his London banker; the country banker's 
 account with the London banker would then be 
 worse by 100/.; and the London banker having 
 100/. less deposits, would be able to lend 100/. less 
 to the London merchants. In other words, the 
 Bank of England, in this case, instead of lending 
 to the government, would lend to the London mer- 
 chant, who would forbear to borrow of the London 
 banker, who would lend to, or^ perhaps, forbear to 
 borrow of the country banker, who would forbear 
 to borrow of the country gentleman, who would 
 lend to the government ; which also seems to be 
 much the same as if the Bank of England themselves 
 lent to the government. This detailed case has been 
 put partly for the sake of observing upon it, that 
 the necessity which would be created for the trans- 
 fer of this 100/. through so many hands, would pro- 
 duce a want of some degree of additional circulat- 
 ing medium in order to effect these several pay- 
 ments. It would, however, be chiefly by the means 
 of a bill on London that the transaction just now 
 supposed would be conducted; but the bill must 
 
 "finally be paid by a Bank of England -note 
 
 Let us imagine a fourth case. Let us suppose 
 
 a sum to be invested in the new exchequer bills by 
 
 H 2 a person 
 
100 
 a person obtaining money for the purpose of the 
 investment, not by calling in a sum lying at inte- 
 rest, as was last assumed, but by selling goods, 
 land, or any other article. We must, then, neces- 
 sarily suppose a buyer of those goods, of that land, 
 or of that other article to be created by such sale. 
 We shall find, also, that it is necessary to suppose 
 either that buyer to become a borrower, or to be- 
 come the seller to one who would become a bor- 
 rower ; or, at least, w^e must come to a borrower at 
 last. We are supposing one man to sell goods 
 for 100/. and not to restore this 100/. to trade, but 
 to lend it out. We must, then, necessarily suppose 
 some other man to borrow 100/. and by thus bor- 
 rowing to add that 100/. capital to trade which the 
 other had taken from it ; for since the trade goods 
 in the country remain the same, the capital invested 
 in trade must be the same also. The body of 
 lenders, therefore, whoever they might be, who 
 lent the four and a half millions to government, 
 necessarily created a body of borrowers to ex- 
 actly the same amount in what may be called 
 the general money market of the country. Thus 
 a pressure was, on the whole, created, which 
 was just equal to that which was relieved ; a pres- 
 sure, in the first instance, falling in some degree 
 (though by no means entirely, or even principally) 
 in a diflferent quarter than before ; a pressure, how- 
 ever, very soon extending itself to the same persons; 
 for there is a competition among the several classes 
 
 both 
 
101 
 
 both of borrowers and of lenders in the money 
 market, which, notwithstanding some inequality 
 occasioned by the usury laws, causes the increased 
 distress brought upon any one classs of the accus- 
 tomed borrowers very soon to distribute itself among 
 all. The bank, it is true, would, by lending the 
 four and a half millions in bills at two months, pos- 
 sess more means of at any time diminishing its 
 loans, and of thus lessening also its notes, than if 
 the same sum had been invested in exchequer bills, 
 since the latter are at a longer date ; and it was na- 
 tural for the bank to call in its loan to government 
 for this reason. If, however, the calling in of the 
 loan to government was only to furnish the means 
 of limiting the notes, then that question returns 
 which has already been discussed, namely, whether 
 the diminution of the notes was not carried possibly 
 somewhat farther than was desirable, even for the 
 sake of the bank itself. During the existence of 
 this loan to government, that reduction of notes, 
 which has been supposed to have been too great, may 
 have been, perhaps, to a certain degree obstructed, 
 though by no means necessarily precluded ; since 
 an opportunity of diminishing the discounts to the 
 merchants, and of thus lessening the notes, at all 
 times existed. On the whole, there appears to be 
 no reason to infer, from the circumstance of the 
 demand for the four and a half millions having been 
 made upon government, that the government was 
 cither the more remote or the more immediate cause 
 
 H3 of 
 
102 
 
 df the suspension of the cash payments of the bank, 
 except, undoubtedly, so far as the war in general, 
 or the particular circumstance of a remittance of a 
 subsidy to the Emperor a short time before the event 
 in question, might be considered as affecting the 
 balance of trade, and thus contributing to draw gold 
 out of the country. 
 
 It is, on public grounds, so important to shew that 
 the more than usual largeness of the bank loans to 
 government (for it can hardly fail to be true that they 
 were more than commonly extended) was not the 
 cause of the suspension of the cash payments of the 
 bank, that I shall dwell for some time longer on this 
 subject. This was continually charged as the cause, 
 and it was not unnatural to suppose it to be so. The 
 paper circulation of the bank, however, it has been 
 observed, was at this time not increased. It was, 
 on the contrary, much reduced. It was by no means 
 higher than was necessary for securing the regu- 
 larity of the payments of the metropolis. Now, if 
 it be allowed that there was this necessity for main* 
 taining the existing quantity of notes, it then was not 
 the notes which must be considered as issued for the 
 purpose of making the loans, but the loans must be 
 considered as made in consequence of the issue of 
 notes. When the notes of the bank are increased, 
 the loans must be increased also j when the notes 
 are maintained, the loans must be maintained in as 
 great proportion ; when the notes are decreased, 
 the loans can be decreased oiily in that proportion. 
 
 There 
 
There can, then, be no matter of blame on account 
 of the magnitude of the loans, unless there be mat- 
 ter of blame on account of the magnitude of the 
 notes. But the notes I have stated to have been 
 probably rather too few than too many. If the 
 reader has agreed v^ith me in this, he must then 
 agree v^ith me that the loans wevQ too scanty rather 
 than too large. In other words, then, the bank, at 
 the time of the failure of its cash payments, had 
 lent too little rather than too much. If the bank 
 would have somewhat diminished its danger by 
 issuing more notes, the granting of more loans 
 would have also diminished its danger. Thus the 
 very converse to the common opinion on this subject 
 seems to be the truth. 
 
 There is, however, another point of importartCfe^ 
 here to be remarked. The loans which the bank 
 had made on the whole, that is, the loans to go^ 
 vernment and to individuals taken together, at the 
 time of the suspension of its cash payments, were 
 not only maintained in that proportion in which the 
 notes were maintained, but thev were increased be-- 
 yond that proportion. This increase beyond that 
 proportion was also a matter of necessity. 
 
 The loans of the bank do not simply keep pac* 
 with the notes. The loans necessarily increase or di- 
 minish through another cause ; they diminish as gold 
 flows in to the bank, and increase as gold goes out, 
 supposing, as we generally may, the article of de- 
 posits to remain the same ; that is, they necessarily 
 
 H 4 increase 
 
104 
 
 increase and diminish in a ratio directly contrary to 
 that which a theorist would prescribe, and which 
 the public naturally would suppose. 
 
 To those who are but slightly acquainted with 
 these subjects, this truth will probably be made 
 much clearer by a statement of the whole dispose-^ 
 able effects of the Bank of England, and of the 
 manner in which those effects are employed. The 
 statement is important, because it will serve to 
 prove, beyond the possibility of contradiction, that 
 the extraordinary largeness of the loans of the bank, 
 at the critical period in question, ought to be consi- 
 dered not as a consequence of any disposition in the 
 bank to be great and adventurous lenders at a time 
 when their guineas grew low, but as arising out of 
 the necessity under which they were placed. I mean 
 that, they could not avoid lending to the whole ex- 
 tent to which they did, provided even that small 
 number of notes which they kept in circulation was 
 maintained. 
 
 The effects of the bank on the 25th February 
 1797, I mean those effects which w^ere their own, 
 as well as those placed in their hands belonging to 
 other persons, m^y, in conformity to the account 
 rendered by themselves to parliament, be stated, in 
 round numbers, to have been as follows. 
 
 (It may be premised, that they had a capital of their 
 own of about 11,626,000/. which shall be excluded 
 from pur present consideration, it being lent to 
 government at three per cent, per annum interest). 
 
 l.Tbcy 
 
105 
 
 ,1. They had a sum of undivided 
 profits which formed an additional and 
 disposeable capital of nearly - - L. 3,800,000 
 
 , 2t They had of deposits lodged with 
 ^Jjem by customers of various classes;;';^^-..^/,.^.^ - 
 
 about 5,100,b00 
 
 These deposits include, as may be 
 presumed, the dividends belonging to 
 many proprietors of stock, which may 
 be viewed in the same light with the 
 cash kept by ap individual in the hands 
 of his banker. 
 
 3. They had what may be consi- 
 dered as disposeable effects, or deposits 
 placed in their hands in return for bank n.^Js v;^;,- 
 notes issued* .-»---- - 8,600,000 
 
 Thus the bank had, at that time, dis- 
 poseable effects amounting in all to L. 17,500,000 
 
 It 
 
 * The reader, perhaps, may not understand upon what principle 
 it is that the amount of the notes of the Bank of England is classed 
 among the deposits. The amount of them was placed on this side of 
 the account in the statement given to parliament by the bank, and 
 yery properly, or rather very necessarily. It is not, however, th^ 
 notes which themselves form deposits. They are given in return for 
 deposits ; and they are, therefore, the measure of those deposits. 
 It is in substance the same thing whether a person deposits loo/. in 
 money with the bank, taking no note, but obtaining a right to draw 
 a draft on a banking account which is opened in his name, or 
 ^%hether he deposits the same loo/. and receives for it a bank note. 
 
 The 
 
106 
 
 It will much illustrate what is about to be added, 
 if the following observations respecting these three 
 several heads of disposeable effects are here made. 
 
 First. Let it be remarked, that the first sum of 
 3,800,000/. does not fluctuate; it only increases 
 gradually, and in a small degree. 
 
 Secondly. The second sum of 5,100,000/. fluc- 
 tuates probably but little ; and as far as it does so, it 
 fluctuates not at the pleasure of the bank, but at 
 the will of its customers. 
 
 Thirdly. The third, then, is the only one of the 
 three component parts of the disposeable effects of 
 
 The possession of the right to draw obtaraed in the one case, ii 
 exactly equivalent to the possession of the note obtained in the other. 
 The notes, it is true, are commonly issued not in consideration of 
 money received, but of bills discounted ; but the deposits, it may 
 also be observed, are generally formed by the same means of bills 
 discounted. The manner of transacting the discounting business at 
 the bank is this: — the discounter opens a banking account with the 
 bank, and usually keeps a small balance upon it ; when he sends bills 
 to be discounted, those bills, if the bank consents to discount them, 
 are placed to the credit of his banking account ; and when he draws 
 for them, or for any part of them, the bearer of his draft receives 
 the amount of it in bank notes. The numerous balances, therefore 
 (in general small ones), which the discounters keep with the bank, are 
 included, no doubt, in the bank account, under the head of deposits, 
 and form a part of the second item in the statement above. The 
 sum which I have considered as deposited in the bank, by those 
 who take away the notes, they opening no account, is not termed 
 deposits in the bank statement. I have, however, thought it ne- 
 cessary so to term it, in order to make the subject the more dear to 
 the reader. 
 
 the 
 
^ 107 
 
 the bank which it is in the power of the bank to 
 increase or diminish at its own option. The bank 
 exercised their power of diminishing this article, at 
 the time in question, so far as to bring it down to 
 about 8,600,000/. To .reduce it thus far was, 
 as has been repeatedly stated, to reduce it, perhaps, 
 somewhat too much ; but let us assume only, that the 
 reduction was sufficient, or nearly sufficient. The 
 bank, then, it mu5t be admitted, had 17,500,000/. 
 of disposeable effects, and it was not to be ascribed 
 to them as a matter of blame that these effects then 
 stood at about the sum at which they did. 
 
 Having, then, these effects, and being undef a 
 necessity of disposing of them in some way or other, 
 let us state next how they did in fact employ 
 them. 
 
 In proceeding to make this statement, it will be 
 necessary, with a view to. the object for which it is 
 made, to name some specific sum (it matters not 
 whether more or less than the real one) for the 
 amount of that part of the effects of the bank which 
 was, on the 25th February, 1797, invested in bul- 
 lion. In the account rendered to parliament, the 
 value of the bullion and of the bills discounted, &c. 
 are put together, and are stated at nearly seven mil- 
 lions. Let it be supposed that the bullion was either 
 one, two, or three millions; and that the bills 
 discounted, &c. were, therefore, either four, five, 
 or six millions. The mode of disposing of the 
 17,500,000/. will then be as follows. 
 
 The 
 
108 
 
 The bank invested in government securities, that 
 is, in exchequer bills, in loans to government made 
 on the security of the land and malt tax which was 
 coming in, and in treasury bills of exchange grow- 
 ing due, about L. 10,500,000 
 
 They invested, as shall for the pre- 
 sent be assumed in conformity to the 
 estimate which it was before propos- 
 ed to make, '' in bills discounted to 
 the merchants," in what is termed in 
 their account, " money lent," and in 
 some other (probably small) " ar- 
 ticles," 4,000,000 
 
 And they had property invested in 
 bullion, as shall for the present be 
 assumed, amounting to - - - - - 3,000,000 
 
 Making together, as the investment 
 necessarily must, the same sum exactly 
 which the disposeable effects were be- 
 fore stated to amount to, namely - L. 17,500,000 
 
 This same account of the investment may be 
 given more briefly and conveniently for our pre- 
 sent purpose, in the following manner, viz. the 
 total sum lent both to government and to indivi- 
 duals, or, in other words, the total loans were 
 
 L. 1 4,500,000 
 The total of the bullion was - - - 3,000,000 
 
 Making together L.17,500,000 
 
 It 
 
109 
 
 It will now be obvious to the reader, that if the 
 bullion, instead of three millions, is supposed to have 
 been only two millions, then the total of the loans 
 must be supposed to be increased one million ; and 
 that if the bullion, instead of three millions, is 
 supposed to be only one million, then the loans 
 must be supposed to be increased two millions. 
 
 In other words, the account of the investment 
 may either be stated as has been just done, or it 
 may be stated as follows : 
 
 Total loans - L. 15,500,000 
 
 Bullion .-.--.-.- 2,000,000 
 
 Making together, as before, - - 17,500,000 
 
 Or total loans ----- - V;t|j^^, >,1 6,500,000 
 
 Bullion j|.^,^^ - . - - - ^^,..*^||'^^l 1,000,000 
 
 Making together, as before, - - L. 17,500,000 
 
 It thus appears, that the loans necessarily must 
 increase in proportion as the gold decreases, pro- 
 vided the disposeable effects remain the same. 
 
 It follows, on the principle which has just 
 been explained, that if we suppose, as we ne- 
 cessarily must, the bullion to have been, twelve 
 months before the time of the suspension of the 
 cash payments of the bank, much higher than at 
 the period of the suspension, the loans would, 
 during the course of those twelve months, neces- 
 sarily 
 
no 
 
 sarrly increase. Let us (for the sake of illustra- 
 tion) suppose the gold to have been a year be- 
 fore the suspension eight millions, and to have 
 fallen on the 26th February, 1797, to the sum 
 of two 'millions. In that case, if we were to sup* 
 pose the disposeable effects of the bank to have 
 been at both periods the same, there must neces- 
 sarily have been, in the course of the year, an in- 
 crease of the bank loans of no less than six mil- 
 lions. But the effects of the bank were not quite 
 the same at the two periods. They probably were 
 higher by about two millions at the former period ; 
 for the notes were higher by nearly that sum. The 
 notes, then, fell in the year two millions, but the 
 bullion fell six. The loans, therefore, would be de- 
 creased two millions, through the decrease of notes, 
 but would be increased six millions through the de- 
 crease of bullion ; that is, ihey would 7iecessarily be 
 increased, in the course of the year, four millions. 
 I have dwelt thus particularly on this circum- 
 stance, because the whole of the suspicion, that 
 the magnitude of the bank loans were the cause of 
 the failure of its cash, seems to me to rest upon it. 
 The largeness of those loans was not the cause of 
 the guineas going from them, as has been ordinarily 
 supposed j it was the effect. Nothing could be 
 more natural than for the public to call that the 
 cause, in this instance, which was the effect, and 
 that the effect which was the cause. In the case 
 of private persons it is often very justly said, 
 
 that 
 
Ill 
 
 that a man fails in his payments because he has 
 lent so largely; and it would seem very strange 
 to reply that this was not the case, for that the man 
 in question had found it necessary to lend largely, 
 because his cash failed him; and that the failure of 
 the cash was the cause, and the lending merely an 
 effect. That, however, which could not be affirm- 
 ed of an individual, is true in the case of the bank, 
 and the circumstances which give occasion for this 
 peculiarity in our reasonings respecting that institu- 
 tion, are these two; first, the difficulty in obtaining 
 a supply of guineas which the bank experiences, a 
 difficulty totally unknown to individuals who draw 
 their guineas from the bank itself; and, secondly, 
 the singular necessity under which the bank is placed 
 of maintaining at all times its notes. 
 
 It was thought by some, that the interference 
 on the part of the government and parliament 
 was improper, inasmuch as the bank ought not 
 to have been prevented from continuing to pay 
 in cash as long as it had any remaining ability 
 to do so. Every bank note, it was urged, is a 
 contract to pay money entered into between the 
 bank and the possessor of it, in consequence of 
 what has been deemed a valuable consideration; 
 and no authority of parliament ought, except in a 
 case of the last necessity, to interpose itself to pre- 
 vent the fulfilment of such a contract. To this it 
 seems to be a fair answer to say, that the question 
 h not whether any one holder of a npte shall have 
 
 his 
 
112 
 his claim to receive money for it interfered with, but 
 that it is a question respecting all the holders of notes, 
 as well as all olher persons having a right to demand 
 any cash payments in any quarter ivJiatever, Now, 
 there are few or no creditors who are not also debtors ^ 
 anda very large proportion of debtors owe as much 
 to others, as others owe to them* Bankers and 
 traders are greater debtors than other men; but 
 they are also greater creditors. The bank itself 
 is a great creditor, its credits, indeed, being far 
 greater than its debts, and it is intitled to receive 
 a part of its debts almost immediately. The case, 
 then, is this : a comparatively very small portion 
 of the persons having a right to demand cash, are 
 led, by sudden alarm, to urge their claim for gui- 
 neas to such a;i extent as to invest even a large 
 portion of their capital in that article of which a 
 quantity has been provided which is sufficient only 
 for the purpose of the ordinary kind of payments. 
 All the cash in the world would not satisfy claims- 
 of this sort, if all men, having a right to urge them, 
 were disposed equally to do so. The very persons 
 who press for these payments do not reflect, that 
 they themselves, perhaps, have creditors who might, 
 with equal justice, exact the immediate money pay- 
 ment of a still larger debt against them. The 
 law authorizing the suspension of the cash pay- 
 ments of the bank, seems, therefore, to have only 
 given effect to what must have been the general 
 wish of the nation in the new and extraordinary 
 
 circumstances 
 
113 
 
 circumstances in which it found itself. If every bill 
 and engagement is a contract to pay money, the 
 two parties to the contract may be understood as 
 agreeing, for the sake of a common and almost 
 universal interest, to relax as to the literal inter- 
 pretation of it, and as consenting that " money 
 " should mean money's worth,'* and not the very- 
 pieces of metal ^, and the parliament may be consi^ 
 dered as interposing in order to execute this com- 
 mon wish of the public. 
 
 By authorising the suspension of the cash pay- 
 ments of the bank, while a certain quantity of 
 guineas still remained in its coffers, the parlia- 
 ment, moreover, much diminished the shock which 
 this extraordinary event might naturally be expect- 
 ed to occasion j and also provided the means of 
 furnishing the guineas actually necessary after that 
 aera for some smaller current payments, as well 
 as the means of securing the credit of bank notes, 
 thus rendering them a more valuable medium of 
 exchange for goods, and a fairer substitute for gui- 
 neas than they might otherwise have been. The 
 parliament, then, were led by the practical view 
 v/hich they took of the subject, to disregard theory, 
 as well as some popular prejudice, for. the sake or 
 more effectually guarding the public safety, and 
 promoting real justice. 
 
 The danger chiefly to be apprehended in London, 
 was, that the common class of people, not receiving 
 their pay in the usual article of coin, and not know- 
 
 I ing 
 
Hi 
 
 ing at the first that one and two pound notes would 
 purchase every thing in the same manner as gold, 
 might be excited to some tumuUuous proceedings. 
 It was also feared that, through the discredit cast 
 on small notes by the common people, this new paper 
 might fall, at the first issue of it, to a discount. 
 It w^as important, therefore, to continue for a time 
 to pay the labouring people in moneys and to cir- 
 culate the new one and two pound notes, in the first 
 instance, by the medium of the higher classes. Of 
 the sum remaining in the bank, a small part was 
 issued to each of the bankers, after the suspension 
 took place, for the convenience of common work* 
 men. It was obviously desirable, that a farther 
 sum should be reserved in the bank as a provision 
 for any subsequent and important uses. 
 
 Immediately after this event, the bank extended 
 the quantity of its notes nearly to the amount of the 
 sum usually in circulation: and not only was credit 
 revived, but in no long time guineas became remark- 
 ably abundant. The bank, as is commonly sup- 
 posed, w^as replenished with them. And there is 
 this infallible proof, that gold flowed into the coun- 
 try; that the course of exchange became much in 
 favour of it. 
 
 CHAP- 
 
'115 
 
 CHAP. V. 
 
 Of the Balance of Trade— Of the Course of Ex- 
 change — Tendency of an unfavourable Exchange 
 to take away Gold — Of the Probability of the 
 Eetnrn of Gold — Of the Manner in which it 
 may be supposed that exported Gold is employed on 
 the Contijient — Reasons for having renewed the 
 Law for suspending the Cash Payments of the 
 Bank of England, 
 
 JL H E law which authorised the sus- 
 penfion of the cash payments of the bank having 
 been re-enacted ; the high price of provisions hav- 
 ing given occasion to much speculation on the sub- 
 ject of paper credit ; the course of exchange hav- 
 ing again turned greatly against the country; and 
 gold having to a material degree disappeared, its 
 place being occupied by small paper notes 3 it is 
 not surprising that suspicions of the necessity of an 
 alteration in the system of our paper credit should 
 have become prevalent. Some consideration shall 
 here be given to that unfavourable state of the 
 exchange between this country and Europe, which 
 operated during the last two years of the war, ift 
 again drawing away our guineas. 
 
 I 2 It 
 
116 
 It may be laid down as a general truth, that the 
 commercial exports and imports of a state (that is 
 to say, the'exported and imported commodities, for 
 which one country receives an equivalent from 
 another^ naturally proportion themselves in some 
 degree to each other; and that the balance of 
 trade, therefore (by which is meant the difference 
 between these commercial exports and imports), 
 cannot continue for a very long time to be either 
 highly favourable or highly unfavourable to a coun- 
 try. For that balance must be paid in bullion, or 
 else must constitute a debt. To suppose a very 
 great balance to be paid, year after year, in bullion, 
 is to assume such a diminution of bullion in one 
 country, and such an accumulation of it in ano- 
 ther, as are not easy to be imagined : it may even 
 be questioned whether the commercial prosperity 
 of a state does not tend, on the whole, to reduce, 
 rather than augment, the quantity of gold in use, 
 through that extension of paper credit to which it 
 leads. To suppose large and successive balances 
 to be formed into a debt, is to assume an accumu- 
 lation of debt, which is almost equally incredible. 
 A prosperous nation commonly employs its growing 
 wealth, not so much in augmenting the debts due 
 to it from abroad, as in the enlargement of its 
 capital at home i I mean, in the cultivation of its 
 lands, in the encrease of its buildings, the extension 
 of its machinery, the multiplication of its docks and 
 its canals, and in ^ variety of other improvements, 
 
 which 
 
117 
 
 whicH become the sure sources of an encreasing in- 
 come. The state may be progressive in these re- 
 spects, even in years in which the balance of trade 
 is unfavourable. There is a customary length of 
 credit in foreign parts which the British exporter, 
 however overflowing his capital may be, is not very 
 willing to enlarge. And events fail not occasionally 
 to arise, which remind him of the danger of com- 
 mitting too great a portion of his property into the 
 hands of those who are not subject to the same 
 laws with himself; and whose country may sud- 
 denly be involved, at any moment^ in a war with 
 Great Britain. 
 
 The equalization of the commercial exports and 
 imports is promoted not only by the unwillingness 
 of the richer state to lend to an unlimited ex- 
 tent, but also by a disinclination to borrow in the 
 poorer. There is in the mass of the people, of all 
 countries, a disposition to adapt their individual 
 expenditure to their income. Importations con- 
 ducted with a view to the consumption of the 
 country into which the articles are imported (and 
 such, perhaps, are the chief importations of a poor 
 country), are limited by the ability of the indivi- 
 duals of that country to pay for them out of their 
 income. Importations, with a view to subsequent 
 exportation, are in like manner limited by the 
 ability to pay which subsists among the individuals 
 of the several countries to which the imported 
 goods are afterwards exported. The income of in- 
 
 I 3 dividuaJs 
 
118 
 
 dividuals is the general limit in all cases. If, there-^ 
 fore> through any unfortunate circumstance, if 
 through war, scarcity, or any other extensive cala^- 
 mity, the value of the annual income of the inha- 
 bitants of a country is diminished, either new eco- 
 nomy on the one hand, or new exertions of indivi- 
 dual industry on the other, fail not, after a certain 
 time, in some measure, to restore the balance. And 
 this equality between private expenditures and 
 private incomes tends ultimately to produce equality 
 between the commercial exports and imports. 
 
 But though the value of the commercial exports 
 and imports of a country will have this generi^l 
 tendency to proportion themselves to each other, 
 there will not fail occasionally to arise a very great 
 inequality between them. A good or a bad harvest, 
 in particular, will have a considerable influence in 
 producing this temporary difference. The extra 
 quantity of corn and other articles imported into 
 Great Britain in this and the last year, with a view 
 to supply the deficiency of our own crops, must 
 have amounted in value to so many millions, that 
 it may justly excite surprise that we should have 
 been able, during an expensive war, to provide the 
 means of cancelling our foreign debt so far even as 
 we have done ; especially when the pieculiar interrup- 
 tions to our commerce are also considered. In this 
 country, however, as in all others, the two princi- 
 ples of economy and exertion are always operating 
 :n proportion to the occasion for them. But the 
 
 economy 
 
119 
 
 economy and exertion follow rather than accom- 
 pany the evil which they have to cure. If the 
 harvest fails, and imports are necessary, in order to 
 supply the deficiency, payment for those imports is 
 almost immediately required : but the means of 
 payment are to be supplied more gradually through 
 the limitation of private expenditure, or the encrease 
 of individual industry. Hence a temporary pres- 
 sure arises at the time of any very unfavourable 
 balance. To understand how to provide against 
 this pressure, and how to encounter it, is a grea^ 
 part of the wisdom of a commercial state. 
 
 By the commercial exports and imports which 
 have been spoken of, those articles have been in« 
 tended for which an equivalent is given ; not those 
 which form a remittance, for which nothing is '^ 
 obtained in exchange. Many of our exported and 
 some of our imported commodities are of that 
 class which furnish no return. 
 
 For example, numerous stores were shipped, dur- 
 
 : ing the war, for the support of our navy and army in 
 foreign parts. Remittances were made, in the way of 
 loan and subsidy, to our allies. Some dividends may 
 be supposed to have been transmitted to the foreign 
 proprietors of British stock. Much property is 
 also sent out of the kingdom, which constitutes a 
 capital employed in the cultivation of lands in the 
 West Indies. On the other hand, capital is trans- 
 mitted to Great Britain from the East Indies,, both 
 
 . by the India Company and by individuals. 
 
 I 4 Although 
 
120 
 
 Although exports and imports of this class form 
 no part of the commercial exports and imports 
 which have been spoken of, they affect the quantity 
 of those commercial exports and imports, and they 
 contribute, exactly like the circumstance of a bad 
 harvest, to render the balance of trade unfavoura- 
 ble* ; they tend, that is to say, in the same manner, 
 
 to 
 
 * This point may be illustrated in the following manner : — 
 Let us suppose a subsidy, for example, of two millions to be re- 
 mitted to the Emperor of Germany, through the medium of bills to 
 that amount, directed to be drawn by Vienna on London. By these 
 bills. Great Britain is laid under a necessity of exporting two mil- 
 lions, either of goods or of bullion, or of both, for which no fo- 
 reign commodities will be given in return. These two millions of 
 exports diminish our fund of exportable goods ; and they alfo satisfy 
 a part of the foreign demand for British articles. They tend, in 
 both these respects, to reduce the quantity of goods which can be 
 exported by us in the way of ordinary commerce, and to turn the 
 balance of trade against us. Capital transferred to our colonies, 
 dividends transmitted to foreigners, and articles shipped for the use of 
 pur fleets and armies, contribute In the same manner as foreign 
 subsidies to render the balance of trade unfavourable. It may be 
 added, that articles consumed at home, in the support of similar 
 fleets and armies, as well as all other expenditure in Great Britain, 
 must have the same general tendency. 
 
 It may be worthy of remark, that since an additional internal 
 expenditure, in the same manner as the remittance of a subsidy 
 to foreign parts, contributes to an unfavourable balance of trade, 
 and therefore, also, to the exportation of our gold, it follows, 
 that, if the remittance of a small subsidy tends to produce at home 
 a large saving ; If, for instance, it spares the expence of maintaining 
 '1 great naval and military force for the defence of our own island, 
 
 thrcmgh 
 
121 
 
 to bring Great Britain into debt to foreign countries, 
 and to promote the exportation of our bullion. 
 Our mercantile exports and imports, neverthe- 
 less, by whatever means they may be rendered 
 disproportionate, necessarily become, in the long 
 run, tolerably equal; for it is evident that there 
 is a limit, both to the debt which foreigners will 
 permit British merchants to incur, and also to the . 
 quantity of British bullion which is exportable. 
 
 Gold has been spoken of in this Chapter as that 
 article by which a balance of trade is discharged, 
 and not as itself constituting a commodity. Gold, 
 however, when exported and imported, may be 
 considered in the same light with all other com- 
 modities ; for it is an article of intrinsic value : its 
 price, like that of other commodities, rises and 
 falls according to the proportion between the sup- 
 ply and the demand ; it naturally seeks, like them, 
 that country in which it is the dearest ; and it is, 
 in point of fact, like them, exported by our mer- 
 chants accordingly as the export or import is likely 
 to yield a profit. Some description of the circum- 
 stances which cause the export of gold to become 
 
 through the continental diversion to which it leads, the subsidy may 
 conduce to render our balance of trade more favourable ; and may, 
 on the whole, prevent rather than promote the exportation of our 
 coin — A circumstance which, in considering the policy of furnish- 
 ing an aid to foreigii allies, is not always taken into contempla- 
 tion, y 
 
 a pro- 
 
122 
 
 a profitable speculation to the merchant may «erve 
 to illustrate this subject. 
 
 When a bill is drawn by one country on another 
 — by Hamburgh, for instance, on London — it is 
 sold (or discounted) in the place in which it is drawn, 
 to some person in the same place; and the buyer or 
 discounter gives for the bill that article, whatever it 
 may be, which forms the current payment of the 
 spot. This article may consist either of gold or 
 silver coin, or of bank paper, or, which is much 
 the same thing as bank paper, of a credit in the 
 books of some public bank. 
 
 Let us now suppose that the exporter of corn 
 from Hamburgh to London draws a bill for 100/. on 
 London, and offers it for sale on the Hamburgh 
 Exchange at the season when great exportations of 
 corn to London are taking place. The persons in 
 Hamburgh having occasion to buy bills are fewer, 
 in such a case, than those who want to sell them ; and 
 the price of the bill, like that of any other article, 
 fluctuates according to the proportion subsisting be- 
 tween the supply and the demand. The dispro- 
 portion, then, between the number of those per- 
 sons at Hamburgh who want to sell London bills 
 for Hamburgh coin, and the number of those who 
 want to sell Hamburgh coin for London bills, causes- 
 the price of London bills to fall, and of Hamburgh 
 coin to rise. Thus gold is said to rise at Ham- 
 burgh ; and the exchange between London and 
 
 Hamburgh 
 
123 
 
 Hamburgh becomes unfavourable to London. Thi^ 
 fluctuation in the exchange will, in the first instance, 
 be small. It will be limited to that trifling sum which 
 it costs to transport bullion from the one place to the 
 other, so long as there is bullion to be transported. 
 But let us now suppose the number of Hamburgh 
 bills on London, drawn for the payment of the 
 goods imported into the latter place, to be so nume- 
 rous, that the exportation of all the bullion which is 
 purchasable in Great Britain, has not sufliced for 
 their payment. Gold coin, in this case, will be ex^ 
 ported, being first melted down for the purpose. 
 Coin, indeed, is not allowed to be exported from 
 Great Britain, nor gold which has been melted down 
 from coin; an oath being required of every ex- 
 porter of gold, that the gold which he exports does 
 not consist of guineas which have been melted. 
 There are, however, many ways of escaping the 
 law which imposes this oath. The law is dis- 
 honestly evaded either by the clandestine expor- 
 tation of guineas, no oath at all being taken; 
 or by taking a false oath; or by contriving that 
 the person taking the oath shall be, in some de- 
 gree, ignorant of the melting which has been 
 practised. The operation of the law is avoided 
 without this dishonesty, through the exportation of 
 gold which had been turned, or had been about to 
 be turned, to the purposes of gilded and golden 
 ornaments, the place of this gold being supplied 
 
 by 
 
124 
 by gold melted down from coin. The state of the 
 British law unquestionably serves to discourage 
 and limit, though not effectually to hinder, that 
 exportation of guineas which is encouraged by 
 an unfavourable balance of trade; and, perhaps, 
 scarcely lessens it, when the profit on exporta- 
 tion becomes very greats The law tends, in- 
 deed, to produce a greater interchange of gold for 
 paper at home. But it encreases whatever evil 
 arises from an unfavourable state of the exchange 
 with foreign countries. 
 
 Let it now be considered how this high price of 
 gold in London must operate in respect to the Bank 
 of England. Great demands for guineas will be 
 made on the bank ; and, in general, probably by 
 persons not intending to meJt or export guineas 
 themselves, but wishing only to supply that want 
 which all have begun to experience in consequence 
 of the large illicit exportations carried on by a few 
 unknown persons. It is assumed, for the present, 
 that the bank is paying in guineas. What, then, is 
 the course which the bank will naturally pursue ? 
 Finding the guineas in their coffers to lessen every 
 day, they must naturally be supposed to be desirous 
 of replacing^ them by all effectual and not extrava- 
 gantly expensive means. They will be disposed, 
 to a certain degree, to buy gold, though at a losing 
 price, and to coin it into new guineas; but they 
 will have to do this at the very moment when 
 
 many 
 
• 125 
 
 many are privately melting what is coined. The one 
 party will be melting and selling, while the other 
 is buying and coining. And each of these two 
 contending businesses will now be carried on not 
 on account of an actual exportation of each melted 
 guinea to Hamburgh, but the operation (or, at 
 least, a great part of it) will be confined to Lon- 
 don y the coiners and the melters living on the 
 same spot, and giving constant employment to each 
 other. 
 
 The bank, if we suppose it, as we now do, to 
 carry on this sort of contest with the melters, is 
 obviously waging a very unequal warj and even 
 though it should not be tired early, it will be likely 
 to be tired sooner than its adversaries. 
 
 The dilemma in which the bank is thus placed, 
 is evidently one which implies no deficiency in its 
 wealth, in its credit, or in the strength of its re- 
 sources. The public, during all this time, may 
 have the highest confidence in it. The notes of 
 the bank may be of the same number as usual, pos- 
 sibly somewhat lower in number; its capital and 
 savings may be immensely great, and perfectly 
 well known; its stock may be selling at much 
 above par; its clear annual profits may be con- 
 siderable. Its gold, nevertheless, through the 
 operation of that one cause which has just been 
 named, may be growing less and less. And it 
 is not at. all impossible, if an alarm at home should 
 
 draw 
 
126 
 draw away the gold at the same time, that, how- 
 ever ample its general fund may have been, it may 
 be reduced to its last guinea; and may actually 
 be brought under the necessity of making a tem- 
 porary suspension of its payments. 
 
 Aa important subject of enquiry here suggests 
 itself. Dr. Smith, as was remarked in the begin- 
 ning of the former chapter, in some degree leads 
 bis reader to assume the Bank of England to be in 
 fault (that is, to have issued too many notes) when- 
 ever an excess of the market price above the mint 
 price of gold takes »place, an excess which pro- 
 duces, as shall immediately be shewn, that difficulty 
 in replenishing the coffers of the bank which has 
 been recently described. If the observation of Dr. 
 Smith be, without exception or qualification, true, 
 then the quantity of paper issued by the Bank of 
 England has undoubtedly been excessive through- 
 out the last two years j for the excess of the market 
 price above the mint price of gold has been, 
 during that time, considerable. Then, also, it is 
 the bank which has placed in its own way that ob- 
 stacle to the purchase of gold which has been 
 spoken of. Any enquiry tending to indicate the 
 causes which place the bank under this singular 
 difficulty, seems to be important. 
 
 I shall here endeavour clearly to explain what 
 is meant by the high and the low price of gold ; 
 and also by that difference between the mint price 
 
 and 
 
127 
 and the market price, which has such material 
 consequences. 
 
 Gold must be considered as dear, in proportion as 
 goods for which it is exchangeable are cheap ; and 
 as cheap, in proportion as goods are dear. Any cir- 
 cumstance, therefore, which serves to make, goods 
 generally dear, must serve to make gold generally 
 cheap, and vice versa ; and any circumstance which 
 serves to make goods dear at any particular time 
 or place, must serve to make gold cheap at that time 
 or place, and vice versa. 
 
 The reason of the difference between the mint 
 price and the market price of gold, does not easily 
 occur. If the bank, from time to time, buys gold 
 at a high price, that is, if it gives for gold a large 
 quantity of goods (or something convertible into a 
 large quantity, which is the same thing); it is na- 
 tural, on the first view, to suppose that the high 
 price given by the bank, which is the principal 
 and almost the only English purchaser, must form 
 <the current English price ; and that this high cur- 
 rent price of gold in England will prove the means 
 both of bringing it hither, and of detaining it here ; 
 causing goods, which are cheap, to go abroad ; and 
 gold, which is dear, to coniie hither, and also to 
 remain in the country. Undoubtedly gold would 
 remain in England, when tempted hither by the 
 high price given for it by the bank, if it were not 
 for the following circumstance. Gold is bought by 
 
 the 
 
-128 
 the bank, in order to be converted into coin ; and, 
 when turned into coin, it forms a part of the circu- 
 lating medium of the country, paper constituting 
 another part. If, then, this paper is by any means 
 rendered cheap, and if the paper so rendered cheap 
 is currently interchanged for one sort of gold, 
 namely, for gold which has been coined, then the 
 coined gold will partake in the cheapness of the 
 paper -, that is, it will buy, when in the shape of 
 coin, i, smaller quantity of goods than it will pur- 
 chase when in the form of bullion. In other words, 
 an ounce of gold coming from the mint in the 
 shape of guineas, and making 3/. lis. \0\d. (for 
 that is the sum into which an ounc6f always is 
 coined at the mint), will be worth less than the 
 same ounce of gold was worth before it went to 
 the mint, and less than if. would again be worth if 
 converted back into bullion. There arises, there- 
 fore^ a temptation to convert back into bullion, and 
 then to export ; or, which is the same thing, to 
 export, and then convert back into f)union ; or, 
 which is also the same thing, to convert back into 
 bullion, and then sell to the bank, at the price 
 which would be obtained by exportation, that gold 
 which the bank had turned from bullion into coin. 
 In proportion as the difficulty of collecting, melt- 
 ing, and sending abroad the gold coin is augmented 
 (and it encreases as the quantityof coin diminishes), 
 the difference between the mint and' -market price 
 of bulhon will become more considei'able, suppos- 
 ing 
 
129 
 
 ing the demand for gold in foreign countries to 
 continue. Thus it is through the interchangeable- 
 ness of gold coin with paper, that gold coin is 
 made cheap in England ; or, in other words, that 
 goodSj in comparison with gold coin, are made 
 Oear. The goods which are dear remain, therefore, 
 in England; and the gold coin, which is cheap (for 
 the bank is indisposed to buy it, on account of the 
 loss sustained on each coinage), goes abroad. 
 
 There is, undoubtedly, much ground for the sup- 
 position of Dr. Smith, that a diminution of the 
 quantity of paper has a tendency to cure this evil*. 
 It tends to render the paper more valuable, and, 
 therefore, to make that gold coin more valuable for 
 which the paper is interchangeable, and thus to 
 flestroy that excess of the market price above the 
 mint price of gold, which forms the obstacle to the 
 
 * That the diminution of the circulating paper has a tendency to 
 bring down the price of goods at home, and to cause those goods to 
 go abroad for the sake of a better market, was observed in the pre- 
 ceding Chapter, and will again be insisted on when we proceed to 
 treat of the importance of properly limiting the quantity of Bank of 
 England notes. Many remarks, however, were added, in the former 
 Chapter, respecting those detrimental effects of a reduction of paper, 
 which are to be set against the good consequences of it. In the pre* 
 sent Chapter the same arguments, on each side, are about to recur, 
 and they will, therefore, be but slightly touched upon. 
 
 In the former Chapter, the difficulties which the bank experiences 
 in consequence of a ran occasioned by an alarm, were chiefly con- 
 sidered; in the present, the difficulties arising from that sort of 
 drain which proceeds from an unfavourable balance of trade are 
 investigated. In some future Chapters, the difficulties to which the 
 bank is exposed by a similar drain, resulting from a too great emission 
 of paper, will be the subject of examination, 
 
 K introduc- 
 
130 
 
 ititroduction of a supply of gold into the coffers 
 of the bank. There seems, nevertheless, to be 
 much of inaccuracy and error in the doctrine of 
 Dr. Smith on this subject. He begins by repre- 
 senting the quantity of paper which may properly 
 circulate, as to be measured by that of the gold 
 which would circulate if there were no paper* 
 The reader is, therefore, led to believe, that a dif- 
 ference between the mint price and the market 
 price of gold atises from an issue of a greater 
 quantity. Dr. Smith also too much countenances 
 an idea, that the excess consists of paper forced 
 into circulation ; for he terms the proper quantity 
 that paper which will " easily circulate." He, 
 moreover, induces his reader to suppose, that the 
 excessive issue is an issue to a more than usual 
 amount. At the time of a very unfavourable ba- 
 lance of trade (an event which Dr. Smith leaves 
 totally out of his consideration), it is very possible, 
 as I apprehend, that the excess of paper, if such it 
 is to be called, is merely an excess above that very 
 low and reduced quantity to which it is necessary 
 that it should be brought down, in order to prevent 
 the existence of an excess of the market price 
 above the mint price of gold. I conceive, there- 
 fore, that this excess, if it arises on the occasion of 
 an unfavourable balance of trade, and at a time 
 when there has been no extraordinary emission of 
 notes, may fairly be considered as an excess created 
 by that unfavourable balance, though it is one 
 which a reduction of notes tends to cure. 
 
 The 
 
131 
 The fair statement of the case seems to be this. 
 At the time of a very unfavourable balance (pro- 
 duced, for example, through a failure of the har- 
 vest), a country has occasion for large supplies of 
 corn from abroad: but either it has not the means 
 of supplying at the instant a sufficient quantity of 
 goods in return, or, which is much the more pro- 
 bable case, and the case v^hich I suppose more ap- 
 plicable to England, the goods which the country 
 having the unfavourable balance is able to furnish as 
 means of cancelling its debt, are not in such de- 
 mand abroad as to afford the prospect of a tempt- 
 ing or even of a tolerable price ; and this want of 
 a demand may happen possibly through some poli- 
 tical circumstance which has produced, in a parti- 
 cular quarter, the temporary interruption of an 
 established branch of commerce. The country, 
 therefore, which has the favourable balance, being, 
 to a certain degree, eager for payment, but not 
 in immediate want of all that supply of goods 
 which would be necessary to pay the balance, pre- 
 fers gold as part, at least, of the payment ; for gold 
 can always be turned to a more beneficial use than 
 a very great overplus of any other commodity. 
 In order, then, to induce the country having the 
 favourable balance to take all its payment in goods, 
 and no part of it in gold, it would be requisite 
 not only to prevent goods from being very dear, 
 but even to render them excessively cheap. It 
 would be necessary, therefore, that the bank should 
 not only not encrease its paper, l^ut that it should, 
 K 2 perhaps. 
 
132 
 
 perhaps, very greatly diminish it, if it would en- 
 deavour to prevent gold from going out in part of 
 payment of the unfavourable balance. And if the 
 bank do this, then there will arise those other ques- 
 tions, which Dr. Smith leaves totally out of his con- 
 sideration ; namely, whether the bank, in the at- 
 tempt to produce this very low price, may not, in a 
 country circumstanced as Great Britain is, so ex- 
 ceedingly distress trade and discourage manufactures 
 as to impair, in the manner already specified, those 
 sources of our returning wealth to which we must 
 chiefly trust for the restoration of our balance of 
 trade, and for bringing back the tide of gold into 
 Great Britain. It is also necessary to notice in 
 this place, that the favourable effect which a limi- 
 tation of bank paper produces on the exchange is cer- 
 tainly not instantaneous, and may, probably, only 
 be experienced after some considerable interval of 
 time j it may, therefore, in many cases, be expected 
 that the exchange will rectify itself before the 
 reduction of bank paper can have any operation. 
 It is also to be recollected (a point, indeed, which 
 Dr. Smith himself states), that gold is retained or 
 drawn away, not by the limitation or the encrease of 
 the Bank of England paper alone, but by that of 
 their paper, conjointly with that of the other paper 
 of the country. The bank paper serves, it is true, 
 to regulate, in a great degree, that other paper ; 
 but not with exactness. The bank, by proceed- 
 ing to that reduction of its own paper which is 
 Tiecessary to bring gold into the country, may 
 '• possibly 
 
133 
 possibly annihilate, before it Is aware, a part or evea 
 almost the whole of the circulating country bank^ 
 notes, and much other paper also ; and it may, ia 
 that case, have to supply gold sufficient to fill the 
 whole void, perhaps more than the whole void, 
 which is has created ; for it may be called upon to 
 furnish large additional sums which may forthwith 
 be hoarded in consequence of the alarm thus occa- 
 sioned. Hence, even though it should encrease 
 the supply of gold from abroad -, it may augment, 
 in a far greater degree, the demand for it at home. 
 For this reason, it may be the true policy and duty 
 of the bank to permit, for a time, and to a certain 
 extent, the continuance of that unfavourable ex- 
 change, which causes gold to leave the country, and 
 to be drawn out of its own coffers : and it must, in 
 that case, necessarily encrease its loans to the same 
 extent to which its gold is diminished. The bank, 
 however, ought generally to be provided with a fund 
 of gold so ample, as to enable it to pursue this line of 
 conduct, with safety to itself, through the period 
 of an unfavourable balance ; a period, the duration 
 of which may, to a certain degree, be estimated, 
 though disappointment in a second harvest may 
 cause much error in the calculation. 
 
 The more particular examination of this subject 
 of an unfavourable exchange, brings us, therefore, 
 to the same conclusien to which we were led in 
 the former Chapter i namely, that the bank ought 
 to avoid too contracted an issue of bank notes.. 
 The absence of gold, though itself an evil, may 
 
 K 3 . prevent 
 
prevent other evils of greater moment ^ and may 
 thus conduce, under certain circumstances, to the 
 good of the country. Our gold has lately furnished 
 the prompt payment for a part of that corn, which 
 has been necessary for our consumption. The 
 common manufacturer, if he understood his own 
 interest, would approve rather than complain of the 
 temporary substitution of paper for gold, which 
 has been thus occasioned : for the export of gold 
 has served to ease him in the first instance: his 
 labour, indeed, must hereafter purchase back again 
 the gold which has been exported, but he will have to 
 buy it back by exertions less severe than would 
 otherwise have been needful. The price of the 
 goods which he manufactures, and, consequently, 
 the price also of his own labour, is rendered some- 
 what higher by not glutting the foreign market with 
 a quantity of articles altogether disproportionate to 
 the demand. It should farther be remembered, that 
 gold is an unproductive part of our capital : that 
 the interest upon the sum exported is so much saved 
 to the country : and that the export of gold serves, 
 as far as it goes, to improve the exchange, by dis- 
 charging the debt due on account of an unfavour- 
 able balance of trade j and to prevent the depre- 
 ciation of our own paper currency, as compared with 
 the current money payments of other countries. 
 
 It may probably be ihought that the exported 
 gold will not return. This subject may deserve a 
 careful enquiry. It should be observed, in the first 
 place, that, in order to produce an improvement in 
 
 the 
 
the exchange, we have only to suppose the present 
 degree of the pressure for payment of goods Im- 
 ported to abate. It may happen, for instance, that 
 in consequence of Hamburgh having become richer 
 through the favourable harvest enjoyed in the sur- 
 rounding countries, and through the high price ob- 
 tained for its exported corn, while Britain has be- 
 come poorer; the antecedent custom of Hamburgh 
 merchants being in debt to London merchants may 
 change, and a contrary custom may become preva^ 
 lent. If this new debt of London to Hamburgh 
 should be permitted to exist in the same manner as the 
 Hamburgh debt may be supposed to have existed be- 
 fore, the exchange will not be affected by it. The 
 debt which affects the exchange is only that sort of 
 debt, the payment of which is more or less eagerly de- 
 manded. A country, therefore, seems likely soon to 
 arrive at a limit in this respect. It has only to diminish 
 not the debt itself, but the pressure of the demand for 
 payment, and the exchange begins to mend. Let 
 the two countries become equally satisfied to allow 
 the debt to continue as it is, and the exchange 
 finds its level. Again; let the country in debt 
 prove itself to be somewhat more desirous to pay 
 its debt, a debt of course running at interest, than 
 the creditor country is to receive payment; and 
 the exchange will be even in favour of the debtor 
 country. 
 
 It may naturally be enquired what becomes of 
 the gold which has been supposed to go from this 
 country to Hamburgh; and how it comes to pass 
 
 K4 that 
 
136 
 
 that it IS there demanded in such large quantities. 
 When Britain has aheady spared out of its circula-* 
 tion, and out of the coffers of its principal bank, 
 many millions, perhaps, of gold; whence happens 
 it that Europe, having only the same trade as before> 
 uses all that is sent, and continues to call, by means 
 of the exchange, for a still encreasing supply? 
 ' I understand that, at the period of every very fa- 
 vourable exchange to Hamburgh, most of the gold 
 poured in thither is melted down into the several 
 sorts of coin which are current on the continent; 
 and that it then becomes an article of remittance to 
 various places. It is, of course, remitted to those 
 parts in which the balance of trade with Hamburgh 
 is unfavourable to that city. Still, however, the 
 difficulty of accounting for the new and general 
 demand for gold seems to remain. The following 
 considerations may afford some solution of it. When 
 the trade of the world, or of many separate and 
 considerable places, is more than usually fluctuating, 
 as in times of political uncertainty or convulsion it 
 can hardly fail to be, a larger quantity of gold is 
 wanted than when confidence is high, and when the 
 several exports and imports of different countries 
 more nearly balance each other. Gold, during any 
 extraordinary irregularity in trade between inde- 
 pendent states, is the most commodious of all ar- 
 ticles of remittance. It is a species of return which 
 Hamburgh, for instance, can send to every place 
 from which its spirit of speculation may have 
 called for articles of commerce. It is, indeed, only 
 
 the 
 
137 
 
 the balance of. the accounts which is paid in mo* 
 ney ; but, at different times, there may be balances , 
 of different sizes to be thus discharged. What^* 
 ever event, therefore, so disturbs the gourse of trade 
 over the continent as to cause an encrease in the ba- 
 lances of the trade of independent countries, seems 
 likely to cause an augmentation of the general 
 demand for gold. But the general demand for 
 gold is also affected by the degree of confidence at 
 the same time subsisting. It has been already 
 shewn, that the quantity of gold requisite for the cir- 
 culation of any single country may be very different 
 at different periods, and that the difference is pro- 
 portioned to the degree of confidence between 
 man and man existing at the several seasons. 
 The quantity of gold wanted for the general trade of 
 the world may also ^fluctuate, in some degree, from 
 the same cause. It is, however, likely also to 
 vary from a variation in the confidence subsisting 
 between independent countries. For the sake of 
 illustration, let us suppose that Hamburgh owes 
 to some town in Prussia, one hundred miles dis-^ 
 tant, 100,000/. sterling, in consequence of an un- 
 favourable balance of trade occasioned by corn pur- 
 chased there, and exported by Hamburgh merchants 
 to London ; a balance which, if the creditors in the 
 Prussian town were willing to wait six months, 
 would probably by that time be repaid, and even 
 more than repaid, through the importation into the 
 same town of West India articles which Ham- 
 burgh would have received within that period from 
 
 Great 
 
13S 
 
 Great Britain. It confidence is high, the merchants 
 of this town will be content, for the sake, perhaps, 
 of an addition of one per cent, to the stipulated 
 interest, to permit the debt to remain unextinguished 
 for the six months; and in this case the course of 
 exchange between the Prussian town and Ham- 
 burgh will alter to the extent of one per cent. 
 But if, through the want of confidence subsisting 
 between the Prussian town and Hamburgh, an ad- 
 dition not of one, but of two per cent, to the current 
 interest should be considered to be the adequate 
 compensation for the risk incurred, the exchange 
 will fluctuate two per cent. ; and a variation of two 
 per cent, in the exchange will produce, let it be 
 supposed, to the Hamburgh debtors a greater loss 
 than would be incurred by the expence of trans- 
 porting 100,000/. in gold to the Prussian town in 
 question. Gold is, therefore, in that case, trans- 
 ported. On the two circumstances, taken toge- 
 ther, of the largeness of the balance between the 
 independent places, and the degree of confidence 
 subsisting between them, appears to depend the 
 quantity of bullion required. It seems, therefore, 
 by no means difficult to account for the. manner in 
 which large quantities of gold exported from this 
 country may be employed on the continent in sea- 
 sons of general distrust, even though we should 
 not suppose any great portion to be hoarded. 
 
 Bullion to a very large amount was retained in 
 the Spanish settlements, during the latter period of 
 the war, through the fear of capture -, and perhaps, 
 
 therefore. 
 
therefore, we might trace in part the want of gold» 
 of which we have complained, to those successful 
 exertions in watching the ports of the enemy which 
 have been made by the British, navy. :|t^ 
 
 The immediate cause, however, of the exporta^ 
 tion of our coin has been an unfavourable ex* 
 change, produced partly by our heavy expenditure, 
 though chiefly by the superadded circumstance 
 of two successively bad harvests. When the re- 
 currence of a favourable balance of trade is long 
 delayed, the fluctuation of the exchange may be 
 expected to be not an immaterial one. The ex- 
 change is, in some degree, sustained for a time, 
 which is thought likely to be short, through the 
 readiness of foreigners to speculate in it; but pro* 
 tracted speculations of this sort do not equally an- 
 swer, unless the fluctuation in the exchange is very 
 considerable. If, for example, a foreigner remits mo- 
 ney to London, at a period when the exchange has be- 
 come unfavourable to England to the extent of three 
 per cent., places it at interest in the hands of a 
 British merchant, and draws for it in six months 
 afterwards, the exchange having by that time re- 
 turned to its usual level, he gains two and a half 
 per cent, for half a year's interest on his money, and 
 also three per cent, by the course of exchange, 
 which is five and a half per cent, in half a year, or 
 eleven per cent, per annum. But if the same fo- 
 reigner remits money to England when the ex- 
 change has, in like manner, varied three per cent., 
 
 and 
 
140' 
 
 and draws for it not in six months but in two yeari?,- 
 the exchange having returned to its usual level t)nly 
 at the end of that long period, the foreigner then 
 gains ten per cent, interest on his money, and three 
 per cent, by the exchange, or thirteen per cent, in 
 two years ; that is to say, he gains in this case six and 
 a half per cent, per annum, but in the other eleven 
 per cent, per annum. If a variation of three per 
 cent, is supposed necessary to induce foreigners to 
 speculate for a period which is expected to end in six; 
 months, a variation of no less than twelve per cent, 
 would be necessary to induce them to speculate for 
 3 period which is expected to end in two years. 
 The improvement of our exchange with Europe 
 having been delayed through a second bad harvest, 
 it is not surprising that the expectation of its reco* 
 covery within a short time should have been weak- 
 ened in the mind of foreigners. Indeed, many cir- 
 cumstances, some of which have been already 
 touched upon *, concurred, towards the conclusion 
 pf the war, in rendering our exchange unfavourable. 
 
 Some 
 
 * A mistaken idea of the bank payments having been suspended 
 through the hnproper largeness of its loans to government, and of its 
 resembliug the continental banks which have issued excessive quan- 
 tities of paper for the service of their several governments, wa$ be- 
 fore stated to be not unlikely to have prevailed abroad, too much 
 countenance having been given in this country to such a sentiment. 
 Foreigners, if such was their opinion, would conceive that our ex- 
 change was a permanently declining one, and that it vrould, therefore, 
 ^inswer better to them to draw than to remit, and to draw imme^ 
 
 diately 
 
141 
 
 Some gold, it may be presumed, was retained in 
 the bank coffers, which, if the cash payments of 
 that company had not been suspended, would have 
 found its way to foreign countries, and have contri-. 
 buted to remedy the existing evil. 
 
 We depended chiefly, as will be shewn hereafter, 
 on the proper limitation of the quantity of our circu- 
 culating paper, though partly, also, on the degree of 
 expectation which was kept up abroad of the future 
 improvement of our exchange; an expectation 
 which might be rendered greater or less by a va- 
 riety of circumstances. Great Britain has hM this 
 great advantage over those countries which are in 
 fhe habit either of depreciating their coin or of al- 
 lowing a discount on their paper, that they, in an- 
 ticipating the return of a more favourable state of 
 their trade, look forward only to a time when their 
 uncertain and unstable rate pf exchange may be 
 meliorated in a degree not easy to be calculated; 
 whereas we have anticipated a period when an 
 intrinsically valuable and specific standard would 
 be restored, when our banks would be obliged to 
 pay fully in guineas containing the same weight of 
 gold as before, and when our exchange, therefore, 
 might be expected completely to return to its 
 former level. 
 
 diately than to dehy drawing. The idea thvat foreign property might 
 be seized in EngLind, as -^n act of retaliation for the British pro- 
 perty seized in the north of Europe, may also have had some influ- 
 ence. The expectation of seizures on each side would prejudice* 
 the exchange of whichever country was in debt, and the country. 
 m debt happened to be Great Britain. 
 ' • ' Undoubted Iv, 
 
142 
 
 Undoubtedly, circumstances of so great and ex- 
 traordinary a nature may arise as to prevent the re- 
 turn of gold at an early or assignable period. It 
 may, however, be safely affirmed, that when the 
 main sources of a country's wealth are unimpaired j| 
 when its populatlpn, its industry, its manufacturing 
 and trading capital, its general commerce, its cre- 
 dit, its colonial possessions, its political strength and 
 independence, its laws and constitution remain j^ 
 and when, moreover, its paper is confined within 
 its accustomed bounds; the absence of its gold, 
 more especially if it be the obvious consequence 
 of one or more unfavourable seasons, is an evil 
 -which is likely neither to be durable, nor In any re- 
 spect very important. 
 
 Under such circumstances, to alter materially the 
 old and accustomed system of paper credit, and, in 
 particular, to restrain in any very extraordinary de- 
 gree the issues of paper of more responsible banks, 
 is to deprive a country of those means of recovering 
 itself which it naturally possesses. This seems to 
 be the fair inference from the observations which 
 have been stated in the present and preceding Chap- 
 ters. The return of gold is to be promoted not so 
 much by any legislative measure directed to that 
 immediate object, as by cherishing the general in- 
 dustry, and attending to the higher and more lead- 
 ing interests of the community. 
 
 It may be proper here to add, that the experienjCe 
 cf past times, both of war and peace, leads us to 
 suppose, that the exchange between Great Britain 
 
 aad 
 
143 
 
 and foreign countries is not likely to remain for any- 
 long period unfavourable to Great Britain. Expe- 
 rience has likewise proved, that the return of gold 
 has not been precluded by the law which authorized 
 the continuance of the suspension of the cash pay- 
 ments of the bank ; for, while that law was in 
 force, there occurred one season during which 
 gold flowed with a remarkably strong tide into the 
 country. 
 
 It seems scarcely necessary now to dwell on the 
 reasons which evince that the repeal of the law in 
 question, in the last period of the war, would have 
 been inexpedient. It would have been to repeal it at 
 a time not a little resembling that in which the par- 
 liament first thought proper to enact it: for it would 
 have been to repeal it when gold had been recently 
 drawn out of the country by an unfavourable ex- 
 change ; and when we were subjected, as before, 
 to alarms of invasion. To have opened the bank 
 would have been, moreover, to have subjected it not 
 only to a demand for gold on these two accounts, but 
 also to such extra calls as might have arisen from 
 the anxiety of the country banks to provide for the 
 event of the first opening more amply than might 
 have been permanently necessary. The renewal, 
 therefore, of the law for suspending the cash pay- 
 ments of the bank stood on the ground of the par- 
 ticular circumstances of the times, and not on any 
 principle which necessarily implied the permanence 
 or even the long continuance of the suspension. 
 
 CHAP. 
 
14^ 
 
 CHAP. VI. 
 
 lError of imagining that Gold can be provided at 
 the Time of actual Distress — Reasons for not ad- 
 mitting the Presumption that the Directors of the 
 Bank must have been to blame for not making be* 
 forehand a more adequate Provision. 
 
 JL HE impracticability of encreasing th6 
 fund of gold in the Bank of England, when an alarm 
 at home has already taken place, or even during the 
 period of a very unfavourable balance of trade, has 
 been manifested in the preceding pages. 
 . There is a pecular inconsistency in the supposi- 
 tion that a country ought, at such a season, to take 
 its measures for encreasing the quantity of its gold. 
 The argument for such an attempt vi^ould run thus— 
 " The stock of gold has been in past time too low, as 
 " appears by the experience of the present period ; 
 *« for it is not now sufficient to supply what is neces- 
 *' sary for our own circulation, and to enable us also 
 " to pay our unfavourable balance. We ought, there- 
 ** fore, to take due care that, in time to come, there 
 " shall be a larger provision of gold in the country." 
 So far, undoubtedly, there may be some general 
 justice in the reasoning. But if the further inference 
 
 is 
 
14*5 
 
 IS added, that we must, therefore, vow begin to 
 make the provision, this is to propose to take mea- 
 sures to provide against a want, which is future and 
 contingent, at a time when that very want which 
 we would prevent is actually pressing upon us. With 
 as fair an appearance of justice it might have been 
 argued in respect to the stock of corn in hand in 
 the country— " The stock of corn has been, as now 
 " appears, for some time too low ; for it is, at 
 ** the present season, insufficient for the due sup- 
 " ply of the country. We ought, therefore, to take 
 ** care that, in time to come, there shall be a better 
 " provision for such contingencies as the present." 
 So far, undoubtedly, there might be justice in the 
 observation. But to proceed in our reasoning as to 
 corn, in the same manner as is sometimes done in 
 respect to guineas, would be to add — " Therefore, 
 " now, while the scarcity is pressing upon us, 
 " let us begin to make this provision; let us 
 '* instantly stock our granaries with a surplus quan- 
 " tity of corn ; let us divert the little grain which 
 " we possess from those most necessary uses to which 
 " it is now destined. Let us encreasc our present 
 " difficulty, in order that the country may be put, 
 " for the future, out of the reach of the danger 
 " which it is experiencing at the present hour.*' 
 The two cases are not, indeed, precisely parallel ; 
 but there seems to be sufficient resemblance to jus- 
 tify the elucidation. 
 
 L There 
 
146 
 There is, however, another ground on which the 
 directors of the bank may possibly *be thought cen- 
 surable — that of having failed to supply themselves 
 with a sufficient quantity of gold at an antecedent 
 period. Let us, therefore, enquire whether the 
 public has sufficient reasons for entertaining this 
 suspicion. 
 
 Let it be premisedj that, since the directors of 
 the Bank of England can have no particular temp- 
 tation to improvidence; and since our national* 
 bank is, from its very nature, liable to that accident 
 which has lately, for the first time, befallen it, a 
 liability which, for obvious reasons, it may have been 
 the custom too studiously to conceal, there is not all 
 that previous presumption of blame which might be 
 supposed. There can be no doubt that the credit of 
 the Bank of England has been, at all periods, most 
 anxiously consulted by its directors ; and that pre- 
 sent profit has uniformly been only the second con- 
 sideration. 
 
 There are, however, certain limits which, even 
 when gold is most easily purchased, the bank natu- 
 rally prescribes to itself in respect to its stock of that 
 article. The amount of the disposable effiscts of 
 the bank, on the 26th of February, 1797, was stated 
 under three heads in a former place ; and it was then 
 observed, that the only part of them which the bank 
 itself could enlarge was the deposits lodged in re- 
 turn for bank notes issued. But even the bank 
 
 notes 
 
147 
 
 notes cannot safely be encreased in a degree which 
 is very considerable. Indeed, experience has 
 proved, that there may be some sort of limit to the 
 demand for them; for the applications for loans 
 have often amounted, during peace, to less than the 
 bank has been disposed to afford on the credit 
 of good bills at the existing rate of discount. 
 
 Let us, then, proceed to illustrate our subject 
 by supposing the disposable effects of the bank to 
 have usually stood, for some years antecedent to 
 the suspension of its cash payments, at the sum of 
 about nineteen millions ; that is to say, let us allow 
 them to have been about a million and a half more 
 than they amounted to at that period. 
 
 It must not be imagined that these nineteen 
 millions could, at any time, be with propriety in- 
 vested in gold. For the Bank of England, like 
 every other mercantile establishment, carries on its 
 business on such principles as will produce a profit. 
 And the very lowest profit which can serve as a 
 sufficient inducement to pursue the trade of bank- 
 ing, must be somewhat higher than the mere cur- 
 rent interest of money. Let us reckon this neccs^ 
 > sary profit of the bank to be six per cent. The 
 ? bank makes no more than three per cent, interest 
 ; on the capital subscribed by its members, which is 
 , permanently lent to government. It must, then^ 
 so manage its disposable effects as to gain an an- 
 Jiual sum equal to an additional three percent, upon 
 
 L 2 its 
 
14i 
 
 its own capital, that is, about 350,000/. This it 
 must do by lending out at interest a part of the nine- 
 teen millions; and it must lend out, at interest, a still 
 farther part of it, both in order to defray the annual 
 charges of its establishment, and in order also to 
 furnish the means of paying those occasional sums 
 to government which are required as the price of 
 the renewal of its charter. It will be found, per- 
 haps, that not less than ten or twelve of the nine- 
 teen millions must be always at interest in order 
 to provide for these objects ; and, consequently, that 
 eight or nine millions will have formed the highest 
 average sum which the bank can have kept in 
 gold, consistently with the acquisition of mere- 
 ly the necessary profit on its capital. But neither 
 is it fair to suppose, that these eight or nine millions 
 ought to have been the general or average sum kept 
 in gold. The cash of the bank fluctuates very 
 greatly; and in order to secure the keeping of cash 
 and bullion to the average amount of eight or nine 
 millions, it will occafionally have been necessary 
 to keep twelve or fourteen millions, or possibly even 
 more. This sum would be most unreasonably large ; 
 for, during the time when twelve or fourteen millions 
 are invested in gold, the bank, instead of gaining 
 six per cent, on its capital, will not gain above 
 three or four; and, moreover, it cannot exactly know 
 how long this extraordinary quantity of gold may 
 continue in its coffers. It certainly can never count 
 
 beforehaMd 
 
149 
 beforehand on those great reductions of cash which 
 may serve, by increasing the sum at interest, to 
 compensate for what is lost by a large detention 
 of bullion : for the reduction of cash happens not 
 through any measures taken by the bank, but in 
 consequence of events difficult to be foreseen, and, 
 as has been already shewn, by no means easy to be 
 controlled. The bank, therefore, without impeach- 
 ment of the character of its directors, may be rea- 
 sonably presumed to have been at least somewhat 
 indisposed to make investments in bullion, which, 
 while they lasted, should reduce its income very far 
 below the necessary annual profit. 
 
 Thus the bank, in endeavouring to secure what 
 has been termed the neceflTary annual profit, w^ould 
 naturally be led to make, on the whole, some- 
 thing more than that profit; and, indeed, a variety 
 of circumstances have lately occurred which have 
 had a tendency to encrease its gains to a degree 
 which must have been unexpected by the bank it- 
 self. Let us, then, suppose that the profits which the 
 bank, considering all circumstances, may fairly and 
 properly have derived from its business for some 
 years past, may have been not six per cent, (which 
 was spoken of as the lowest sum necessary for 
 carrying on the trade of banking), but seven or eight 
 per cent. Now seven or eight per cent, or a littJe 
 more, seems likely to be that profit which the bank 
 has, in point of fact, been gaining. The dividends 
 which it has paid to the proprietors have been, for 
 
 L 3 some 
 
150 
 
 8omc time, seven per cent.; and it has also added 
 SjBOOjOOO/. to its capital. This addition has been 
 accruing, no doubt, during a long course of years. 
 If we assume that it has accumulated at the rate of 
 about 116,C00/. per annum, the bank will have 
 gained annually one percent, on its capital, besides 
 the seven per cent, which has been divided ; if at 
 232,000/.* per annum, the bank will have gained 
 annually two per cent, on its capital, besides the 
 seven per cent, which has been divided. 
 
 The bank, then, let it be supposed, has been 
 gaining eight or nine per cent, when seven or eight 
 per cent, is as much as it is reasonable that it should 
 have acquired. I have entered into this detail, 
 which, in various parts, may be somewhat erro- 
 neous, merely for the sake of shewing that any pro- 
 posed enquiry whether the quantity of gold kept by 
 the bank may or may not have been too small, must 
 necessarily be much narrower than many persons 
 may imagine. According to the supposition just 
 made, it can relate only to the propriety of a past 
 annual gain of about one per cent, or at most of two 
 per cent, on the bank capital. A gain ofone per cent, 
 would have been about 116,000/. per annum; and 
 
 * This is to suppose that the savings of the bank have been 
 between sixteen and seventeen years in accumulating, a period cer- 
 tainly much too short ; but the accumulation must have been more 
 rapid during the Ust ye^rs. 
 
 consequently 
 
 ^ 
 
151 
 
 tonsequently the bank, by taking this gain, have, on 
 an average, kept a stock of gold which has been 
 smaller than it would otherwise have possessed by 
 about 2,300,000/. Whether this sum of 2,300,000/,, 
 or whether any sum somewhat greater than this, or 
 somewhat short of it, ought or ought not, in time 
 past, to have been invested in gold in addition to 
 the sum which was invested, is a point on which all 
 that it seems safe to affirm with confidence, is, that 
 no person unacquainted with the affairs of the bank 
 can be capable of pronouncing any clear judge- 
 ment. There must have existed many arguments, 
 and some standing even on the ground of safety and 
 credit, against maintaining the additional fund which 
 has been mentioned. 
 
 If the whole profits of the bank had been lately 
 restricted to seven per cent., they would have been 
 limited to that sum which the bank proprietors had 
 been for some time in the habit of receiving. They 
 would have been confined to a suqi which would 
 not easily have admitted of accumulations. By ob- 
 taining a higher profit the directors have secured to 
 the proprietors the continuation of the same regular 
 dividend, and have thus prevented that uncertainty 
 which would have encouraged gambling in bank 
 stock. They have also made, in the course of years, (# 
 an important addition to their capital; an addition 
 which has caused it to maintain nearly an uniform pro- 
 portion to the growing extent of the transactions of the 
 bank, and to the advancing commerce of the coun- 
 
 L 4 try^ 
 
152 
 
 tryi an addition also, by the help of which they 
 have lately lent to government three millions without 
 interest, for a short term of years, as the price of the 
 renewal of their charter. They have thus strength- 
 ened that security vi^hich the creditors of the bank 
 possess, so far as additional capital can strengthen 
 it; and they will be able hereafter, if it shall seem 
 necessary, to invest in gold, in addition to what 
 they could otherwise have invested, a much larger 
 sum than they could with any propriety have so in- 
 vested in time past. 
 
 It must farther be borne in mind, that the ne- 
 cessity under which the bank has been placed of 
 providing gold which is to fill the void occasioned 
 by the disappearing of country bank notes, has been, 
 in part, a new necessity, country bank notes not hav- 
 ing circulated, at remoter periods, in so great a 
 degree as they have lately ; and that the additional 
 sum of two or even of three or four millions would 
 have been no security against the effects of a ge- 
 neral alarm in the country. The fluctuation in the 
 balance of trade with foreign countries, which we 
 experience, is also become, in consequence of the 
 greater extent of our population and commerce, 
 larger than heretofore. The scale of all things 
 having encreased, the scale of this balance may have 
 encreased also to a degree unexpected by the bank. 
 A war, moreover, unprecedented as that in which we 
 have lately been engaged was not to be anticipated ; 
 and the case of a succession of two bad harvests, 
 
 and 
 
153 
 
 and of an importation ofcorn,amounting in two years 
 to the value of fifteen or twenty millions, is felt by all 
 to have been an extaordinary event. We need not 
 wonder, then, if events unforeseen by others, were 
 not foreseen by the Bank of England ; nor if for 
 unforeseen events an adequate provision was not 
 at hand. 
 
 On the whole, it may be suggested to those who 
 cast blame on the bank for its improvidence in 
 time past, that they should consider well the several 
 points which have here been briefly pointed out ; 
 and that if, afterwards, they continue to think th« 
 bank censurable, they should ask themselves, be- 
 fore they become the censurers, whether they are 
 sure that, in taking upon themselves the office, they 
 exercise that candour with which they would ex- 
 pect to be judged if they had bcenihemselves, dur- 
 ing the late difficult and trying period, directors of 
 that institution. 
 
 It has already been observed, that, in that crisis 
 during which the conduct of the directors has been 
 more particularly known, they proceeded, perhaps, 
 with too great fear and caution rather than with too 
 little. There seems, therefore, to be a presumption, 
 that a character, if not for caution, at least for to- 
 lerable prudence, must have generally been their 
 due. To say the least, there appears to be no ground 
 for charging them with having acted in antecedent 
 times on a directly opposite principle. 
 
 CHAP. 
 
154- 
 
 CHAP. VII. 
 
 Of Country Banks — their Advantages and Disad- 
 
 vanta£'es. 
 
 JL HE country banks in Great Britain 
 appear to have amounted, in the year 1797, to three 
 hundred and fifty- three. By a numeration taken 
 in 1799, they appear to have been three hundred 
 and sixty-six. By a third numeration taken in 
 1 800, they were three hundred and eighty-six *. It 
 seems, therefore, that no material addition to their 
 number has arisen in these three years. 
 
 A great increase of country banks took place 
 during the time v^hich intervened between the 
 American and the present war, and chiefly in 
 the latter part of it 5 a period during which the 
 trade, the agricuhure, and the population of the 
 country must have advanced very considerably. 
 The circumstance of so many of oUr country banks 
 having originated at such a time, affords a pre- 
 sumption that they are consequences and tokens 
 of the prosperity, rather than indications of the de- 
 
 * This statement of the number of country banks is taken from 
 three printed accounts of them, the first of which may not have been 
 very accurate, but may be presumed to state them at too low rather 
 than too high a number. The two later enumerations were made in 
 a more careful manner. 
 
 dining 
 
155 ^^ 
 
 clining state of the country. No banks have arisen* 
 in France during the period of its troubles, though 
 several attempts to erect them have been made. 
 It was v^ith difficulty that any banks supported them- 
 selves in America during the war; but after the 
 establishment of peace, banks were instituted in 
 most of the American states. They seem naturally 
 to belong to all commercial countries ; but are more 
 particularly likely to be multiplied in a state like 
 ours, in which the mercantile transactions are ex- 
 tended, the population is great, and the expendi- 
 ture of individuals considerable ; and where also a 
 principal bank exists, which, through the necessity 
 imposed on it by its situation, undertakes the task 
 of providing a constant reservoir of gold accessible 
 to every smaller banking establishment. The crea- 
 tion of tlie large bank operates as a premium on , 
 the institution of the smaller. ''''' 
 
 A description of the origin of one of our smaller 
 country banks may elucidate the subject before us. 
 In every town, and in many villages, there existed, 
 antecedently to the creation of what were after- 
 wards termed banks, some trader, manufacturer, or 
 shopkeeper, who acted, in many respects, as a 
 banker to the neighbourhood. The shopkeeper, for 
 example, being in the habit of drawing bills on 
 London, and of remitting bills thither, for the pur- 
 poses of his own trade, and receiving also much 
 money at his shop, would occasionally give gold to 
 his customers, taking in return their bills on the me- 
 tropolis, 
 
 THRA 
 
 Of THl 
 
 .* o^ .. 
 
156 
 
 tropolis, which were mixed with his other bills, and 
 sent to his London correspondent. 
 
 Persons who were not customers being also found 
 to want either money for bills, or bills for money, 
 the shopkeeper was led to charge something for his 
 trouble on accommodating them : and the trade of 
 taking and drawing bills being thus rendered pro- 
 fitable, it became an object to encrease it. For 
 the sake of drawing custom to his house, the shop- 
 keeper, having as yet possibly little or no view to the 
 issuing of bank notes, printed " The Bank" over 
 his door, and engraved these words on the checks 
 on which he drew his bills. 
 
 It may be assumed, also, to have been not un- 
 common, before country banks were established, 
 for the principal bhopkeeper in a town to take at 
 interest some of the money of his neighbours, on 
 the condition, however, that he should not be re- 
 quired to pay it back without some notice. The 
 money thus deposited with him, or borrowed by 
 him (it is difficult to say which term is the more 
 proper), might either be thrown into his trade, or 
 employed in discounting bills soon to become due ; 
 but the latter would evidently be the more safe and 
 prudent way of investing it. 
 
 All these parts of the banking business arose 
 out of the situation and circumstances of the coun- 
 try ; and existed in many places before the name 
 of banker was assumed. 
 
 The 
 
157 
 
 The practice of issuing country bank notes, that is 
 to say, notes payable to the bearer on demand, may, 
 undoubtedly, be considered as a separate branch of 
 business. These notes, however, have been shovs^a 
 to be not so very different in their nature from other 
 paper as is Commonly imagined. ' ■ 
 
 For the sake of more particularly proving this 
 point, let us advert to the nature of interest notes, a 
 species of paper which some country banks have is- 
 sued to a great extent. Even the shopkeeper, it 
 was lately observed, would take sums at interest. 
 For each of these sums, especially if he became 
 a banker, he would give out his note, in which 
 would be expressed the sum lent or deposited, 
 the rate of interest upon it, and the time which was 
 to intervene before payment could be demanded. 
 This note would be transferable to any third per- 
 son. There would, however, be some impediments 
 to its circulation. The interest must be calculated 
 as often as it should change hands. Some of the 
 persons to whom it was offered might not be dis- 
 posed to accept it as a payment, especially if it had 
 a long time to run. Although these notes might cir- 
 culate, they would circulate heavily. In order to pro- 
 mote their circulation, and thus encrease the whole 
 number of issuable notes, the banker would be in- 
 clined to lessen the time within which they should 
 be payable; and he would find that, in proportion 
 as he adopted this practice, a lower rate of inte- 
 rest on the notes would suffice to induce persons to 
 
 take 
 
158 
 take them. Notes carrying no interest would circulate, 
 if due within a short time, better than notes bearing: 
 interest which should be due at a very distant period; 
 But the only notes which would circulate freely 
 would be those which should be payable, or at least 
 paid, without any notice. Some banks wishing, on 
 the one hand, to encourage the circulation of their 
 paper, and, on the other, to avoid the inconve- 
 nience of a strict obligation to pay without notice 
 have issued notes payable after a certain time, and 
 yet have been in the regular practice of giving 
 money for them whenever payment was demanded, 
 and have taken no discount for the accommoda- 
 tion. 
 
 Thus, then, the shorter the notice is, the greater 
 is the currency of the note ; and in proportion, 
 therefore, as the circumstances of a country render 
 it more safe for the banks to shorten their notice, 
 in the same proportion it may be expected that 
 notes to the bearer on demand will be issued, and 
 gold displaced. 
 
 Some speculative persons have imagined, that the 
 practice pursued by bankers of emitting notes pay- 
 able on demand is founded on an altogether vicious 
 and unwarrantable principle, inasmuch as such pa- 
 per is issued with a view to a profit which is to be 
 obtained only by lending out part of the sum ne- 
 cessary for the payment. A number of promises, 
 it is said, are thus made, which the banker has evi- 
 dently placed it out of his power to perform, sup- 
 posing 
 
159 
 posing the fulfilment of them all to be required at 
 the same time, an event by no means impossible. 
 This objection implies, that the banker ought not, 
 after receiving the deposits left v^ith him by his 
 customers, to lend out part of the sum necessary for 
 the payment of those deposits ; for he is as much 
 bound to discharge demancfs for deposits with- 
 out notice, as to pay without notice all his notes. 
 The Bank of England, the London banker, the 
 country banker, the merchant, and also the in- 
 dividual of every class, proceed, in respect to all 
 their promises to pay money, not on any prin- 
 ciple of moral certainty, but on that of reasonable 
 and sufficient probability. The objection to bank 
 notes, as suchy if pushed to that extent to which, if 
 it is at all just, it might be carried, would apply to all 
 Verbal promises to pay money, and, indeed, to almost 
 all promises whatever; for there is scarcely any class 
 of these for the performance of which a perfectly sure 
 provision is always made at the time of giving the 
 promise. The objection implies, therefore, that 
 men. ought to be prohibited from acting in theif 
 commercial concerns according to that rule of suf- 
 ficient probability by which all the other aifairs of 
 human life are conducted*. 
 
 It 
 
 * In some of the demoGratic pamphlets of the present day, bank 
 notes of every kind are spoken of not merely as liable to be carried 
 to excess, or to be issued by irresponsible persons, 6x as producing 
 particular evils, but as radically and incurably vicious ; they are con- 
 sidered 
 
160 
 
 It is completely understoood by tlie holders of 
 notes, as well as by the customers of banks, that 
 instant payment is provided for only a part of that 
 sum which may, by possibility, be demanded ; and 
 the banker, therefore, seems fully justified if he 
 makes such provision as the general and known 
 usage of others in the same profession (for he is 
 supposed, by those who trust him, to follow this 
 usage), and a prudent regard to all the circum- 
 stances of his own case teach him to consider as 
 sufficient. 
 
 The practice of issuing notes payable to bearer on 
 demand became very common a few years antece- 
 dent to the present war, when various circum- 
 stances united to encourage this part of the 
 country banker's employment. Confidence was 
 then high, the number of traders in the country had 
 been greatly multiplied, the income and expenditure 
 of individuals were much increased, and every branch, 
 therefore, of the banking business had naturally en- 
 larged itself. Some addition had been made to the 
 number of London bankers; and a few of these 
 took forward and active measures to encourage 
 
 sidered in the light of a complete fraud upon the public, which is 
 practised by the rich, and connived at by the government; and the 
 very issue of them has been stigmatised as equivalent to the crime 
 of forgery. The resemblance of bank notes to other paper, and 
 the resemblance of a promise on paper to any other promise, have 
 been here touched upon vnth a vi6w of exposing the absurdity of 
 those doctrines. 
 
 the 
 
161 
 
 the formation even of very small banks In the coun- 
 try, with a view to the benefit expected from a 
 connection with them. In many of our great towns, 
 a fair opening was afforded for the erection of ad- 
 ditional banks. These new establishments having 
 taken place, various country traders, who had before 
 made use of their own correspondents in London, 
 fell into the practice of transacting their business 
 with the metropolis through the medium of the 
 country banker with whom they kept their cash. 
 The country banker drew largely on a London 
 banker on the account of the country traders, and 
 the London banker was willing to execute the ex* 
 tensive country business which he thus acquired, in 
 consideration of a much lower commission thari 
 had before been paid by the several country traders 
 to their separate correspondents in London, who 
 had been, for the most part, London merchants." 
 The reduction of the rate of commission arose from 
 two causes: first, from the new security which was 
 afforded to the transactions between the town and 
 the country, by the interposition of the credit of 
 rich and responsible country banks ; and, secondly, 
 from the transfer to one house of that labour of 
 keeping accounts, writing letters, and receiving and 
 paying bills, which had, before, been divided among 
 many. The risk and trouble being diminished, a 
 proportionate abatement in the rate of commission 
 could be afforded. 
 
 M The 
 
162 
 
 The multiplication even of country banks, pur- 
 posing to deal chiefly in bills, would tend, in many 
 ways, to produce an encreased issue of notes on 
 demand. Some deposit of gold would be kept by 
 banks of every class, with the view of satisfying 
 the demands of their customers; and the stock, 
 maintained for this purpose, would form a part of the 
 necessary provision for the payment of notes 
 payable on demand, and it would, therefore, be- 
 come an encouragement to the issue of them. The 
 multiplication of deposits of gold through the coun- 
 try would, moreover,, furnish, in many cases, more 
 prompt means of obtaining gold on any sudden 
 emergency; since one country bank might often 
 procure a supply from a neighbouring one, espe- 
 cially if a good understanding on this subject should 
 subsist between them. The establishment of mail 
 coaches afforded, at the same time, a more cheap 
 and ready method than before of bringing gold 
 from London, as well as of transmitting thither 
 any superfluity of it which might arise in the coun- 
 try. In proportion to the facility of obtaining gold, 
 the unproductive stock of it kept in hand might be 
 reduced; or, if the same stock should be main- 
 tained, the issue of notes payable on demand would 
 be less hazardous. Indeed, a few old and respec- 
 table country banks had long been in the habit of 
 emitting much paper of this sort, and had seldom 
 experienced any inconvenience from doing it. The 
 new ones, therefore^ many of which were not at 
 
 all 
 
163 
 all inferior in property to the old, were led into the 
 practice partly by example. 
 
 The circumstance which chiefly operated in pro- 
 curing currency to the new circulating paper, was 
 that participation of the benefit resulting from it 
 which wa5 enjoyed by the customers of the country 
 banker ; for he lent among them the capital which 
 was acquired by the issue of his paper, and they 
 became his instruments in sending it into circula* 
 tion, by accepting it as a ready-money payment in 
 return for bills discounted. In consideration of 
 their obligations to the banker, and of the interest 
 which they had^in his stability, they were also for- 
 ward, on most occasions, in the support of his 
 credit. Such appear to have been the chief circum- 
 stances which led to that great encrease of our , 
 country banks, and to that substitution of paper in 
 the place of gold, which have been, for some years 
 past, so much the subject of complaint. 
 
 In order to assist the reader in judging whether 
 a preponderance of good or of evi4 results from our 
 numerous country banks, an endeavour shall now 
 be made to enumerate the principal benefits as well 
 as inconveniences of them. 
 
 That country banks have, in a variety of re- 
 spects, been highly advantageous, can scarcely ad- 
 mit of a doubt. They have afforded an accommo- 
 dation to many descriptions of persons; but more 
 especially to those who are engaged in commerce. 
 They may be regarded as an effect of that division 
 
 M2 of 
 
vf labotfr which naturally takes place in every opu* 
 lent country. The receipts and the payments of 
 'money are now no longer conducted at home, even 
 by the middling trader, but are become a separate 
 1)ranch of business in the hands of bankers. It 
 was to be expected that they to whom this employ- 
 ment has been transferred would find means of 
 abridging labour, and of sparing the use of coin, the 
 most expensive circulating medium. By their skill 
 in attaining these objects, they transact an im- 
 portant portion of the business of the trader at an 
 
 exoence far inferior to that which he must incur 
 
 ji 
 
 were he to conduct it by his own clerks ; and they de- 
 rive a profit to themselves, which, no less than the 
 saving to the customer, may be regarded as clear 
 gain to the kingdom. 
 
 Country banks are also useful by furnishing to 
 many persons the means of laying out at interest, 
 and in a safe manner, such money as they may have 
 ^tospare. Those banks, in particular, which give 
 interest notes for very small sums, afford to the 
 iniddling and to the lower class of people an en- 
 couragement to begin to lay up property, and thus 
 to make provision for the time of sickness or old age. 
 "Coun'try banks also furnish a very convenient me- 
 thod of distributing to one class of men the super- 
 ■fluity of another. All who have money to spare 
 '•krtow where they can place it, without e^pence or 
 'lass of time, not only in security, but often with 
 
 pecuniary 
 
165 
 
 pecuniary advantage : and all commercial persons^ 
 of credit understand in what quarter they can ob- 
 tain such sums, in the way of loan, as their circum- 
 stances will fairly warrant them in borrowing, 
 While country banks thus render a benefit of the 
 first magnitude to fair and prudent commerce, 
 they are important barriers against rash specula- 
 tion, though not unfrequently they- are loudly ac^j 
 cused of favouring it. However some few banks 
 may have subjected themselves to this charge, banks 
 in general, and particularly those which have been 
 long established, take care to lend the sums which 
 have been deposited in their hands, not to the im- 
 prudent speculator, or to the spendthrift, by whona 
 they are in danger of suffering loss, but to those who, 
 being known to possess some wealth and to manage 
 their concerns with prudenc'^e, give proof that they 
 are likely to repay the loan. Borrowers of this 
 class are no,t apt to enter into very large and peris* 
 lous undertakings ; for they are unwilling to risk 
 the loss of their own capital. Bankers, especially 
 men of eminence, feel a special motive to circum- 
 spection, in addition to that which operates with . 
 other lenders. The banker always lends under 
 an impression that, if he places in any one a boundr 
 less or immoderate confidence, the imprudence will 
 necessarily be known, in case the borrower should 
 fail, as the affairs of every bankrupt are laid open 
 to the body of creditors; and that his rash- 
 ness is, therefore, liable to become the subject. of 
 M 3 conversation 
 
166 ^ 
 
 conversation among his customers. Indiscretion of 
 this kind, even if the particular instance be of no 
 prominent magnitude, may thus prove an occasion 
 of injuring the character and credit of the banking 
 house, and of lessening the general profits of the 
 business. 
 
 The banker also enjoys, from the nature of his 
 situation, very superior means of distinguishing the 
 careful trader from him who is improvident. The 
 bill transactions of the neighbourhood pass under 
 his view: the knowledge, thus obtained, aids his 
 judgment; and confidence may, therefore, be mea- 
 sured out by him more nearly than by another per- 
 son, in the proportion in which ground for it exists. 
 Through the creation of banks, the appreciation of 
 the credit of numberless persons engaged in com- 
 merce has become a science ; and to the height to 
 which this science is now carried in Great Britain 
 we are in no small degree indebted for the flourish- 
 ing state of our internal commerce, for the general 
 reputation of our merchants abroad, and for the 
 preference which in that respect they enjoy over the 
 traders of all other nations. It is certainly the in- 
 terest, and, I believe, it is also the general prac- 
 tice, of banks to limit not only the loan which any 
 one trader shall obtain from themselves, but the 
 total amount also, as far as they are able, of the 
 sum which the same person shall borrow in dif- 
 ferent places; at the same time, reciprocally to 
 communicate intelligence for their mutual assist- 
 ance J 
 
167 
 ance ; and, above all, to discourage bills of accom- 
 modation. While the transactions of the surround- 
 ing traders are thus subject to the view of the 
 country banks, those of the country banks them- 
 selves come under the eye of their respective cor- 
 respondents, the London bankers; and, in some 
 measure, likewise, of the Bank of England. The 
 Bank of England restricts, according to its discre- 
 tion, the credit given to the London banker. Thus 
 a system of checks is established, which, though 
 certainly very imperfect, answers many important 
 purposes, and, in particular, opposes many impe- 
 diments to wild speculation. 
 
 Country banks, also, as well as the Bank of Eng- 
 land, have been highly beneficial, by adding, through 
 the issue of their paper, to the productive capital 
 of the country *. By this accession our manufac- 
 tures, unquestionably, have been very much ex- 
 tended, our foreign trade has enlarged itself, and 
 the landed interest of the pountry has had a share 
 of the benefit. The common charge which is 
 
 brought 
 
 * Dr. Smith remarks, that it is not by augmenting the capital of 
 the country, but by rendering a greater part of that capital active 
 and productive than would otherwise be so, that the most judicious 
 operations of banking can encrease the industry of the country. 
 ** Dead stock," he observes, " is converted into active and pro- 
 ductive stock." Whether the Introduction of the use of paper is 
 spoken of as turning dead and unproductive stock Into stock which is 
 active and productive, or as adding to the stock of the country, 
 15 much the same thing. The less the stock of gold is, the greater 
 
 M 4 will 
 
168 
 brought against country banks, of having raised up 
 a fictitious capital in the country, admits of the 
 following answer. They have substituted, it is 
 true, much paper in the place of gold : but the 
 gold which has gone abroad has brought back, as 
 Dr. Smith observes, valuable commodities in re- 
 turn. The guinea spared from circulation has con- 
 tributed to bring home the timber which has been 
 used in building, the iron or the steel which has 
 been instrumental to the purposes of machinery, and 
 the cotton and the wool which the hand of the ma- 
 nufacturer has worked up. The paper has thus 
 given to the country a bondjide capital which has 
 been exactly equal to the gold which it has caused 
 to go abroad; and this additional capital has con- 
 tributed, just like any other part of the national 
 stock, to give life to industry. 
 
 It has lately been objected to paper credit, that, 
 by supplying the farmers w^ith large loans, it has 
 enabled them to keep back their corn from the 
 market, and enhance the price. It is true, that 
 
 will be the stock of other kinds; and if a less stock of gold will, 
 thrqiigh the aid of paper, equally well perform the work of a larger 
 stock, it may be fairly said that the use of paper furnishes even addif 
 tional stock to the country. Thus, for example, the use of a new 
 sort of machinery which costs less in the erection than that which 
 was employed before, and which just as effectually does the work 
 required, since it enables the owner to have always more goods in 
 j;he course of manufacture, while he has exactly the fame means of 
 manufacturing them, might not improperly \)& described as adding IQ 
 the stock of the country, 
 
 farmers. 
 
169 
 
 farmers, both in the last and many preceding years, 
 may have obtained larger loans than they would 
 have procured if no country bank notes had existed. 
 The capital so furnished to the farmers may possibly 
 have induced some of them, at certain times, to 
 keep in hand a larger quantity of grain than they 
 would otherwise have found it convenient to hold. 
 We know, however, that the general stock of graia 
 in the autumn of 1300 was particularly low. 
 Since, therefore, but a small part of the capital of 
 the farmers, whether borrowed or their own, was 
 then vested in grain, the principal share would pro- 
 bably be laid out on their land, and would encrease 
 its produce ; for, unquestionably, the value of a 
 crop obtained from a farm depends chiefly on the 
 sum employed in cultivation and improvement. 
 Country bank notes have thus added to the general 
 supply of grain ; and, by doing so, have contri- 
 buted to prevent a rise in its price : they have, pro* 
 bably, in this manner, afforded much more thari 
 a compensation for any temporary advance in price 
 to which they may have given occasion by enabling 
 farmers to keep a larger quantity in hand. The 
 very possession of a large quantity in hand is to be 
 considered as, in general, a benefit rather than a 
 disadvantage j for it is our chief security against 
 scarcity, and, consequently, also against dearness. 
 To the want of a larger surplus stock at the end of 
 the years 1799 and 1800 is to be ascribed, in a great 
 degree, the subsequent high price of provisions. The 
 
 tendency^^ 
 
170 
 
 tendency, therefore, of country bank paper to en- 
 crease generally the stock of grain in the hands ot 
 the farmer is to be ranked among the advantages 
 of country banks. The tendency to encrease it at 
 the particular time of actual scarcity, is to be classed 
 among the evils which they produce; and it is an 
 inconsiderable evil, which is inseparable from a 
 great and extensive good. To those who are dis- 
 posed to magnify this occasional evil, it may be 
 further observed, that the farmer is enabled to en- 
 large his stock by the encrease of his own as well 
 as of the general wealth, much more, no doubt, 
 than by the share which he obtains of that parti- 
 cular part of the new capital of the kingdom which 
 is, created through the substitution of country bank 
 notes for gold ; only a portion, therefore, of the 
 mischief complained of is to be referred to country 
 bank notes. It is principally to be ascribed to the 
 growing riches and prosperity both of the farmers 
 and other inhabitants of the country. 
 
 It is no small additional recommendation of the 
 use of our paper, that the public draws a large 
 yearly revenue from the tax imposed on bills and 
 notes. If paper credit did not exist, a sum equal 
 to that which is thus raised must be supplied by 
 taxes either burthening the industry, or paid out of 
 the property of the people. The public has, since 
 the late additional tax, become a very considerable 
 sharer in the profits of the country bankers* bu- 
 siness. 
 
 Since^ 
 
171 
 
 Since, therefore, a paper medium has served the 
 purposes which have been described, and has been, 
 generally speaking, quite as convenient an instru- 
 ment in settling accounts as the gold which it has 
 displaced, the presumption in favour of its utility 
 seems to be very great ; and, if it could be added, 
 that no other effects than those which have as yet 
 been stated have arisen or are likely to arise from it, 
 the advantage of it would be beyond dispute. To 
 reproach it with being a merely fictitious thing, 
 because it possesses not the intrinsic value of gold, 
 is to quarrel with it on account of that quality 
 which is the very ground of its merit. Its merit 
 consists in the circumstance of its costing almost 
 nothing. By means of a very cheap article the coun- 
 try has been, for some years, transacting its money 
 concerns, in which a very expensive material had pre- 
 viously been employed. If this were the whole 
 question, the substitution of paper for gold would 
 be as much to be approved as the introduction of 
 any other efficacious and very cheap instrument in 
 the place of a dear one. It would stand on the 
 same footing with the substitution, for example, of 
 cast iron for wrought iron or steel; of water car- 
 riage for land carriage ; of a steam engine for the 
 labour of men and horses ; and might claim a high 
 rank among that multitude of ingenious and econo- 
 mical contrivances to be found among us, by the 
 aid of which we have attained to the present un^- 
 rivalled state of our manufactures and commerce. 
 
 Some 
 
172 
 
 Some very solid objections, however, may be 
 urged against the system of banking in the country. 
 
 The first which I shall mention, is, the tendency 
 of country banks to produce, occasionally, that ge- 
 neral failure of paper credit, and with it that de- 
 rangement and suspension of commerce,, as well as 
 intermission of manufacturing labour, which have 
 been already spoken of. 
 
 Country bank notes, and especially the smaller 
 ones, circulate, in a great measure, among people 
 out of trade, and pass occasionally into the hands 
 of persons of the lower class ; a great proportion, 
 therefore, of the holders of them, have few means 
 oi judging of the comparative credit of the several 
 issuers, and are commonly almost as ready to take 
 the paper of any one house calling itself a bank, as 
 that of another. A certain degree of currency 
 being thus given to inferior paper, even the man 
 who doubts the ultimate solvency of the issuer is 
 disposed to take it ; for the time during which he 
 intends to detain it is very short, and his responsi- 
 bility will cease almost as soon as he shall have 
 parted with it *. Moreover, the amount of each 
 note is so small, that the risk seems, also, on that; 
 
 account, 
 
 * I apprehend that, supposing a country bank to fail, the holder 
 of one of its notes, who should have parted with it in sufficient 
 time to afForo to the next holder an opportunity of applying for the 
 discharge of it before the day of failure, could not be called upon 
 
 for 
 
173 
 
 account, insignificant. The notes of tlie greatef 
 and of the smaller country banks, thus obtaining, 
 in ordinary times, a nearly similar currency, they 
 naturally fall at a season of alarm into almost equal 
 discredit. If any one bank fails, a general run upon 
 the neighbouring ones is apt to take place, which, 
 if not checked in the beginning by pouring into the 
 circulation, a large quantity of gold, leads to very 
 extensive mischief. Many country bankers, during 
 a period of danger, prescribe to themselves a prin- 
 ciple of more than ordinary reserve in the issue of 
 their notes, because they consider these as the more 
 vulnerable part of their credit. They know^, that 
 if the character of their bouse should be brought 
 into question, through the fears or even the caprice 
 of any of those strangers into whose hands their 
 circulating paper passes, some distrust may be ex- 
 cited among their customers, the effect of which 
 may be a sudden demand for the payment of large 
 deposits. The amount, therefore, of the country 
 bank notes circulating in the kingdom is liable to 
 great fluctuation. The country banker, in case of 
 an alarm, turns a part of the government securities, 
 bills of exchange, or other property which he has 
 in London, into Bank of England notes, and those 
 
 for the payment of the value of it. The responsibility, therefore, 
 of him who has been the holder of a country bank note commonly 
 ceafes in about one or two days after it has been jmrted with. That 
 of the holder of a bill continues till after the bill is due, namely, 
 for a period, perhaps, of one or two months. 
 
 notes 
 
174 
 
 notes into money; and thus discharges rtiany of his 
 own circulating notes, as well as enlarges the fund 
 of gold in his coffers. The Bank of England has, 
 therefore, to supply these occasional wants of the 
 country banker ; and, in order to be fully prepared 
 to do this, it has, ordinarily, to keep a quantity of 
 gold equal to that of the notes liable to be extin- 
 guished, as well as a quantity which shall satisfy 
 the other extraordinary demands which may be made 
 at the same season of consternation either by bank- 
 ing houses, or by individuals. Thus the country 
 banker by no means bears his own burthen, w^hile 
 the Bank of England sustains a burthen which is not 
 its own, and which we may naturally suppose that 
 it does not very cheerfully endure*. 
 
 The national bank, indeed, may fairly be called 
 upon, in consideration of the benefits enjoyed 
 through its monopoly, to submit to a considerable 
 €xpence in supplying gold for the country; but there 
 must be some bounds to the claims which can equi- 
 
 * At the time of the dlftress of 1793, feme great and opulent 
 country banks applied to the Bank of England for aid, in the shape 
 of discount, which was refused on account of their not offering ap^ 
 proved London securities: fome immediate and important failures 
 were the consequence. The Bank of England was indisposed to 
 extend its aid to houses in the country. The event, however, 
 shewed that the rchef of tlie country was necessary to the solvency 
 of the metropolis. A sense of the unfairness of the burthen cast on 
 the bank by the large and sudden demands of the banking establish- 
 ments in the country, probably contributed to producQ an unwilling- 
 ness to grant them relief. 
 
 tab!)- 
 
175 
 
 tably be made upon it: and, in estimating the be- 
 nefit arising to the kingdom from the use of coun* 
 try bank notes, we have either to deduct the loss 
 which the Bank of England incurs by maintaining 
 an additional supply of gold sufficient to answer the 
 demands which they occasion, or else we have to 
 take into consideration the risk which the bank 
 incurs by only keeping a fund of gold which is 
 somewhat inadequate. The country banks may, 
 perhaps, cause the bank in some measure to en- 
 crease its general fund of gold, though not to hold 
 so much of this unproductive article as to afford a 
 security equal to that which the bank would en- 
 joy if no country bank notes existed. 
 
 It is obvious, that thg additional capital given to 
 the kingdom through the use of country bank notes 
 must not be measured by the amount of those notes, 
 but that a deduction must be made of the sum kept 
 in gold in the coffers of the issuers, as their provision 
 for the occasional payments to which their bank 
 paper subjects them. The other deduction, which 
 has been spoken of, is of the same nature. It is a 
 second deduction, which must be made on account 
 of a similar, and, perhaps,- no less considerable 
 provision for the payment of country bank notes, 
 which is rendered necessary to be kept in the coffers 
 of the Bank of England. In other words, the ca- 
 pital given to the country, through the use of 
 country bank notes, is only equal (and it was so 
 
 stated 
 
176 
 
 stated in speaking of that subject) to the amount of: 
 the gold which they cause to be exported. 
 
 I shall endeavour here to explain more particu- 
 larly than has yet been done, some of those circum- 
 stances which cause a great diminution of country 
 bank notes to bring distress on London, and to end 
 in a general failure of commercial credit. 
 
 In a former chapter it was observed, that when 
 that alarm among the common people, which pro- 
 duces an unwillingness to take country bank paper, 
 and an eagerness for gold has risen to a considerable 
 height, some distrust is apt to be excited among 
 the higher class of traders ; and that any great want 
 of confidence in this quarter produces an encreased 
 demand for that article, which is, among London 
 bankers and merchants, in much the same credit as 
 gold; I mean Bank of Er^gland notes, and which 
 forms, at all times, the only circulating medium of 
 the metropolis in all the larger transactions of its 
 commerce. This more than usual demand for 
 Bank of England notes the bank is at such a time 
 particularly unwilling to satisfy, for reasons which 
 I shall endeavour fully to detail. The reader will 
 have been prepared to enter into them by the ob- 
 servations on the subject of the bank, introduced 
 towards the close of the chapter which treated of 
 that institution. 
 
 First, the bank may be supposed to be unwilling 
 . to satisfy that somewhat cficreased demand for it* 
 notes which a season of consternation is apt to pro- 
 duce. 
 
I7T 
 duce, because it is not unlikely to partake, in som^ 
 degree, in the general alarm, especially since it must 
 necessarily be supposed to have already suffered, 
 and to be still experiencing a formidable reduction' 
 of the quantity of its gold. The natural operation 
 of even this general sort of fear must be to incline it 
 to contract its affairs, and to diminish rather than, 
 enlarge its notes. 
 
 But it must also be recollected) that the bank has 
 necessarily been led already to encrease its loans in 
 the same degree in which its gold has been reduced, 
 provided it has maintained in circulation the accus- 
 tomed quantity of notes. This point was explained in 
 the chapter on the subject of the bank. The directors, 
 therefore, must seem to themselves to act with ex- 
 traordinary liberality towards thqse who apply to 
 them for discounts^ if they only go so far as to main- 
 tain the usual, or nearly the usual, quantity of notes. 
 The liberality in lending which they must exercise, 
 if, when the gold is low, they even augment their 
 paper, must be very extended indeed. 
 
 In order to render this subject more clear, let us 
 suppose that an extra demand on the Bank of Eng- 
 land for three millions of gold has been made through 
 the extinction of the paper of country banks, and 
 through the slower circulation and hoarding of 
 gold which have attended the general alarm. Let 
 us assume, also, that the bank, during the time 
 of its supplying this gold, has thought proper to 
 reduce its notes one million. It will, in that case, 
 
 N have 
 
178 
 
 have necessarily encreased its loans two millions. 
 Let us further assume, as we not very unreasonably 
 may, that the two millions of additional loans have 
 been afforded, not to the government, who owe a 
 large and standing sum to the bank (suppose eight 
 or ten millions besides the bank capital), but exclu- 
 sively to the merchants ; and let the total amount 
 of loans antecedently afforded to the merchants be 
 reckoned at four millions. The bank, in this case, 
 will have raised its discounts to the merchants from 
 four millions to six -, that is, it will have encreased 
 them one half, even though it has diminished its 
 notes one million. This extension of the accus- 
 tomed accommodation to the mercantile world 
 must appear to call for the thanks of that body, 
 father than to leave any room for complaint; and yet 
 it is plain from reasoning, and, I believe, it might 
 be also proved from experience, that it will not ease 
 the pressure. The difRculties in London, notwith- 
 standing this additional loan of two millions to the 
 merchants, will be somewhat encreased ; for a sum 
 in gold, amounting to three millions, has been drawn 
 from the bank by the London agents of the country 
 bankers and traders, and has been sent by those 
 agents into the country. London, therefore, has 
 furnished for the country circulation three millions 
 of gold ; and it has done this by getting discounted 
 at the bank two additional millions of bills, for 
 which it has received two of the millions of gold, 
 and by sparing one million of its circulating notes 
 
 as 
 
ds a means oF obtaining the other million. This- 
 reduction of the usual quantity of notes is borne by 
 the metropolis with peculiar difficulty at a time of 
 genera^ alarm. However liberally, therefore, the 
 bankers and merchants may acknowledge them** 
 selves to have been already relieved by the bank, 
 they wilt repeat, and will even urge more than 
 ever, their application for discounts. 
 
 It may be observed, with a view to the further 
 elucidation of this part of our subject, thaf both the 
 bank, and they who borrow of it, are naturally led 
 to fix their attention rather on the amount of the loans 
 furnished than on that of the notes in circulation. 
 The bank is used to allow to each borrower a sum 
 bearing some pfbportion to his supposed credit; 
 but seldom or never exceeding a certain amount. 
 It is true, the various borrow^ers do not always in 
 an equal degree avail themselves of their power of 
 Raising money at the bank ; and,. therefore, a mate- 
 rial enlargement of the sum total of the bank loans 
 may take place at a moment of difficulty, through 
 the encreased use which some of the richer 
 merchants then miake of their credit, as well as 
 through the creation of a few new borrowers at the 
 bank. The directors also, in particular cases, may 
 suffer their rule to be relaxed. The circumstance, 
 however, of the general principle on which the bank; 
 ordinarily, and, indeed, naturally proceeds, being 
 that of a limitation of the amount of each of its 
 loans to individuals, must tend, as I conceive, to 
 ' , N 2 place 
 
180' 
 
 ^lace something like a general limit to the total 
 sum lent. It must conduce to prevent the fluctu- 
 ation in the bank loans from keeping pace with the 
 variation in the necessities of the public, and must 
 contribute to produce a reduction of notes at that 
 season of extraordinary distrust, when the state 
 €f the metropolis, as was more fully remarked in a 
 former 'part of this Work, calls rather for their en- 
 crease. 
 
 That the borrowers at the bank are likely to pay 
 no attention to the subject of the total quantity of 
 notes in circulation, is easily shewn. They have, 
 indeed, no means of knowing their amount. They 
 can only judge of the liberality of the bank by the 
 extent of its loans ; and of this they form an im- 
 perfect estimate by the sum which they or their 
 connexions have been able to obtain. Scarcely 
 any one reflects, that there may be a large encrease 
 of the general loans of the bank, as well as possibly 
 an extension of each loan to individuals, while 
 there is a diminution of the number of bank notes; 
 and that the amount of the notes, not that of the 
 loans, is the object on which the eye should be 
 fixed, in order to judge of the facility of effecting 
 the payments of the metropolis. 
 
 It was remarked, in a former chapter, that the 
 bank, at the time antecedent? to the suspension of 
 its cash payments, having diminished the sum lent 
 by it to government, and enlarged, though not in 
 an equal degree; that furnished to the merchants, 
 
 ..... the 
 
rsi 
 
 Ihe pressure on the merchants was not relieved, as 
 was expected, by the encreased loan afforded them^ 
 but even grew more severe. It was also shewn, 
 that this could not fail to be the case, since the 
 bank notes necessary for effecting the current pay- 
 ments of the metropolis were then diminished, and 
 since the additional loans afforded to the merchants 
 only in part compensated for the new pressure which 
 was created in the general money market of the 
 kingdom, by the circumstance of the government 
 being obliged to become a great borrower in that 
 market. Whenever the bank materially lessens its 
 paper, a similar pressure is likely to be felt. Nei- 
 ther the transfer of the bank loans from the govern- 
 ment to the merchants, nor even a large encrease 
 of its loans, when that encrease is not carried so 
 far as is necessary to the maintenance of the accus- 
 - tomed, or nearly the accustomed, quantity of bank 
 paper, can-prevent, as I apprehend, distress in the 
 metropolis ; and this distress soon communicates 
 itself to all parts of the kingdom. The short ex- 
 planation of the subject is this. Many country 
 bank notes having disappeared, a quantity of gold 
 is called for, which is so much new capital sud- 
 denly needed in the country. The only place in 
 which any supply of gold exists is the Bank of 
 England. Moreover, the only quarter from whence 
 the loan of the ncr/ capital, under all the circurn- 
 stances of the case, can come, is also the Bank of 
 England J for the gold in the bank is the only dead 
 
 N3 bt 
 
or sleeping stock in the kingdom' which is conver-> 
 tlble into the new active capital which is wanted. 
 The bank, therefore, must lend the -gold which it 
 furnishes; it must lend, that is to Say, to some in- 
 dividuals a sum equal to the gold which other 
 individuals have taken from it : otherwise it does 
 not relieve the country. 
 
 If it should be asked. Why does not the bank in such 
 case demand something intrinsically valuable, instead 
 of contenting itself with mere paper in return ? — the 
 answer is, first, that if the bank were to receive 
 goods in exchange for its gold, or, in other words, 
 were to purchase goods, it would have afterwards 
 to sell them; and it would then become a trading 
 company, which it is forbid to be by its charter; 
 it is allowed to traffic only in bullion. The an- 
 swer is, secondly, that if it were to take goods as 
 a mere security, and to detain them as such, it 
 would then prevent their passing into consumption 
 with the desirable expedition. By proceeding on 
 either of these plans, it would also involve itself 
 in a degree of trouble which would not be very 
 consistent with the management of the business of 
 a banking company*. It may be answered, thirdly, 
 
 * Of the parliamentary loan of exchequer bills in 1793, which 
 was directed to be granted on the security either of sufficient bonds- 
 men, or of a deposit of goods, only a small proportion was taken oq 
 the latter principle, on account of the great obstruction to the sale of 
 goods, which was thought to arise from warehousing them on the ac- 
 count of the commissioners appointed by parliament. It has beeij 
 already remarked, that no part of the sum lent was lost. 
 
 that 
 
183 
 that the bills 'whlcli the bank discounts, are, ge- 
 nerally speaking, so safe, that the security either of 
 goods, or stocks, or land, none of which are re- 
 ceived in pledge by the directors, may be consi- 
 dered as nearly superfluous. A very small propor- 
 tion of the five per cent, discount, gained upon the 
 bills turned into ready nvoney at the bank, has com- 
 pensated, as I believe, for the whole of the loss 
 upon them, even in the years of the greatest com- 
 mercial failures which have yet been known. 
 
 The observations which have now been made 
 sufficiently shew what is the nature of that evil of 
 which we are speaking. It is an evil which ought 
 to be charged not to any fault in the mercantile 
 body, but to the defects of the banking system* 
 It is a privation which the merchants occasionally 
 experience of a considerable part of that circulat- 
 ing medium which custom has rendered essential 
 to the punctual fulfilment of their engagements. In 
 good times, the country banks furnish this necesr 
 ^sary article, which they are enabled to do througl^ 
 the confidence of the people in general ; but when 
 an alarm arises, the country banks cease to give it 
 '^ut, the people refusing what they had before re- 
 ceived ; and the Bank of England, the only body 
 by whose interposition the distress can be relieved, 
 is somewhat unwilling to exercise all the necessary 
 liberality, for the reasons which have been so fully 
 mentioned. The merchants are some of the chief 
 sufferers, and they are generally, also, loaded with 
 
 N 4 no 
 
184 
 no inconsiderable share of censure; but the public, 
 the country banks, and the Bank of England, may 
 more properly divide the blame. 
 
 The mischief produced by a general failure of 
 paper credit is very considerable. Hov^^ much such 
 a failure interrupts trade and manufacturing indus- 
 try, and, therefore, ultimately also tends to carry 
 gold out of the country, has been already stated at 
 large. It also causes a great, though merely tem- 
 porary, fall in the market price of many sorts of 
 property ) and thus inflicts a partial and very heavy 
 loss on some traders, and throws extraordinary gain 
 into the hands of others; into the hands, I mean, 
 of those who happen to have superior powers of 
 purchasing at the moment of difficulty. By giving 
 to all banking, as well as mercantile, transactions 
 the appearance of perilous undertakings, it deters 
 men of large property, and of a cautious temper, 
 from following the profession of bankers and mer- 
 chants. It creates no small uneasiness of mind, 
 even among traders who surmount the difficulties 
 of the moment. Above all, it reduces many re- 
 spectable, prudent, and, ultimately, very solvent 
 persons to the mortifying necessity of stopping pay- 
 ment ; thus obliging them to share in that discre- 
 <lir, in which, it is much to be desired, that traders 
 of an opposite character only should be involved. 
 If, indeed, we suppose, as we necessarily must, 
 that, on account of the multitude of failures which 
 happen at the same time, the discredit of them is 
 
 much 
 
185 
 much diminished, then another evil is produced, 
 which, in a commercial country, is very great. Acts 
 of insolvency, leaving less stigma on the character, 
 become not so much dreaded as might be wished. 
 The case of some, who bring difficulties on them- 
 selves, being almost unavoidably confounded with 
 that of persons whose affairs have been involved 
 through the entanglement of paper credit, to stop 
 payment is considered too much as a misfortune or 
 accident, and too little as a fault ; and thus a prin* 
 cipal incentive to punctuality in mercantile pay- 
 ments is weakened, and an important check to ad^ 
 venturous speculation is in some measure lost. 
 
 The observations which have been made, will, 
 however, shew that the tendency of country bank 
 paper to produce a general failure of paper credit, 
 is an evil which may be expected to diminish ; for, 
 first, if the Bank of England, in future seasons of 
 alarm, should be disposed to extend its discounts in a 
 greater degree than heretofore, then the threatened 
 calamity may be averted through the generosity of that 
 institution *. If, secondly, the country bankers should 
 be taught (as, in some degree, unquestionably they 
 
 must)^ 
 
 * It is by no means intended to imply, that it would become the 
 Bank of England to relieve every distress which the rashness of 
 country banks may bring upon them : the bank, by doing this, 
 might encourage their improvidence. There seems to be a medium 
 at which a public bank should aim in granting aid to inferior esta- 
 blishments, and which it must often find very difficult to be observed,. 
 
 The 
 
18G 
 mnsi), by the difficulties which they have expe-^ 
 rienced, to provide themselves with a Jarger quan- 
 tity of that sort of property which is quickly con- 
 vertible into Bank of England notes^ and, therefore, 
 also, into gold, then the country bankers will have 
 in their own hands a greater power of checking the 
 progress of an alarm. Still, indeed, their resource 
 will be the gold which is in the bank. The en- 
 creased promptitude, however, with which the 
 greater convertibility of their funds will enable 
 them to possess themselves of a )part of the bank 
 treasure, will render a smaller supply of it suffi- 
 cient; and this smaller supply may be expected tp 
 be furnished, without difficulty, either by means of 
 6i»ch a trifling addition to the ba.nk loans as the bank 
 will not refuse, or by sparing the necessary sum 
 from the jpaper circulation of the metropolis, which, 
 if commercial confidence is not impaired, will always 
 admit of some slight and temporary reduction. The 
 Bank of England will itself profit by the circum- 
 etance of its gold becoming more accessible to the 
 country banks j for the untoward event of a general 
 failure of paper credit will thus be rendered less 
 probable, and, therefore, a smaller stock of gold 
 
 .The relief should neither be so prompt and liberal as to exempt 
 those who misconduct their business from all the natural consequences 
 of their fault, nor so scanty and slow as deeply to involve the general 
 interests. These interests, nevertheless, are sure to be pleaded by 
 every distressed person whose affairs are large, hov^ever indifferent 
 or even ruinous may be their stater. 
 
 will 
 
187 
 
 will be an equally sufficient provision for the extra- 
 ordinary demands at home to which the bank will 
 be subject. Or if, thirdly, those among whom 
 country bank notes circulate should learn to be lessk 
 variable as to the confidence placed by them in coun- 
 try paper, or even to appreciate more justly the se-* 
 veral degrees of credit due to the notes of different 
 houses, then the evil which was before supposed to 
 be obviated by the liberality of the Bank of England, 
 or by the prudence of the country banker, will 
 abate through the growth of confidence and the 
 diffusion of commercial knowledge among the pub- 
 lic. It seems likely that by each of these means, 
 though especially in the second mode which was 
 mentioned, the tendency of country bank notes to 
 produce an' occasional failure of commercial credit 
 will be diminished. In time past, the mischief 
 has been suffered to grow till it appeared too 
 formidable to be encountered; and this has hap- 
 pened partly in consequence of our wanting that 
 knowledge and experience which we now possess. 
 
 Another evil attending the present banking sys? 
 tem in the country is the following. 
 
 The multiplication of country banks issuing small 
 notes to bearer on demand, by occasioning a great 
 and permanent diminution in our circulating coin, 
 serves to encrease the danger, lest the standard by 
 which the value of our paper is interided to be at 
 
 all 
 
all times regulated should occasionally not be main- 
 tained. 
 
 The evils of a great depreciation of paper cur- 
 rency are considerable. In proportion as the ar- 
 ticle which forms the current payment for goods 
 drops in value, the current price of goods rises. If 
 the labourer receives only the same nominal wages 
 as before the depreciation took place, he is under- 
 paid. Antecedent pecuniary contracts, though no- 
 minally, and, perhaps, legally fulfilled, are not per- 
 formed with due equity. It is true, that the ge- 
 neral stock of wealth in the country may remain 
 nearly the same ; and it is possible that the circu- 
 lating paper may be restored to its full value when 
 the period of the particular difficulty shall have 
 passed by. Some degree, however, of unfairness 
 and inequality will, in the mean time, have 
 been produced, and much pressure may have 
 been felt by the lower classes of people, whose 
 wages are seldom raised until some time after the 
 occasion for a rise has begun to exist. 
 
 In those countries in which the government is 
 the chief banker or issuer of notes, a temptation 
 arises, on the occasion of every public pressure, 
 either to lessen the quantity of precious metal 
 contained in the chief current coin, as one of 
 the means of detaining it in the country, or to 
 allow paper to pass at a considerable and pro- 
 fessed discount, which is another mode of pre- 
 venting 
 
IS9 
 
 A-'entiiig the coin from being exported. These are 
 evils from which we consider ourselves as happily 
 secured by the established principles of good faith 
 which prevail in Great Britain. Those principles, 
 however, should, perhaps, lead us even to place 
 ourselves at a distance from that temptation to de- 
 preciate coin, or to permit a discount on paper, to 
 which so many other countries have yielded. The 
 possession, in ordinary times, of a very considerable 
 quantity of gold, either in the bank or in general 
 circulation, or both, seems necessary for our com- 
 plete security in this respect. The substitution of 
 country bank notes -for gold tends to lessen that se- 
 curity. The evil of them is not that they create 
 any false and merely ideal riches, or that they do 
 any constant prejudice to the country. They enable 
 the trader to vest a capital in merchandize, which, 
 without them, he would not possess, and thereby 
 add to the annual income of the nation. In their 
 immediate effect, therefore, they are beneficial ; but 
 they leave us more exposed to an occasional evil, 
 against which it is prudent to guard, provided we 
 can accomplish that purpose without too great a 
 sacrifice of present advantages. It seems, on this 
 account, as well as on some others, very undesir- 
 ' able to render permanent the temporary law passed 
 some years since, and subsequently renewed, for 
 the purpose of perrpitting the issue of English notes 
 under five pounds. When it shall have expired, 
 
 the 
 
190 
 the power of re-enacting it, which we shall possess, 
 will be a valuable resource. If, moreover, any mea- 
 sure can be devised, which, by encreasing the pub- 
 lic confidence in good paper, will lessen the danger 
 of a general failure of paper credit, and of a run 
 upon the bank for gold, and which^ also, by ob- 
 structing the issue of five and ten pound notes by 
 smaller and less respectable banks, will somewhat 
 extend the use of coin, on the whole, it will have 
 a twofold argument to recommend it *. 
 
 The reader will observe, that even our circulating 
 gold coin has here been considered in the light of a 
 provision against an unfavourable balance of trade 
 with foreign countries, and, therefore, as export- 
 able. Part of our coin will, in fact, always be ex- 
 ported when the balance is very unfavourable, and 
 the exportation, under such circumstances, is bene- 
 ficial to the country. We are apt to think that it 
 is the interchange of the usual gold coin for paper 
 at home which alone maintains the value of our 
 paper; and we are partly, on this account, much 
 more anxious to detain our gold at home, than we 
 are to discharge by means of it an unfavourable 
 
 * Various objections, however, occur against almost every par- 
 liamentary measure for the regulation of country banks. Dr. Smith 
 is of opinion, that a law prohibiting the issue of small notes is alone 
 a sufficient remedy for the evils attending these institutions, and that 
 the danger arising from banks is lessened by the multiplication of 
 them. It is the object of this Work not so much to canvass any 
 question respecting the particular means of regulating paper cre- 
 dit, as to lay down some general principles concerning it. 
 
 balance 
 
balance of trade, and thereby to improve our ex- 
 change with foreign countries. I apprehend, how- 
 ever, that an unfavourable course of exchange, 
 which the export of our gald would cure, will, in 
 many cases, tend much more to depreciate ouf 
 paper, and to produce a rise in the nominal price of 
 articles, than the want of the usual interchange of 
 gold for paper at home. Our coin itself, as has been 
 already remarked, when paper is depreciated, passes 
 not for what the gold in it is worth, but at the paper 
 price ; though this is not generally observed to be 
 the case. It is the maintenance of our general ex- 
 changes, or, in other words, it is the agreement of 
 the mint price with the bulhon price of gold which 
 seems to be the true proof that the circulating paper 
 is not depreciated* 
 
 CHAP. 
 
192 
 
 CHAP. VIIL 
 
 Of the Tendency of a too great Issue of Bank Paper 
 to produce an Excess of the Market Price above 
 the Mint Price of Gold. — Of the Means by which 
 it creates this Excess, namely, by its Operation 
 on the Price of Goods and on the Course of Ex- 
 change. — Errors of Dr. A, Smith on the Subject 
 of excessive Paper. — Of the Manner in ivhich the 
 Limitation of the Quantity of the Bank of En^f- 
 land Paper serves to limit the Quantity and sustain 
 the Value of all the Paper of the Kingdom, 
 
 J\ THIRD objection commonly made to 
 country banks, is, the influence which their notes 
 are supposed to have in raising the price of ar- 
 ticles. 
 
 By the principles which shall be laid down in 
 this Chapter, I propose to prove, that, though a ge* 
 neral encrease of paper has this tendency, the ob- 
 jection, when applied to the paper of country banks, 
 is particularly ill founded. 
 
 It will be necessary, in the discussion which is 
 now about to take place, to join the consideration 
 of two subjects, that of the influence which an en- 
 larged emission of paper has in lifting up the price 
 of commodities, and that of its influence, also, in pro- 
 ducing an excess of the market price above the 
 
 njiut 
 
193 
 mint price of gold, and in thus exposing the bank 
 to failure, and the country to considerable incon 
 venience. It is through the medium of the ^en- 
 hanced price of commodities that I conceive the 
 ill effect on the mint price of gold to be brought 
 about. 
 
 The discussion of these topics will best be intro- 
 duced by a statement of the principle which regu- 
 lates the value of all the articles of life. 
 
 The price of commodities in the market is 
 formed by means of a certain struggle which takes 
 place between the buyers and the sellers. It is 
 commonly said, that the price of a thing is regulated 
 by the proportion between the supply and the de- 
 mand. This is, undoubtedly, true; and for the fol- 
 lowing reason. If the supply of an article or the 
 demand for it is great, it is also known to be great; 
 and if small, it is understood to be small. When, 
 therefore, the supply, for example, is known to be 
 less than the demand, the sellers judge that the 
 buyers are in some degree at their mercy, and they 
 insist on as favourable a price as their power over 
 the buyers is likely to enable them to obtain. The 
 price paid is not at all governed by the equity of 
 the case, but entirely by the degree of command 
 which the one party has over the other. When 
 the demand is less than the supply, the buyers, 
 in their turn, in some degree, command the mar- 
 ket, giving not that sum which is calculated 
 
 O tct 
 
194 
 
 to indemnify the seller against loss, but so much 
 only as they think that the seller will accept rather 
 than not sell his article. The question of price is* 
 therefore, in all cases, a question of power, and of 
 power only. It is obvious, that a rise in the price of 
 a scarce commodity will be more or less consider- 
 able in proportion as the article is felt to be one of 
 more or less strict necessity. 
 
 The principle which has been laid down as 
 governing the price of goods, must be considered 
 as also regulating that of the paper for which they 
 are sold ; for it may as properly be said, on the oc- 
 casion of a sale of goods, that paper is sold for 
 goods, as that goods are sold for paper: thus the 
 sale of a single commodity, as it is called, is a two- 
 fold transaction, though not commonly understood 
 to be so : I mean, that the price at which the ex- 
 change (or sale) takes place depends on two facts; 
 on the proportion between the supply of the par- 
 ticular commodity and the demand for it, which is 
 one question; and on the proportion, also, be- 
 tween the state of the general supply of the circu- 
 lating medium and that of the demand for it, which 
 is another. 
 
 Paper, moreover (of which I shall here speak as 
 if it were the only circulating medium, it being 
 the only one used in the larger payments), is, to 
 some persons, somewhat in the same manner as 
 bread is to all, an article of necessity. It is neces- 
 sary to traders, partly because they have come 
 
 under 
 
195 
 
 under engagements to make payments which are 
 only to be effected by nieans of their own pre- 
 vious receipts: and partly because they hold goods 
 which must, within no long time, be sold for money, 
 that is to say, for paper, since a continually growing 
 loss accrues 'from the detention of them. Paper, 
 therefore, must be bought by the trader : and if 
 there is a difficulty in obtaining it, the buyer of it 
 is brought under the power of the seller, and, in 
 that case, more goo,ds must be given for it. 
 
 L^t us, now, trace carefully the steps by which 
 an encrease of paper serves to lift up the price of 
 articles. Let us suppose, for example, an encreased 
 number of Bank of England notes to be issued. 
 In siich ease the traders in the metropolis discover 
 that there is a more than usual facility of obtaining 
 notes at the bank by giving bills for them, and that 
 they may, therefore, rely on finding easy means of 
 performing any pecuniary engagements into which 
 they may enter. Every trader is encouraged by the 
 knowledge of this facility of borrowing, a little to 
 enlarge his speculations; he is rendered, by the 
 plenty of money, somewhat more ready to buy, 
 and rather less eager to sell; he either trusts that 
 there will be a particular profit on the article which 
 is the object of his speculation, or else he judges, 
 that, by extending hi* general purchases, he shall 
 at least have his share of the ordinary profit of com- 
 mercial business, a profit which he considers to be 
 proportioned to the quantity of it. The opinion of 
 
 O 2 an 
 
196 
 
 an encreared facility of effecting payments causes 
 other traders to become greater buyers for the same 
 reason, and at the same time. Thus an inclination 
 to buy is created in all quarters, and an indisposition 
 to sell. Now, since the cost of articles depends 
 on the issue of that general conflict between the 
 buyers and sellers, which was spoken of, it fol- 
 lows, that any circumstance which serves to com- 
 municate a greater degree of eagerness to the mind 
 of the one party than to that of the other, will have 
 an influence on price. It is not necessjary to €up- 
 pose either a monopoly, or a combination, or the 
 least unfairness, to exist, or even large and im- 
 proper fpeculations. The encrease in the eager- 
 ness of each buyer may be trifling. The zeal to buy, 
 being generally diffused, may, nevertheless, have a 
 sensible operation on price. 
 
 That, on the other hand, a reduction of the quan- 
 tity of paper causes a fall in the price of goods, is 
 scarcely necessary to be proved. It may be useful, 
 however, in some degree, to illustrate this point by 
 facts. I understand, that at the time of the great 
 failure of paper credit in 1795, the price of corn 
 fell, in a few places, no less than twenty or thirty 
 per cent. The fall arose from the necessity of sell- 
 ing corn under which some farmers were placed, 
 in order to carry on their payments. Much of the 
 circulating medium being withdrawn, the demand 
 for it was in those places far greater than the sup* 
 ply ; and the few persorjs, therefore, who were in 
 
 possession 
 
197 
 possession of cash, or of what would pass as cash, 
 having command of the market, obliged the farmers 
 to sell at a price thus greatly reduced. It was a 
 new and sudden scarcity of cash, not any new 
 plenty of corn, which caused the price of corn to 
 drop. 
 
 It has been already observed, that some few days- 
 antecedently to the suspension of the cash payments 
 of the bank, exchequer bills, as well as stocks, when 
 sold for ready money> that is to say, for bank notes, 
 fell in price. Not many days afterwards, although 
 no material event had occurred except that of the 
 stoppage of the bank, they rose. This fall and 
 rise in the price of government securities evidently 
 did not result from any corresponding fluctuation in 
 the national confidence in them^ for the fall took 
 place when the national credit would naturally be the 
 highest, namely, when the bank was as yet paying 
 in cash, and the approaching stoppage was not 
 known ; and the rise happened when the national 
 credit would be the lowest, namely, within a few 
 days after that discouraging event. The reasbii of 
 each of the fluctuations unquestionably was the fluc- 
 tuation in the quantity of the Bank of England 
 notes, which, as it has since appeared, were, during 
 the day or two which preceded the suspension, 
 about a million less than they were either a short 
 time before or a short time afterwards. The notes 
 being fewer during those few days, the price of them 
 was, at the same time, higher. It was, in fact, 
 
 O 3 therefore. 
 
198 
 
 therefore, the price of notes which rose, rather than 
 that of stocks which fell, on the days immediately 
 preceding the suspension ; and it was the price of 
 notes which a few days afterwards fell, rather than 
 that of stocks which rose *. 
 
 I shall, for the present, consider the doctrine 
 which has been laid down, as being sufficiently 
 established, namely, that paper fluctuates in price 
 on the same principles as any other article, its value 
 rising as its quantity sinks, and vice versa; or, in 
 other words, that an augmentation of it has a ge- 
 neral tendency to raise, and a diminished issue to 
 
 lower, 
 
 * In the event of any great public alarm, sach, for instance, as 
 that which might be occasioned by the landing in this country of any 
 considerable body of enemies, it is likely tliat the price of Bank 
 of England notes, compared with that of stocks, or other articles 
 for which there is a ready money market, would ia like manner 
 rise, even though the <^antity of paper should . continue the same : 
 tliis would happen in consequence of that encreased demand for bank 
 notes, to which it has been repeatedly observed that a state of con- 
 sternation always gives occasion. Many bankers, at such a time, 
 vould feel a doubt whether they might not be drawn upon more 
 largely than usual by some of their more timid customers ; and whe- 
 ther, al£0^ they might not be subjected to more than common diffi- 
 culty in selling government securities, an article which, in ordinary 
 time?, they are used to turn into cash on the shortest notice, and 
 v/hicb, while a prompt sale of them is to be depended on, they 
 prefer to back notes, because an interest is gained by holding the 
 one, and not by detaining the other. 
 
 During the sliort crisis of an invasion, the advantage of accruing 
 intert:st would be little regarded, and each banker, therdbre, would 
 make an effort to exchange his exchequer bills, or, perhaps, his 
 
 ?.tocks. 
 
199 
 
 lower, the nominal cost of commodities, although, 
 partly for reasons which have been already touched 
 upon, and partly for some which shall be hereafter 
 given, an exact correspondence between the quan- 
 tity of paper and the price of commodities can 
 by no means be expected aKvays to subsist. 
 
 The reader possibly may think that, in treating of 
 this subject, I have been mistaking the effect for the 
 cause, an encreased issue of paper being, in his esti- 
 mation, merely a consequence which follows a rise in 
 the price of goods, and not the circumstance which 
 produces it. That an enlarged emission of paper 
 n>ay often fairly be considered as only, or chiefly, an 
 effect of high prices, is not meant to be denied. 
 It is, however, intended to insist, that, unques- 
 tionably, in some cases at least, the greater quan- 
 tity of paper is, more properly speaking, the cause. 
 A fuller explanation of this apparently difficult and 
 
 stocks, for Bank of England notes, an effort which must prove ge- 
 nerally ineffectual, supposing the quantity issued to be the same; 
 but which, however, would have the effect of bringing down the 
 comparative price of the article so eagerly offered in exchange for 
 notes* Thus the price of government securities would appear to fall, 
 when, in part at least, it would rather be the price of bank notes 
 which should be said to rise. Some encrease of the bank issues seems 
 very justifiable at such a time; such an encrease, I mean, as should 
 be sufficient only to prevent what may be termed an unnatural rise in 
 the value of bank notes. This issue would be the means of pre- 
 venting a misconception among the public respecting the degree of 
 distrust in government securities entertained by the dealers in them, 
 f circumstance which might be of some political imporunce in a 
 |ftoment of general consternation. 
 
 O 4 . disputable 
 
200 
 disputable position will be given in the further pro- 
 gress of this Work. 
 
 I proceed, in the next place, to shew in what 
 manner a general rise in the cost of commodities, 
 whether proceeding from an extravagant issue of 
 paper, or from any other circumstance, contributes 
 to produce an excess of the market price above the 
 mint price of gold. 
 
 It is obvious, that, in proportion as goods are ren- 
 dered dear in Great Britain, the foreigner becomes 
 unwilling to buy them, the commodities of other 
 countries which come into competition whh our's 
 obtaining a preference in the foreign market; and, 
 therefore, that in consequence- of a diminution of 
 orders from abroad, our exports will be dimi- 
 nished; unless we assume, as we shall find it ne- 
 cessary to do, that some compensation in the ex- 
 change is given to the foreigner for the disadvantage 
 attending the purchase of our articles. But not 
 only will our exports lessen in the case supposed; 
 our imports also will encrease : for the high Bri- 
 tish price of goods will tempt foreign commo- 
 dities to come in nearly in the same degree in 
 which it will discourage British articles from going 
 out. I mean only, that these two effects (that of a di- 
 minished export, and that of an encreased import) 
 will follow, provided that we suppose, what is 
 not supposable, namely, that, at the time when the 
 price of goods is greatly raised in Great Britain, the 
 course of exchange suffers no alteration. For the 
 
 following 
 
201 
 following reason, I have said that this is not suppos- 
 able. Under the circumstances which have been 
 described of a diminished export, and an encreased 
 import, the balance of trade must unavoidably 
 turn against us ; the consequence of which must 
 be, that the drawers of bills on Great Britain in 
 foreign countries will become more in number than 
 the persons having occasion to remit bills. This 
 disparity between the number of individuals want- 
 ing to draw, and of those wanting to reinitj as was 
 remarked in a former Chapter, must produce a fall 
 in the price at which the overabundant bills on Eng- 
 land sell in the foreign market. The fall in the 
 selling price abroad of bills payable here, will ope* 
 rate as an advantage to the foreign buyer of our 
 commodities in the computation, of the exchange- 
 able value of that circulating medium of his own 
 country with which he discharges the debt in Bri- 
 tain contracted by his purchase. It will thus ob- 
 viate the dcarness of our articles: it will serve as a 
 compensation to the foreigner for the loss which he 
 would otherwise sustain by buying in our market. 
 The fall of our exchange will, therefore, promote 
 exportation and encourage importation. It will, in 
 a great degree, prevent the high price of goods in 
 Great Britain from producing that unfavourable ba- 
 lance of trade, which, for the sake of illustrating 
 the subject, was supposed to exist. 
 
 The compensation thus made to the foreigner 
 for the high British price of all articles is necessary 
 as an inducement to him to take them, somewhat 
 
 in 
 
202 
 
 in the same manner as a drawback or bounty on 
 exportation is the necessary inducement to take 
 those particular goods which have been rendered 
 too dear for the foreign market by taxes laid on 
 them in this country. In each case the British con- 
 sumer pays the high price, and the foreigner is 
 spared, because otherwise he will not accept our 
 commodities. 
 
 The fall in our exchange was just now defined 
 to be an advantage gained in the computation of 
 the exchangeable value of that foreign circulating 
 medium with which the foreigner discharges his 
 debt in Great Britain, a debt paid in the circulating 
 medium of this country. It implies, therefore, a 
 high valuation of his circulating medium, and a 
 low valuation of our's; a low valuation, that is to 
 say, both of our paper and of the coin which is in- 
 terchanged with it. 
 
 Now, when coin is thus rendered cheap, it by 
 no means follows that bullion is rendered cheap 
 also. •Coin is rendered cheap through its consti- 
 tuting a part of our circulating medium; but bul- 
 lion does not constitute a part of it. Bullion is a 
 commodity, and nothing but a commodity; and it 
 i:ises and falls in value on the same principle as all 
 other commodities. It becomes, like them, dear in 
 proportion as the circulating medium for which ^it 
 is exchanged is rendered cheap, and cheap in pro- 
 portion as the circulating medium is rendered 
 dear. 
 
 In 
 
203 
 In the case, therefore, which has now been sup- 
 posed, we are to consider coin as sinking below its 
 proper and intrinsic worth, while bullion maintains 
 its natural and accusjtomed price. Hence there 
 arises that temptation, which was formerly noticed, 
 either to convert back into bullion and then to 
 export; or, which is the same thing, to export and 
 then convert back into bullion; or, which is also 
 the same thing, to convert back into bullion, and . 
 then sell to the bank, at the price which would be 
 gained by exportation, that gold which the bank 
 "has purchased, and has converted from bullion into 
 coin. 
 
 In this manner an encrease of paper, supposing 
 it to be such as to raise the price of commodities 
 in Britain above the price at which, unless there is 
 some allowance afforded in the course of exchange, 
 they will be received in foreign countries, con- 
 tributes to produce an excess of the market price 
 above the mint price of gold, and to prevent, there- . 
 fore, the introduction of a proper supply of it into 
 the Bank of England, as well as to draw out of its 
 coffers, that coin which the directors of the bank 
 would wish to keep in them. 
 
 Dr. Smith appears to me to have treated the im- 
 portant subject of the tendency of an excessive pa- 
 per circulation to send gold out of a country, and thu?? 
 to embarrass its banking establishments, in a manner 
 which is particularly defective and unsatisfactory. 
 It is true, that he blames the Bank of England 
 
 for 
 
204 
 
 for having contributed to bring on itself, during se* 
 veral successive years, a great expence in buying 
 gold through a too great circulation of its papery 
 and that he also charges the Scotch banks with hav- 
 ing had, through their excessive issues, a share in 
 producing this evil. Thus, therefore, he seems to 
 give to his reader some intimation of the ten- 
 dency of an excessive issue of paper to create an 
 excess of the market price above the mint price 
 of gold*. 
 
 It appears, however, in some degree, from the 
 passage in question, though much more clearly 
 from other parts of his work, that he considers 
 every permanent excess, whether of the market 
 price above the mint price, or of the mint price 
 above the market price of gold, as entirely re- 
 
 * •* By issuing too great a quantity of paper, of which the ex- 
 " cess was continually returning in order to be exchanged for gold 
 *' and silvjer, the Bank of England was, for many years together, 
 ' ' obliged to coin gold to the extent of between eight hundred thou- 
 •* sand pounds and a million a year. 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 the high price of 4/. an ounce, which 
 «* I; soon after issued in coin at 3/. 17J. lOy^. an ounce, losing, in 
 •' this manner, between two and a half and three per cent. ThougI>^ 
 ** the bank, therefore, paid no seignorage, though the government 
 '* was properly at the expence of the coinage, this liberality of go- 
 •' vefnmentdid not prevent altogether die expence of the bank.** — 
 Enquiry into the Nature and Causes of the Wealth of Nations, by 
 Dr. A.Smith, Vol, I. page 451, 4th edit. Oct. 
 
 ferable 
 
205 
 feral)le to " something in the state of the 
 coin V 
 
 In one place he remarks, that a high price of 
 bullion arises from the difference between the 
 weight of our more light and that of our more 
 heavy guineas ; the value of the gold in the heavier, 
 guineas, as he represents the case, determining 
 the general current value of both the lighter and 
 the heavier pieces of coin ; and the superior quan- 
 tity of gold in the heavier guineas constituting, 
 therefore, so much profit on the melting of those 
 heavier pieces f: a supposition manifestly erro- 
 neous, and contradicted by experience ; for it im- 
 plies 
 
 * ** When the market price either of gold or silver bullion con- 
 " tinues for several years together steadily and constantly either more 
 ** or less above, or more or less below, the mint price, we may be 
 •< assured that this steady and constant either superiority or infe- 
 •» riority of price is the effect of something in the state of the coin, 
 ** which, at that time, renders a certain quantity of coin either of 
 ** more value or of less value than the precise quantity of, bullion 
 ** which it ought to contain.*' — Smith on the Wealth of Nations, 
 Vol. I. page 69, 4th edit. Oct. 
 
 f ** In every country tke greater part of the current coin is almost. 
 ** always more or less worn or otherwise degenerated from its stand- 
 «* ard. In Great Britain, It was, before the late reformation, a 
 *' good deal so, the gold being more than two per cent, and the silver 
 *' more than eight per cent, below its standard weight. But if 
 ** forty-four guineas and a half containing their full standard weight, 
 ** a pound weight of gold, could purchase very little more than a 
 " pound weight of uncoined gold, forty-four guineas and a half 
 ** wanting a part of their weight, could not purchase a pound 
 
 " weight, 
 
206 
 plies that the excess of the market price above the 
 mint price of gold both never is and never can be 
 greater than the excess of the weight of the heavier 
 above the lighter guineas; and, also, that the price 
 of bullion cannot fluctuate while the state of our 
 coinage remains in all respects the same. We have 
 lately experienced fluctuations in our exchange, 
 and correspondent variations in the market price, 
 compared with the mint price of gold, amounting 
 to no less than eight or ten per cent., the state 
 
 ** weight, and something was to be added, in order to make up the 
 <* deficiency. The current price of gold bulHon at market, tliere- 
 ** fore, instead of being the same with the mint price, or 46/. 14-f. 6d. 
 '* was then about 47/. 141. and sometimes about 48/. When the 
 ** greater part of the coin, however, was in this degenerate condi^ 
 " tion, forty-four guineas and a half, fresh from the mint, would 
 *• purchase no more goods in the market than any other ordi- 
 *' nary guineas; because, when they come into the coifers of the 
 *' merchant, being confounded with other money, they could not 
 ** afterwards be distinguished, without more trouble than the difference 
 ** was worth. Like other guineas, they were worth no more than 
 ** 46/. 14J. 6d. If thrown into the melting pot, however, they 
 *• produced, without any sensible loss, a pound weight of standard 
 ** gold, which could be sold at any time for between 47/. 14^. and 
 ** 48/. either in gold or silver. There was an evident profit, there- 
 <* fore, in melting down new coined money ; and it was done so 
 ** instantaneously, that no precaution of government could prevent it. 
 ** The operations of the mint were, upon this account, somewhat 
 «' like the web of Penelope ; the work that was done in the day 
 ♦* was undone in the night. The mint was employed not so much 
 ** in making daily additions to the coin, as in replacing the very best 
 <* part of it which was daily melted down.'* 
 
 of 
 
207 
 
 of our coinage continuing, in all respects, the 
 same. 
 
 Dr. Smith recommends a seignorage, as tending 
 to raise the value both of the lighter and heavier 
 coin ; and thus, also, to diminish, if not destroy, 
 the excess of the market price above the mint price 
 
 of gold *. 
 
 It 
 
 ♦ ** Were the private people who carry their gold and silver to 
 '* the mint to pay themselves for the coinage^ it would add to the 
 « value of jhose metals in the same manner as the fashion does to 
 '• that of plate. Coined gold and silver would be more valuable 
 ** than uncoined. The seignorage, if it was not exorbitant, would 
 ** add to the bullion the whole value of the duty, because the go- 
 ** vernment having every where the exclusive privilege of coining;, 
 ** no coin can come to market cheaper than they think proper to 
 " afford it. 
 
 " A seignorage will, in many cases, take away altogether, and 
 " will in all cases diminish, the profit of melting down the new 
 " coin. This profit always arises from the difference between the 
 ** quantity of bullion which the common currency ought to con- 
 *' tain, and that which it actually does contain. If this difference 
 ** is less than the seignorage, there will be loss instead of profit. 
 ** If it b equal to the seignorage, there will neither be profit nor 
 ** loss. If it is greater than the seignorage, there will, indeed, be 
 ** some profit ; but less than if there were no seignorage."— -Smith's 
 Wealth of Nations, Vol. II, Book lY. Chap. VI. pages 333, 334, 
 and 335. 
 
 These observations of Dr. Smith, on the subject of a seignorage, 
 seem erroneous in the following respects. Plate, when bought, is 
 purchased in order not to be sold again, but to be retained by the 
 possessor; and the price paid by the original buyer may, therefore, 
 be not unfairly considered, as it is by Dr. Smith, to be the current 
 price of the article. Gold, on the contrary, is no sooner bought 
 
 and 
 
208 
 It is remarkable, that this Writer does not, in any 
 degree, advert either to that more immediate cause 
 (a fall of our exchanges), from which I have, in this 
 as well as in a former Chapter, described the ex- 
 cess 
 
 and coined, than it is sent into circulation ; it is sold, that is to say 
 (or exchanged for commodities), again and again. What we mean, 
 therefore, by the current price of gold coin, is that price at which 
 it passes, not in the original bargain for bullion between the seller 
 of it and the bank, but in the general course of this subsequent cir^ 
 tulation. Guineas, moreover, not only circulate at home, but are 
 liable to be sent abroad in the event pf any unfavourable balance of 
 trade. They are worth, in that case, just as mucl:\ as the foreign 
 country will give for them ^ and the foreign country, lt\ estimating 
 their value, since it means to melt them, does not at all take into its 
 calculation the expence of the coinage of the piece of metal. It 
 acts like a buyer not of new but of old plate, who destines it to the 
 melting pot, and, therefore, refuses to allow any thing for ** the 
 fashion." 
 
 This foreign price of our coin principally determines the current 
 value of the price of coin in England. It appears to me to do this 
 in the following manner. 
 
 When the price whiph our coin will fetch in foreign countries is 
 such as to tempt it out of the kingdom, the directors of the bank 
 naturally diminish, in some degree, the quantity of their paper, 
 through an anxiety for the safety of their eftablishment. By dimi- 
 nishing their paper, they raise its value ; and in raising its value, 
 they raise also the value in England of the current coin which' is ex- 
 changed for it. Thus the yalue of our gold coin conforms itself to 
 the value of the current paper, and the current paper is rendered by 
 the bank directors of that value which it \s necessary that it should 
 bear in order to prevent large exportations ; a value sometimes rising 
 a little above, and sometimes falling a little below, the price which 
 our coin bears abroad ; a price, in the formation of which jio regard 
 
 is had to the fashion.; 
 
 ^ seignorage, 
 
209 
 
 cess in question, as, in all cases, arising ; or to that 
 more remote one on which I have lately dwelt, 
 namely, a too high price of goods, which produces 
 a fall of our exchanges. 
 
 Dr. Smith does not, in any of his observations 
 on this subject, proceed sufficiently, as I con- 
 ceive^ on the practical principle of shewing how 
 it is through the medium of prices (of the prices 
 of goods in general, and of bullion in particu- 
 lar, compared with the price of the current cir- 
 culating medium), that the operations of importing 
 
 A seignorage, nevertheless, might add to the current value of 
 the coin of the kingdom for the following reason. It might in- 
 cline the directors of the bank to improve the value of their paper by 
 a stricter limitation of it, for the sake of more effectually exempting 
 themselves from an occasional burthen, which is now borne for them- 
 by the government. The point belovj which they would wish to 
 prevent their paper from falling would still be the same as it is now, 
 namely, the selling price of our coin when melted and carried to 
 foreign countries : the care, however, which they would take to pre- 
 vent its falling below that price would, perhaps, be greater, and 
 would be such as to raise its average price, if, in the event of each 
 depression, they should be subject not only, as they are now, to 
 loss in the purchase of gold, but to a further loss in coining it. 
 There seems no reason, however, to suppose, that the degree of 
 fluctuation which is now apt to subsist between the market price and 
 mint price of gold could, by any efforts of the bank, be materially 
 lessened. It results from the fluctuations in the exchange ; and those 
 fluctuations, in general, proceed from variations in the markets of 
 Europe, which affect the balance of trade, and cannot, by any ma« 
 nagement of bank paper, be exactly counteracted, 
 
 P and 
 
t2lO 
 ind exporting gold are brought about. He con- 
 siders our coin as going abroad simply in conse- 
 quence of. our circulation at home being over full, 
 l^ayment in coin, according to his doctrine, is de- 
 manded of every bank for as much of its paper as 
 is excessive, because the excessive paper can nei- 
 ther be sent abroad nor turned to any use at home; 
 whereas, w^hen it is changed into coin, the coin 
 may be transmitted to a foreign part, and may there 
 be advantageously employed*. 
 
 The reader will perceive, that, according to the 
 principle which I have endeavoured to establish, 
 coin does not merely leave the country because, the 
 
 • " The coffers of 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, 
 ** though they ought to be filled much fuller, yet must empty them" 
 ** selves much faster than if their business was confined within more 
 " reasonable bounds, and must require not only a hiore violent but 
 ** a more constant and uninterrupted exertion of expence in order 
 ** to replenish them. The coin, too, which is thus continually 
 *' drawn in such large quantities from their coffers cannot be em- 
 ** ployed in the circulation of the country. It comes in place of a 
 «* paper which is over and above what can be employed in that cir- 
 *' cuUtion', 'ind is, therefore, over and above what can be em- 
 <* ployed in it too. Bat as that coin will not be allowed to lie idle, 
 *' it must, in one shape or another, be sent abroad, in order to find 
 ** th'at profitable employment which it cannot find at home j and this 
 *' continual exportation of gold and filver, by enhancing the diffi- 
 ** calty, must necessarily enhance still further the expence of the 
 " bank in finding more gold and silver in order to replenish those 
 '* coffers which empty themselves so very rapidly.*' — Vol. I. page 
 
 circulation 
 
 ■;,^^S»t^ 
 
211 
 
 circulation being full, no use can be found at home 
 for additional circulating medium ; but that every 
 encrease of paper has been represented as enhan- 
 cing the price of goods, which advanced price of 
 goods affords employment to a larger quantity of 
 circulating medium, so that the circulation can ne- 
 ver be said to be overfull. This advanced price of 
 .goods is the same thing as a reduced price of eoiil:; 
 the coin, therefore, in consequence of its reduced 
 price, is carried out of the country for the sake of 
 obtaining for it a better market. The heavier pieces, 
 undoubtedly, will be preferred, if there is a facility 
 of obtaining and transporting them ; but the lighter 
 guineas will also be exported, when the state of the 
 exchange shall be sufficiently low to afford, a profit 
 on such a transaction. One of the consequences 
 of Dr. Smith's mode of treating the , subject, is, 
 that the reader is led into the error of thinking, that 
 when, through an excessive issue of paper, gold has 
 been made to flow away from us, the expence of 
 restoring it consists merely in the charge of collect- 
 ing it and transporting it from. the place to which it 
 is gone. It follows, on the contrary, from the prin- 
 ciples which I have laid down, that, in order to 
 bring back gold, the expence not only of importing 
 it may be to be incurred, but that also of purchasing 
 it at a loss, and at a loss which may 'be either more 
 or less considerable: a circumstance of great im- 
 portance in the question. If this loss should ever 
 become extremely great, the difficulties of restoring 
 
 P 2 the 
 
212 
 
 the value of our paper might not easily be sur- 
 mounted, and a current discount or difference be- 
 tween the coin and paper of the country would 
 scarcely be avoidable. 
 
 Dr. Smith, indeed, represents the expence of 
 bringing back gold as considerable; but he seems 
 to impute the greatness of it to the circumstance of 
 its recurring again and again: and he describes it 
 as continuing to recur in the case of each individual 
 bank, whether in town or country, which persists 
 in the false policy of issuing more paper than is 
 sufficient to fill the circulation of the neighbouring 
 district. I shall here take occasion to notice some 
 great inaccuracies in one part of his reasoning upon 
 this point. 
 
 He says— ^" A banking company which issues 
 *' more paper than can be employed in the circu- 
 " lation of the country, and of which the excess is 
 " continually returning upon them for payment, 
 " ought to encrease the quantity of gold and silver 
 " which they keep at all times in their coffers, not 
 " only in proportion to this excess, but to a much 
 " greater proportion. Suppose, for instance, all 
 " the paper of a particular bank, which the circu- 
 *' lation of the country can easily absorb, amounts 
 " to forty thousand pounds, and the bank keeps 
 *^ usually ten thousand pounds in gold and silver for 
 *' its occasional demands. If this bank should at- 
 " tempt to circulate forty-four thousand pounds, 
 " the excess of four thousand pounds will return as 
 
 '' fast 
 
213 
 ** fast as it is issued. Fourteen thousand pounds 
 " must then be kept instead of ten thousand 
 " pounds, and the bank will gain nothing by the 
 "excessive circulation. On the contrary, it will 
 ^' lose the whole expence 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 in." 
 
 He then adds — ** Had every particular bank al- 
 " ways understood and attended to its own inte- 
 " rest, the circulation would never have been over- 
 " stocked with paper money.'* 
 
 There is, no doubt, some sort of ground for say- 
 ing that an excess of paper will come back upon 
 the banks which issue it, and that, in coming back, 
 it will involve the issuing banks in expence. Much 
 exception, however, might be taken against Dr, 
 Smith's mode of estimating the expence which the 
 quantity which would come back would bring upon 
 the issuing banks. But the objection which I shall, in 
 the first place, urge against the remark of Dr. Smith, 
 is, that, even granting it to be just, it can be just 
 only in a case which can scarcely ever occur among 
 the country banks of this kingdom. I mean, that 
 it can apply solely to the case of a single bank of 
 which the paper circulates exclusively through a 
 surrounding district : it obviously cannot hold- in 
 the case of many banks, the paper of all of which 
 circulates in the same district. 
 
 P3 In 
 
214 
 
 111 order to explain this clearly, let us make the 
 following supposition. Let us imagine the circu- 
 lation of country bank paper which a certain district 
 will bear to be one hundred thousand pounds, 
 and ten banks to be in that district, each usually 
 circulating and able to keep in circulation ten thou- 
 sand pounds. Let us also suppose an excessive 
 issue of four thousand pounds, and let us allow the 
 effect of this on the ten banks to be that which Dr. 
 Smith describes, a point which might certainly be 
 disputed, namely, that a necessity will arise for 
 always keeping (for this is what Dr. Smith's lan- 
 guage implies) an additional stock of gold amount- 
 ing to exactly four thousand pounds, and also that a 
 reiterated expence will be incurred (Dr. Smith does 
 not say how frequently reiterated) in collecting and 
 transporting these four thousand pounds of gold. 
 Still it must be observed, that we may suppose the 
 issue of the four thousand pounds excessive paper 
 to be made by some one only of the ten banks, while 
 the charge incurred by such issue may be divided 
 among them all. It may, therefore, on Dr. Smith's 
 own principles, answer to one of several banks 
 emitting paper which circulates in the same place, 
 to issue the paper which is considered by him as ex- 
 cessive; and the practice of doing so may be owing 
 to the country banker's too well knowing his own 
 interest, and not, as Dr. Smith supposes, to his too 
 yj understanding it. 
 
 But 
 
215 
 
 But the case which I have supposed has been 
 put merely by way of illustration. When many 
 banks issue notes circulating over the same district, 
 it is impossible to say whose paper constitutes the 
 excess. Whatever temptation to excess exists, 
 must be a general one. It is, however, counter- 
 acted not only by the charge of transporting gold, 
 on which alone Dr. Smith dwells, but likewise by 
 all the other charges, as well as by all the risks to 
 which country bank notes subject the issuers ; not 
 , to , mention the difficulty of finding a channel 
 through which a quantity of paper much larger 
 than common can be sent by the country bank into 
 circulation. 
 
 Dr. Smith supposes, in the passage which has just 
 been quoted, that, when there is an excessive circula- 
 tion of country bank paper, the excess returns upon 
 the banks to be exchanged for gold and silver. The 
 fact is, that it returns to be exchanged not for gold and 
 silver only, but either for gold and silver, or for bills 
 on London. A bill on London is an order to receive 
 in London, after a certain interval, either gold or 
 Bank of England notes. This order imposes oa 
 the country banker the task of providing a fund in 
 London sufficient to answer his draft: it serves, how- 
 ever, to spare that ^xpence of transporting gold, 
 as well as to lessen that necessity of maintaining a 
 stock of guineas, which Dr. Smith assumes to b^ 
 the consequence of every excessive emission of 
 
 P 4 notes. 
 
216 
 notes, and to be the certain means, if bankers do but 
 understand their interest, of limiting their issue. 
 
 The remark which has just been made derives 
 particular importance from the circumstances of the 
 period through which we have passed. For, if the 
 usual means of preventing an excess of country 
 bank notes were nothing else than the liability of 
 the issuers to be called upon for a money payment 
 of them, it might fairly be assumed, that, at a time 
 when the money payment of them has been sus- 
 pended, we must necessarily have been exposed to 
 the greatest inundation of country paper, and to a 
 proportionate depreciation of it. The unbounded 
 issue of country bank notes has been restrained by 
 the obligation under which country bankers have 
 considered themselves to be of granting bills on 
 London ; that is to say, orders to receive in London 
 Bank of England paper in exchange for their notes, 
 if required to do so : and it is certain that they 
 would be required to do so whenever the quantity 
 of their notes should be much greater in propor- 
 tion to the occasion for them, than the quantity of 
 the notes of the* Bank of England in proportion ' 
 to the occasion for those notes. 
 
 For the sake of explaining this, let it be admitted, 
 for a moment, that a country bank has issued a very 
 extraordinary quantity of notes. We must assume 
 these to be employed by the holders of them in 
 making purchases in the place in which alone the 
 country bank paper passes, namely, in the sur- 
 rounding 
 
217 
 rounding district. The effect of such purchases, 
 according to the principles established in this Chap- 
 ter, must be a great local rise in the price of ar- 
 ticles. But to suppose a great and merely local 
 rise, is to suppose that which can never happen 
 or which, at least, cannot long continue to exist 5 
 for every purchaser will discover that he can buy 
 commodities elsewhere at a cheaper rate ; and he 
 will not fail to procure them in the quarter in which 
 they are cheap, and to tranfport them to the spot 
 in which they are dear, for the sake of the profit on 
 the transaction. In order that he may be enabled to 
 do this, he will demand to have the notes which 
 pass current in the place in which we have sup- 
 posed goods to have been rendered dear by the ex- 
 traordinary emission of paper, converted into the cir- 
 culating medium of the place in which goods are 
 cheap: he will, therefore, require to have his coun- 
 try bank note turned into a Bank' of England note, 
 or into a bill on London, which is nearly the same 
 thing, provided Bank of England notes are fewer in 
 proportion to the occasion for them than the country 
 bank notes ; that is to say, provided Bank of Eng^ 
 land notes have less lifted up the price of goods in 
 London than country bank notes have lifted up 
 the price of goods in the country. 
 
 This point may be still more fully illustrated in 
 the following manner. Let us imagine a mercan- 
 tile house to consist of two branches, the one placed 
 in the metropolis, the other in the country, and 
 f each 
 
218 
 
 each branch to be accustomed to make certain pay- 
 ments in the spot in which it is situated, each, 
 however, to be in the habit of borrowing as largely 
 as it is able, the one of a neighbouring country 
 bank, the other of the Bank of England, and of 
 applying these loans to the joint use of the trading 
 concern. Let us next suppose an extraordinary 
 facility of borrowing at the country bank to arise, 
 while the opportunities of obtaining loans at the 
 Bank of England remain the same *. In such case 
 the mercantile house, provided its London pay- 
 ments continue to bear the same proportion as be- 
 fore to its country payments, which will hardly fail 
 to be the case, will exchange some part of its en- 
 creased loans in the country, . consisting in country 
 bank notes, for bills on London, or, in other words, 
 •for Bank of England notes. It will thus adjust, 
 with the greatest nicety, the quantity of London 
 and of country paper to the amount of the pecu- 
 niary demands upon it in each quarter; and, in doing 
 
 * The case here put Is assumed to exist only by way of argu- 
 ment. The point intended to be shewn, is, that the case cannot 
 happen ; or, at least, that such cannot be the case, at the same time, 
 of all the country banks in the kingdom. A single individual, it is 
 true, may find his means of borrowing at a particular country bank 
 to encrease in the manner which is here supposed ; for he may ob- 
 tain a preference over other borrowers. A single bank, also, may 
 find its means of lending to encrease ; for its notes may usurp the 
 place of those of other banks. There can, however, be no mate- 
 rial enlargement on the whole of the paper of the country, while the 
 facility of borrowing in London remains the same. 
 
 so. 
 
219 
 60, it will contribute to prevent the supply of notes 
 in either place from becoming g/eater in proportion 
 to the demand than in the other. What has been 
 supposed of one' house, may be supposed of many- 
 similar ones ; and not only of houses of the parti- 
 cular description which has been spoken of,, but 
 also of the several independent establishments in 
 the two distant places which have pecuniary trans- 
 actions together, and have an interest in accommo- 
 dating each other. Their general operations, of a 
 pecuniary kind, must be such as always to check 
 a local rise in the price of commodities in either 
 place, while it is as yet so small as to be scarcely 
 perceptible. In this manner, therefore, the ex- 
 changeableness of country paper for London pa- 
 per will never fail very nearly to equalize the va- 
 lue of them both. It is, moreover, important clearly 
 to point out that their value will be equalized, or 
 nearly equalized, not by a tendency in the London 
 paper to partake in a low value which the country 
 paper has acquired in consequence of its not being 
 Jimited by any voluntary act of the issuers ; nor by 
 a tendency in each to approximate in value to the 
 other ; but by a tendency in the country paper to 
 take exactly the high value which the London paper 
 bears in consequence of its being restricted by 
 the issuers. That this must be the case is plain, 
 from the remark which has just been made ; for it 
 has been shewn, that the country paper, however 
 "it may fail to be limited in quantity by any mode- 
 ration 
 
220 
 ration or prudence of the issuers, becomes no Jess 
 effectually limited through the circumstance of their 
 being compelled by the holders to exchange as 
 much of it as is excessive for the London paper 
 which is limited ; which is limited, I mean, in con- 
 sequence of a principle of limitation which the di' 
 rectors of the Bank of England have prescribed to 
 themselves. 
 
 The country paper, let it then be observed, 
 does not add any thing to the quantity of the 
 London paper; for the effectual limitation of 
 the London paper is the great point, which it 
 must be borne in mind, that we have assumed. 
 The country paper, therefore, does not in any de- 
 gree diminish the price of the London paper ; for 
 its price must remain fixed so long as its quantity 
 continues fixed, supposing, as we do in our present 
 argument, that the demand for it is the same. It 
 has been proved, however, that the country paper is 
 rendered, by itsexchangeableness with the London 
 paper, almost exactly equal to it in value. It is, 
 then, rendered almost exactly equal in value to a 
 paper of which the value is completely sustained. 
 Thus, therefore, .the limitation of the supply of the 
 single article of London paper, of which, however, 
 we are taking for granted that the demand continues 
 the same, is the means both of sustaining the value 
 of London paper, and also of sustaining the value 
 as well as limiting the quantity of the whole paper 
 of the country. 
 
 It 
 
221 
 It is, however, necessary here to point out to the 
 reader, that, in the immediately preceding observa- 
 tions, vre have assumed certain facts to exist, for the 
 sake of stating clearly a general principle. It will 
 be the object of a succeeding Chapter to shew in 
 what respects the case which has been supposed 
 differs from the actual one. 
 
 CHAP. 
 
122 
 
 CHAP. IX. 
 
 Of the Circumstances xvhich cause the Paper of 
 the Bank of England, as well as all the other 
 Paper of the Country, to fail of having their Va- 
 lue regulated according to any exact Proportion 
 to the Quantity of Bank of England Notes, 
 
 'EVERAL points may be considered as 
 having been assumed, for the sake of describing 
 clearly the principle which was laid down in the 
 close of the former Chapter. They may be stated 
 to have been the following. 
 
 First, the notes of the Bank of England were 
 spoken of as forming exclusively the whole circu- 
 lating medium of the district which surrounds the 
 metropolis, and as having no circulation beyond the 
 boundaries of that district. The object was, then, 
 to evince, that supposing, secondly, the quantity 
 of Bank of England paper to continue the same , 
 and supposing, thirdly, the payments within the 
 district to be the same ; and supposing also, fourthly, 
 the general circumstances to be such as to render 
 the same quantity of circulating medium just as 
 sufficient as before to effect the same payments j 
 the Bank of England paper could not fail both to 
 maintain its ow^ji value, and also to maintain the 
 
 value 
 
223 
 value as well to restrict the quantity of the general 
 paper of the country. 
 
 In. attempting' to shew in what respects the case 
 thus put may have differed from the actual X)ne, I 
 shall advert to each of the four points which have 
 just been mentioned. 
 
 First, the notes of the Bank of England have a 
 circulation, which is not perfectly exclusive, over 
 ■any definable district. In the metropolis itself, and 
 .'in its:: neighbourhood j they are the only currer^t 
 ^aper,> some coin circulating also. In many- 
 distant parts of the country -a very small quantity 
 of Bank of England notes circulate, ^ and also much 
 other paper, as 'Well as a certain quantity of coin. 
 This London and country coin, as well as country 
 paper, iViay happen through various causes to sup- 
 plant the Bank of England paper, or to be sup- 
 planted by it, either in a greater or in a less degree; 
 and every such variation will have an effect which 
 it is necessary to consider. If, for example, a larger 
 quantity than usual of Bank of England notes 
 should circulate ill 'the c6untry ; then ttig quantity 
 of them which i-emains applicable to the uses of 
 the London district will be smaller, supposing the 
 total amount issued to be the same. In the case, 
 therefore, of more Bank of England notes circu- 
 Jating in the country, and in the case also, of sottife 
 Bank of England notes occupying the place of gui- 
 neas antecedently current in London, an issue of 
 a larger total quantity of Bank of England paper 
 
 will 
 
22i 
 will be necessary, in order to give the saine means 
 as before of effecting London payments, and in or- 
 der to produce the same limitation as before of the 
 total quantity of circulating paper in the country. 
 
 All the one and two pound notes of the Bank bf 
 England (a species of paper which has been issued 
 only since th6 suspension of its cash payments) 
 have clearly formed that sort of addition to the 
 bank paper of which I have been speaking. These 
 have circulated^ some in London, and many of 
 them in the country^ in the place of guineas, which 
 have disappeared ; and the amount of them has 
 lately been two millions. In order, therefore, to 
 produce the same effect on the country paper as 
 before the suspension, the total amount of Bank 
 of England notes lately circulating ought to have 
 exceeded the quantity issued before the suspension 
 by about two millionsj supposing all other things 
 the same. There are other causes which occasion- 
 ally produce variations in that part of the Bank of 
 England paper, which assists in supplying the distant 
 country circulation: and these variations may some- 
 times be considerable, and may not easily be esti- 
 mated. They probably, however, have not lately 
 been material. For though, while the practice of 
 paying in gold has been suspended, country banks, 
 on the one hand, may have been encouraged some- 
 what more than before to push their notes into cir- 
 culation, and may thus have supplanted some of 
 the paper of the Bank of England usually passing 
 
 in 
 
225 
 in their neighbourhood; they certainly, on the 
 other hand, have many of them kept lately in their 
 drawer a fund of Bank of England notes, which 
 was not heretofore deemed necessary, for the sake 
 of being able to offer these in payment of their own 
 paper*. 
 
 I have to consider, secondly, how far, allowing 
 for that difference of two millions of which mention 
 has been made, the circulating quantity of Bank of 
 England paper has lately corresponded with that of 
 antecedent periods. 
 
 The average amount of Bank of England notes 
 in circulation during three years ending in De- 
 cember 1795, appears to have been 11,975,573/. 
 The amount in circulation on the 26th of February 
 1797, the day antecedent to the suspension of the 
 cash payments of the bank, has been already stated' 
 to have been about 8,600,000/., this being that 
 very low sum to which they were then reduced. 
 By a statement of their amount on the 6th Decem- 
 ber 1800, laid before the House of Commons, they 
 appear to have been then 15,450,970/. This last 
 mentioned sum includes the two millions of one 
 and two pound notes. If these two millions are 
 deducted, the amount on the 6th December 1800 
 will exceed the average amount in three years an- 
 tecedent to the suspension of the cash payments of 
 
 * Some Bank of England notes have also been recently ctft- 
 ployed in the place of small bills on London, the use of which has 
 been discouraged by the late additional duty on bills and notes. 
 
 Q the 
 
the bank by 1,475,397/. It remains, however^ to 
 be observed, that the notes of the Bank of Eng- 
 land were stated to the House of Commons by the 
 governor of that company, in the spring of 1801, 
 to have been then reduced to a sum less by about 
 a million and a half than their amount on the 6th 
 December 1800. The total quantity, therefore, 
 of the Bank of England notes in circulation in one 
 part of the spring of 1801, if the two millions be 
 deducted, almost exactly agrees with their average 
 amount during the three years ending December 
 ^95*. 
 
 We 
 
 ♦This account of tlie comparative quantities of the Bank of 
 England notes circulating before, and of those circulating after the 
 suspension of the cash payments of the bank, differs greatly from 
 that of Mr. Boyd, who has, in his pamphlet, minutely investigated 
 the same subject. The causes of this disagreement are the fol- 
 lowing. 
 
 He mentions, as I have done, the amount of Bank of England 
 notes to have been, on the 6th December 1800, 15,450,970/. H« 
 then compares this their highest amount (for such, or nearly such, 
 I consider it to be), first with their lowest amount, namely, with 
 their amount on the 26th February 1797, which was 8,640,250/., 
 and then with their average amount for three years antecedent to 
 the suspension of tlie cash payments of the bank, viz, ii,975>573/'> 
 the same average amount at which 1 have reckoned them, for I have 
 adopted Mr. Boyd's own statement. He then infers, that, on the 
 first pf his principles of comparison, an addition of nearly four-fifths, 
 and, on the second, of three-tenths, had been made to the sum in 
 cifculatiou. 
 
 To this representation the answer is, as will appear from 
 the tex£> first, that of the 15,450,970/. stated to the House 
 
 of 
 
227 
 We have to consider, thirdly, whether the pay- 
 ments of the metropolis may be likely to have 
 been the same in the last year as in some preceding 
 years. 
 
 A subject, in the examination of w^hich there 
 may seem to be some difficulty, shall here, in 
 
 the 
 
 of Commons to be the amount of Bank of England notes in circu- 
 lation on the 6th December 1 800, thfe sum of about two millions, 
 consisting in one and two pound notes, ought to have been deducted 
 by Mr. Boyd in forming his comparison. These notes evidently 
 filled the place which was before occupied by guineas. They were» 
 for that reason, not added to the 1 3,450,970/. in the return made 
 by the bank to parliament, as they have been in the pamphlet of 
 Mr. Boyd, but were set down as a separate article. Bankers have 
 commonly given out these one and two pound notes as a substitute for 
 guineas ; and every individual, whether in London or in the country, 
 who has had a note of this description in his pocket, has obviously 
 k^pt it in the place of gold. 
 
 It is to be replied, secondly, that the sum of 8,640,250/., 
 with which one of the comparisons of Mr. Boyd is made, is that 
 remarkably low sum to which the bank improperly, as I have ven- 
 tured to suspect, and certainly to the no small distress of the metropolis, 
 had suffered their notes to fall on the day antecedent to the suspen- 
 sion of their cash payments, a sum of the smallness of which Mr. 
 Boyd himself has complained. Their notes on the 1 8th February, 
 
 that is, exactly one week before, were .£, 9,137,950 
 
 They were two weeks before 9>43 1>550 
 
 Three weeks before 9,667,46© 
 
 A month before , 10,024,740 
 
 And five weeks before * r. . . . 10,550,830 
 
 Their notes, also, immediately after they were at that lowest sum of 
 8,640,250/., with which Mr. Boyd forms the first of his comparisons, 
 were encreased considerably : they were, on the 4th March, that is, 
 
 Q, 2 one 
 
228 
 
 the first place, be discussed. It has been already 
 observed, that the quantity of Bank of England 
 notes is limited by the bank directors who issue 
 them J and that the quantity of country bank pa- 
 per, though restricted in an equal degree, is li- 
 mited not by the act of the issuers, but through 
 the circumstance of its exchangeableness for Lon- 
 don paper. By saying that the country paper 
 is limited in an equal degree, I always mean 
 not that one uniform proportion is maintained 
 between the quantity of the London paper and 
 that of the country paper, but only that the quan- 
 tity of the one, in comparison with the demand 
 for that one, is the same, or nearly the same, as. 
 the quantity of the other in proportion to the call 
 for the other. 
 
 one week after, 10,416,520/,, and they were gradually raised still 
 higher. 
 
 There can, therefore, be no doubt that the comparison ought to 
 have been made with the number which were in circulation, not at 
 the remarkable sera of the 26th February 1797, but only during an 
 average of years preceding the suspension. 
 
 The fact of the Bank of England notes having been re- 
 duced near ti million and a half in the spring of J 801, a circum- 
 stance which renders the amount of them almost exactly equal at 
 the two periods at which both I and Mr. Boyd have made our com* 
 parison, could not be known to Mr. Boyd at the time of writing his 
 pamphlet. 
 
 Mr. Boyd founds, on the supposed fact of the vast encrease of 
 Bank of England notes, the opinion which he states in the begin- 
 ning of his Work, that " to the augmentation of bank paper not con- 
 vertible into specie, more than to any other cause, is to be ascribed the 
 high price of provisions." 
 
 The 
 
229 
 The reader, in reasoning on this state of the 
 case, may, perhaps, be inclined to infer, and it is 
 a question which seems to deserve consideration, 
 that when the Bank of England paper is more than 
 usually restricted, the pressure in London which 
 in such case takes place (for it is there that the 
 general pressure originates), may be likely to re- 
 lieve itself either by drawing to London ^ large 
 part of the Bank of England paper usually circu- 
 lating in the country, the place which it occupied 
 being supplied by country paper, or by causing 
 many of the payments of London to transfer them- 
 selves to the country^ If either of these two con- 
 sequences should result from every pressure in Lon- 
 don, then, even though the total amount of Bank of 
 England paper should be diminished, that part of it 
 which circulates in London may possibly continue to 
 be just as sufficient as before to perform the task as- 
 signed to it of effecting the London payments ; and 
 in that case the country paper also, since it always 
 takes the price of the London paper, will so far en- 
 crease itself as to become in the same manner as be- 
 fore commensurate with the country payments. If 
 any considerable effect of this kind should follow from 
 every limitation of the London paper; then the prin- 
 ciple which was laid down in the close of the former 
 Chapter in a great measure fails : and the bank has 
 not that power which was ascribed to it of restricting 
 the quantity and regulating the value of the paper 
 of the country. 
 
 Q 3 That 
 
230 
 
 That a pressure in London is not likely to pro- 
 duce the first of the two effects which have been 
 mentioned, that of drawing to London the Bank 
 of England notes circulating in the country, is a 
 point on which I shall not separately dwell, except 
 so far as to observe, that a pressure in London, if 
 it be very sudden and severe, may be suspected of 
 having a tendency directly contrary to that of 
 bringing Bank of England notes from the country 
 to London -, for it is apt, through the alarm which 
 it excites, to produce, as was formerly explained, 
 an extraordinary diminution of country bank notes ; 
 a diminution, I mean, which is even greater in pro- 
 portion to the country payments to be effected than 
 that of the notes of the Bank of England in propor- 
 tion to the London payments. In such case, a 
 necessity is created for the substitution of other cir- 
 culating medium in the place of the country paper 
 which has been suppressed. The substitute prin- 
 cipally demanded will be gold ; but some Bank of 
 England paper is not unlikely to be also employed 
 in filling the void* 
 
 In proceeding to enquire whether a pressure in 
 London, arising from the restriction of Bank of 
 England paper, is likely to cause the transfer to the 
 country of many of the payments usually made in 
 London, 1 shall advert to past experience. 
 
 It was mentioned in an early Chapter of this 
 Work, that there seems to have existed, for some 
 tiine, an encreasing disposition to transfer to London 
 
 the 
 
231 
 
 the pecuniary part of even those commercial trans-* 
 actions which be long properly to the country* It here 
 naturally occurs to us to enquire for what reason the 
 restriction of the notes of the Bank of England by 
 the issuers in time past, has not served to remove 
 this disposition, and even to cause the quantity of 
 London payments, compared with those of the 
 country, continually to lessen, rather than to en- 
 crease. The Bank of England paper, let it here 
 be observed, Operated before the suspension of the 
 cash payments of the bank in restricting the country 
 paper, exactly in the same manner as it has done 
 since that event. It is comtnonly and very naturally 
 supposed, that it was the exchangeableness of the 
 country paper for guineas which used to sustain its 
 value. This, however, was not the case : its value 
 was sustained by its exchangeableness for Bank 
 of England notes. The country paper bore al- 
 ways and necessarily the same value as the notes 
 of the Bank of England ; and not always or ne- 
 cessarily the same value as the gold contained in 
 the coin, for which the country paper was exchange- 
 able. It is true, indeed, that the quantity of gold 
 in our coin had an influence on the value of country 
 paper. It had, however, only an influence which 
 was imperfect and indirect. It served to dictate to 
 the directors of the Bank of England what was that 
 quantity of paper which they might properly emit. 
 For, if at any time the exchanges of the country be- 
 came so unfavourable as to produce a material ex- 
 
 Q 4 cess 
 
232 
 cess of the market price above the mint price of 
 gold ; the directors of the bank, as appears by the 
 evidence of some of their body given to parliament, 
 were disposed to resort to a reduction of their paper 
 as a means of diminishing or removing the excess, 
 and of thus providing for the security of their esta- 
 blishment. They, moreover, have at all times been 
 accustomed to observe some limit as to the quantity 
 of their notes, for the same prudential reasons. 
 
 This interest in the prevention of any great ex- 
 cess of the market price above the mint price of 
 gold was in no degree felt by the country banker ; 
 for the loss sustained by every new conversion of 
 bullion into coin was borne not by him, but by the 
 Bank of England, out of whose coffers all the gui- 
 neas called for in every part of the kingdom were 
 supplied. The Bank of England, if coin was de- 
 manded of it, had to purchase bullion at a losing 
 price. The country banker, if coin was in like 
 manner required of him, had only to possess himself 
 of a Bank of England note, which was exchange- 
 able at the bank for guineas without any discount. 
 If, therefore, the directors of the Bank of Eng- 
 land suffered their paper to be worth less than the 
 gold contained in the coin for which their paper 
 was exchangeable, the country paper vvas worth 
 less also ; or, in other words, the degree of ex- 
 pence and difficulty which the country banker in- 
 curred in obtaining guineas, was to be measured 
 by the degree of expence and difficulty incurred in 
 
 obtaining 
 
233 
 
 obtaining Bank of England notes, and not by the 
 degree of expence and difficulty incurred in buying 
 and then coining gold. The necessity which the 
 Bank of England felt of curing any great excess of 
 the market price above the mint price of gold, 
 caused the limitation of Bank of England paper; 
 and then this limitation, in proportion as it took 
 place, produced the limitation of the paper of the 
 country. It was in this manner that an excessive 
 issue of the paper of the kingdom was restrained be- 
 fqre the suspension of the cash payments of the Bank 
 of England. If, then, the directors of the bank 
 were used before the suspension of their cash 
 payments to limit their issues through a necessity 
 which sometimes urged them, and if thus they 
 limited the paper of the country in the manner 
 which has been described, it follows that, sup- 
 posing them after that event to have restrained their 
 issues in like manner, though through a somewhat 
 less urgent motive, the general effect must have 
 been the same. There can, therefore, be no more 
 reason to suppose a transfer to have lately takea 
 place of London payments to the country, or of 
 Bank of England notes circulating in the country 
 to London, than there is to suppose the same trans- 
 fer to have taken place in the time when the bank 
 paid in gold. Both the nature of the pressure, and 
 the principle on which our paper credit stood, were 
 the same at both periods. 
 
 It 
 
234 
 
 It remains for us to enquire, how far the pay- 
 ments of London are likely to have varied through 
 any other cause. It is probable that, under ordi- 
 nary circumstances, they do not fluctuate in any very 
 considerable degree within a short distance of 
 time. War seems likely, on the whole, to en- 
 crease them, both by the additionafl business 
 in the stocks, and also by the other pecuniary 
 transactions on the account of government (trans- 
 actions generally carried on entirely in London), 
 to which it gives occasion. It also encreases 
 the payments of London, in common with those 
 of the country, by contributing to a general rise 
 in the price of articles. It is, however, neces- 
 sary to guard this observation. In respect to the 
 total quantity of consumable articles produced and 
 sold in the kingdom, war, perhaps, may be consi- 
 dered as usually making little difference ; for, while 
 it gives a spur to some, it operates as a check to 
 other branches of industry ; and, while it encreases 
 national consumption, it may possibly diminish, 
 in an almost equal degree, that of individual. 
 It raises, however, i\iQ price of commodities, and 
 thus enlarges the general amount of payments, 
 though it more particularly augments those pay- 
 ments which are made in the metropolis. This 
 general augmentation, however, of the price of 
 our articles, unattended by a similar rise in 
 the price of the commodities of other countries, 
 obstructs, as has been already shewn, the expor- 
 tation 
 
2(^ 
 
 tation of our goods ; since it renders them less able 
 to stand the competition to which they are subject 
 in foreign markets, unless a compensation for the 
 rise is afforded to the foreigner in the computation 
 of the exchange betv/een the two countries. The 
 reader may, perhaps, be led here to imagine, that 
 the bank ought to prevent this rise, according to 
 the principles which it is the object of this Chapter 
 to establish, a sufficiently considerable reduction of 
 its paper being all that is necessary for the purpose. 
 No doubt the fact is, that the tendency of goods 
 to rise is continually restrained by the limitation of 
 the paper of the Bank of England. And I appre- 
 hend that it is restrained just as much as it is pro- 
 per, or, perhaps, practicable, to restrain it, if the 
 paper of the bank is so far confined as to prevent 
 an excess of the market price above the mint price 
 of gold : for, in that case, it is restrained so far as 
 still to afford to our goods the opportunity of sale 
 in a foreign market, without giving to the foreigner 
 that compensation in the exchange which leads to 
 the -exportation of the current coin of the country. 
 To suppose the bank paper to be restrained much 
 farther, is to suppose a profit on the importation of 
 bullion ; a profit, to which the continuance of the 
 importations of that article must soon put a period. 
 In saying, therefore, that war enhances the price 
 of goods, and thus causes an encrease of payments, 
 we ought here to bear in mind that it ought only to 
 be allowed to lift them up to that point to which 
 
 they 
 
236 
 they can be raised consistently with the general 
 maintenance of our exchanges ; and that, so far as 
 they permaneiitly stand above that point, it is the 
 enlarged and too great quantity of notes of the 
 Bank of England which is to be considered as the 
 cause of the high price of goods, rather than the 
 high price of goods which is to be taken to be the 
 cause of the enlarged quantity of notes of the Bank 
 of England*. There is considerable danger, lest, 
 in this respect, we should, in some degree, at least, 
 mistake the effect for the cause ; and should too 
 much incline to consider an advanced price of com- 
 modities to be both the cause of an encreased issue 
 of paper and the justification of it. 
 
 * It was observed in a former pUc?, tbat this difficult and dis- 
 putable point would be again adverted to in the progress of the pre- 
 sent Work. The fairest mode, as it appears to me, of determinirig 
 which ought to be deemed the cause and which the effect, is that 
 •which has been adopted in the text ; namely, to charge too much 
 paper with being the cause when the price of bullion is rendered 
 permanently higher than that of coin, and, when otherwise, to consi* 
 der it rather as an effect. By the term " permanently,*' I, however, 
 mean such a degree of permanence as may serve to shew that the 
 fell of our exchanges, and the rise in the price of bullion, are not 
 referable to any extraordinary and passing event, such as that of 
 one or even of two particularly bad harvests ; for these may not un- 
 fairly be termed temporary circumstances, though their influence may 
 extend over a period of one or two years. In general it may, per- 
 haps, also be assumed, that an excessive issue of paper has not been 
 the leading cause of a fall in the exchange, if it afterwards turns* out 
 that the exchange is able to recover it3elf without any material re- 
 duction of the quantity of paper. 
 
 War, 
 
237 
 
 War, on the contrary, may be supposed to lessen 
 the amount of general payments, or, at least, to 
 check their growth, so far as it obstructs the accu- 
 mulation of wealth and the natural progress of 
 commerce. We know^ however, that, during the 
 late war, the amount of our exported and im- 
 ported articles continued greatly to encrease. 
 This happened partly> no doubt, through the 
 general tendency of our trade to enlarge itself, 
 partly through the advantages resulting from some 
 new colonial acquisitions, and partly from the 
 circumstance of the commerce of our competitors 
 having been still more interrupted than our own. 
 Our exports and imports, it is true, form no just 
 measure of the total quantity either of our commer- 
 cial transactions or of our general payments : they 
 afford, however, some presumption of the enlarge- 
 ment of both. If we take into consideration all 
 the points which have been touched upon, there 
 will appear sufficient reason to believe, that, during 
 the^ate war, a very considerable and progressive 
 augmentation of the payments of the metropolis 
 must have taken place. 
 
 It now remains only to consider, fourthly, how 
 far circumstances may have been such as to have 
 rendered the same quantity of Bank of England 
 notes either more or less sufficient for effecting the 
 same quantity of London payments. 
 
 Several causes may have contributed to spare the 
 ,use of notes. First, it is to be remembered, that 
 a small extension of their quantity may be suffi- 
 cient 
 
258 
 
 cient to effect a comparatively largt number of ad- 
 ditional payments; for the private bankers in Lon- 
 don, who are the chief holders of Bank of England 
 paper, by no means find it necessary to enlarge their 
 stock of it in tull proportion to the encreased num- 
 ber of their pecuniary transactions. The talent of 
 ceconomizing bank notes is also a continually im- 
 proving one ; and the very circumstance of the sus- 
 pension of the cash payments of the bank, by serv* 
 ing to strengthen mercantile credit, has favoured the 
 exercise of oeconomy in the use of the paper of the 
 Bank of England When payments were currently 
 made in gold, the country banks were subject to 
 sudden demands for cash through temporary alarms 
 among the holders of their notes. From these they 
 have lately been more exempt, in consequence of 
 no other option having been given to those who de- 
 manded payment of country bank paper than that 
 of receiving Bank of England notes in return. Since 
 the suspension of the cash payments of the bank, 
 credit has been less subject to interruption, and the 
 quantity both of country paper and of Bank of Eng- 
 land notes has probably been less variable; or, if 
 the fluctuations of the latter have been as consider- 
 able as before, they may have more nearly correspond- 
 ed with the variations in the wants of the public*. 
 
 To 
 
 * Immediately after the payment of the quarterly dividends on 
 the public funds, the amount of Bank of England paper in cir- 
 culation is considerably encreased; bm the expec^tion that the plenty 
 
 of 
 
239 
 To sum up the observations which have now 
 been made : it thus appears, that, since the suspen- 
 sion of the cash payments of the bank, the number 
 of its notes has been the same, or nearly the same, as 
 before that event, if those two millions of one and 
 two pound notes, which have been a mere substitute 
 for gold, are deducted; that the payments, how- 
 ever, of the metropolis have been much encreased ; 
 but that, on the other hand, the same number of 
 
 4 
 
 of it will soon cease, disposes bankers and others to hold for a time a 
 superfluous quantity. In consequence of the additions to the public 
 debt made during the war, the occasional enlargements of. the 
 quantity of bank paper, arising from this cause, have become 
 much more considerable. A diminution of notes, if known to be 
 temporary, and if also moderate, produces, on the other hand, 
 little pressure ; for the expectation of returning abundance serves to 
 maintain confidence, and to dispose the bankers to deem a somewhat 
 reduced stock of bank paper for the time sufficient. The chief oc- 
 casion of a diminution of the number of bank note« has been, that 
 of the payment of the instalments on the public loans. The govern- 
 ment, during the latter years of the War, issued from week to week 
 a species of exchequer bills, which they received back in part of the 
 payments . on the loans. By thus lessenifig the quantity of paper 
 taken out of circulation at the time of each instalment, they gave 
 new facility to the operation of raising the public money ; an ope- 
 ration which, however great, has in itself no other difficulty than 
 that which arises from the too sudden diminution of London paper 
 to which it is apt to lead. It can scarcely be necessary to add, that 
 a great loan may, nevertheless, portend difficulty in other quarters, 
 and that the degree of ease with which the payment of our loans 
 may be accomplished, is, therefore, no true criterion of the state 
 of the public resources. 
 
 notes 
 
240 
 
 notes has probably sufficed of late for more than 
 the same number of payments. 
 
 It has not been the object of these remarks to 
 found upon them any exact estimate of the effect 
 which the quantity of Bank of England paper lately 
 issued is likely to have had on the cost of commo- 
 dities, or on the market price of bullion ; but ra- 
 ther, on the contrary, to shew that no such esti- 
 mate can with confidence be formed, on account 
 of the number of circumstances, some of them 
 very difficult to be appreciated, which affect the 
 question. I believe the fact to be, that very little 
 correspondence has subsisted between the fluctuar 
 tion in the amount of Bank of England notes in 
 circulation at different times, and the variations in 
 the general price of articles at the same periods; and 
 this want of a very discernible connexion between 
 the cause and the effect, seems not unlikely to have 
 led some persons too hastily to conclude, that the' 
 enlargement and diminution of Bank of England 
 paper have not that influence on the exchanges or 
 on the price of commodities which has been spoken 
 of*. 
 
 Let 
 
 * It is not long since the Bank of England first adopted the custom 
 -of issuing notes for five pounds. These have circulated for some 
 years in the place partly of gold, partly of country bank notes, 
 and partly also, though it is impossible to say in what degree, 
 in the place of ten pound Bank of England notes. There is, 
 thetefore, an unknown number of notes for five pounds which 
 
 ha5 
 
241 
 
 Let it, therefore, be carefully remembered, that 
 I by no means suppose a limitation of London pa- 
 per to operate simply by causing an equal reduction 
 of country paper, and then such a fall in the price 
 of goods over the kingdom as is exactly commen- 
 surate with the general diminution of paper; and, 
 finally, also such a variation in the exchange as is 
 precisely proportionate to the reduction of paper^ 
 and, to the fall in the price of goods. Counteracting 
 circumstances of various kinds may prevent these 
 proportions from being maintained : and the full 
 effects may not follow their cause until after the 
 lapse of some period of time. 
 
 It must, in particular, be borne in mind, that a 
 limitation of Bank of England paper affects prices 
 in a great measure by its operation, on the state 
 of commercial confidence; and this influence on 
 the minds of men will be far from uniform. A small 
 limitation of Bank of England paper may give a 
 great shock to confidence, when the state of cre- 
 dit is delicate ; and may, therefore, at such a time, 
 much discourage speculation. The very same limi- 
 tation, under other circumstances of the country, 
 may be almost without effect. 
 
 has formed that sort of addition to the Bank of England paper, which 
 has no influence in raising the prige of articles. This is only 
 one of many circumstances, some operating in one direction, audi 
 some in the contrary, which render it difBcult to draw a correct in- 
 ference from those accounts of the quantity of Bank of England 
 notes circulating at a variety of periods, which have been lately laid 
 before parliament, 
 
 R But 
 
242 
 
 But although there is so great difficulty in estimat- 
 ing the precise influence on the cost of articles, or 
 on the market price of bullion, which each altera- 
 tion in the quantity of Bank of England notes may 
 produce, there is no reason, on that account, to 
 doubt the general truth of the proposition which 
 was laid down in the close of the former Chapter, 
 namely, that the restriction of the paper of the 
 Bank of England is the mean both of maintain- 
 ing its own value, and of maintaining the va- 
 lue, as well as of limiting the quantity, of all the pa- 
 per in the country. Although it .should be diffi- 
 cult, or even impossible, to determine to what point 
 the limitation must be carried in order to produce 
 a given effisct, it may be sufficiently clear that the 
 tendency of the limitation is to secure the benefit 
 in question. 
 
 The perplexities of this subject being such as I 
 have now described, it naturally occurs to us to rea- 
 son from the effect to the cause, and to infer a 
 too great issue of paper when we perceive that 
 there is an excess of the market price above the 
 mint price of gold. But this inference is one which, 
 for reasons formerly given, should always be very 
 cautiously made ; for it is to be borne in mind, 
 that the excess may arise from other causes besides 
 that of a too great emission of paper. Let the man- 
 ner in vi'hich an extravagant issue of notes operates 
 in producing the excess be recollected. It raises, 
 and probably by slow degrees, the cost of British 
 
 goods. 
 
243 
 goods. It thus obstructs the export of them, unless 
 a compensation for the high price is afforded to the 
 foreign buyer in the rate of exchange ; and the vari- 
 ation in our exchange produces a low valuation 
 of our coin, compared with that of bullion. The 
 state of the exchange, then, is the immediate 
 cause of the evil in question. Now, a suspension of 
 the foreign demand for British manufactures, or an 
 encrease of the British demand for foreign articles, 
 circumstances which may arise when there is no 
 encrease of bank paper, are the much more fre- 
 quent as well as the more obvious causes of a fall 
 in our exchange, and, therefore, also of a high 
 price of bullion. 
 
 We are thus led back to the point which was 
 dwelt upon some time since. Our two defective 
 harvests, and the interruptions experienced in our 
 export trade, very sufficiently account for the late 
 fluctuation of our exchanges. In these respects there 
 has evidently been much in our situation which has 
 been remarkable ; while, as has been proved in the 
 present Chapter, there has been nothing which 
 ought to be deemed extraordinary in the quantity 
 of paper issued by the Bank of England. 
 
 It must, however, be admitted, that if an exces- 
 sive issue of Bank of England notes produces, as 
 i^ has been shewn to do, an unfavourable exchange ; a 
 reduction of them below the accustomed number 
 must have a tendency to improve our exchange, by 
 whatever means it may have been made to turn 
 
 R 2 against 
 
244 
 against us. But, after this admissidn, it may be re- 
 marked, that it may be necessary to encounter 
 much evil in effecting the reduction. We have 
 been lately placed between two dangers; be- 
 tween that of a depreciated paper currency on the 
 one hand, and that of an interruption to our paper 
 credit, and a consequent stagnation of our com- 
 merce and manufactures, on the other. - And, on the 
 whole, we have, perhaps, owed much to that 
 liberal policy of the directors of the Bank of Eng- 
 land, which has led them to maintain a quantity of 
 notes in appearance encreased, and in reality not 
 diminished, in ispite of some political as well as 
 popular prejudices on this subject; at a time, also, 
 when their conduct was observed with particular 
 jealousy, on accolint of the suspension of their 
 cash payments, and even when the course of ex- 
 change w^as much against us. Whether the bank 
 may have erred a little on the one side or on the 
 other, is a point which it would be invidious very 
 critically to examine, and difficult to determine with 
 certainty. It seems sufficiently clear, that if, at the 
 period of the late northern confederacy, when our 
 exchanges were the least favourable, the bank had 
 materially diminished its paper, the embarrassment 
 of our manufacturers and merchants, which the 
 state of the continent had begun to render great, 
 would have immediately become far greater; and 
 that manufacturing labour, which was then in some 
 degree interrupted bv a suspension of the demand 
 
 for 
 
for British goods on the continent, wpuld have been 
 likewise obstructed at the same season (a season 
 of peculiar pressure on the common people, from 
 the circumstance of the scarcity) by a more than 
 ordinary difficulty which our manufacturers would 
 have experienced in effecting their payments. The 
 stock of goods in our warehouses, made ready 
 for subsequent exportation, would, in this case, 
 have been smaller -, and we might, therefore, on the 
 whole, have had to look forward to a less early rec- 
 tification of our exchanges. The difficulties of 
 1793 might have been added to those of the spring 
 of 1801 ; and if commercial confidence had failed, 
 political credit might in consequence have been 
 shaken at one of the most critical periods of oqr 
 history. 
 
 From the principles recently laid ^own, some ad- 
 ditional inferences may be deduced. 
 
 It was the object of several former Chapters 
 to point out the evil of a top contracted issue 
 of paper. The general tendency of the present, 
 as well as of the preceding one, has been to shew 
 the danger of a too extended emission. Tw^o 
 kinds of error on the subject of the aflTairs of the 
 Bank of England have been prevalent. Some poli- 
 tical persons have assumed it to be a principle, that 
 in proportion as the gold of the bank lessens, its 
 paper, or, as is sometimes said, its loans (for the 
 amount of the one has been confounded with that 
 of the other), ought to be reduced. It has been al- 
 ready shewn, that a maxim of this sort, if strictly 
 
 R 3 followed 
 
246 
 
 followed up, would lead to universal failure. A 
 sentiment has prevailed among other persons, which 
 has bordered on a very different extreme. They 
 have complained of nothing, except the too scanty 
 liberality of the bahk, and have seen no danger in 
 almost any extension of its discounts, or profusion in 
 the issue of its paper, provided only the bills dis- 
 counted (that is, the bills received by the bank in 
 return for its notes) were real bills, and were those 
 also of sufficiently safe and responsible houses. 
 
 But it will appear from the prmciples laid down 
 in this and the preceding Chapter, that there may 
 be a disposition among very rich and punctual men 
 to borrow a sura far exceeding that which it may 
 be prudent in the bank to lend. Every additional 
 loan obtained from the bank, if we suppose its gold 
 to remain the same, implies an encreased issue of 
 paper; but the measure of such issue has been 
 shewn to be regulated by aprinciple which is noteven 
 connected with the question of the opulence of the 
 borrowers at the bank, or of the nature of the bills 
 discounted. The borrowers make a promise (and 
 we will suppose that there is no reason to doubt 
 the fulfilment of it) that the loan shall be repaid 
 with punctuality. But in what manner is the payment 
 to be effected? It will be made either in notes fur- 
 nished by the Bank of England itself, or else in 
 gold supplied by the same company, which notes 
 and gold the bank must take care to render in- 
 terchangeable for each other; and this is only to 
 
 be 
 
247 
 be done by keeping down their quantity, and tlius. 
 maintaining their value. 
 
 Objections have been made by some to the mo- 
 nopoly of the bank. And its indisposition to lend to 
 safe houses, on the security of real bills, to an ex- 
 tent which is deemed sufficient, has probably been 
 the circumstance which has induced some mer- 
 cantile persons to favour the idea of the establish- 
 ment of a rival establishment. Competition^ it is 
 thought, would lead to greater liberality ; and, in a 
 variety of respects, would operate beneficially in 
 this case, as it is known to do in many others. 
 
 It has been evinced, however, in the present 
 Chapter, that we derive a material advantage from 
 the power enjoyed by the Bank of England of 
 exclusively furnishing the paper circulation of the 
 metropolis. To this very circumstance the bank 
 stands indebted for its faculty of regulating all the 
 paper of the kingdom. On the bank is devolved 
 the task of providing guineas for the whole coun- 
 try : with the bank is lodged the power of so restrict- 
 ing the general paper, as to render bullion purchas- 
 able, except in some extraordinary cases of alarm 
 or difficulty. If these excepted cases should arise, 
 and the cash payments of the bank should be 
 suspended, an event of the possible recurrence of 
 which we must not altogether exclude the idea; 
 then the same circumstance of the monopoly of the 
 bank affiards to it the means of still sustaining the 
 value both of its own paper and of that of the 
 
 R 4 whole 
 
248 
 
 whole island. It serves also to impose upon the di- 
 rectors of this powerful company a complete respon- 
 sibility. If a rival institution to the Bank of Eng- 
 land were established, both the power and the re- 
 sponsibility would be divided; and, through the 
 additional temptation to exercise that liberality in 
 lending, which it is the object of competition to 
 promote, the London notes, and also the country 
 bills and notes, would be more liable to become 
 •excessive. Our paper credit would, therefore, 
 stand in every respect on a less safe foundation. 
 
 CHAP. 
 
Q49 
 
 CHAP. X- 
 
 Objections to the Doctrine of the tzvo preceSing 
 Chapters a?iszvered, — Of the Circumstances zvhick. 
 render it necessary that the Bank should impose 
 its oivn Limit on the Quantity of its Paper,^^ 
 Effect of the Law against Usury, — Proof of the 
 Necessity of restricting the Bank Loans, draxvn 
 from the Case of the Transjer of Capital to Fo- 
 reign Countries, 
 
 >INCE it Is not improbable that the 
 reasoning of the preceding Chapters may have fail- 
 ed to produce full conviction in the mind of those 
 who have been in the habit of deerning all limita- 
 tion of the bank paper by the bank itself to be unne- 
 cessary ; some few pages may be usefully employed 
 in answering popular objections to the doctrine 
 which has been laid down, and in more fully elu- 
 cidating the subject. 
 
 " The encrease of Bank of England paper,*' we 
 will suppose it to be still said by an objector, '* is 
 *? the effect and not the cause of an advanced 
 " price of commodities. To enlarge the Bank 
 " of England notes merely in proportion as safe and 
 " real bills are offered in return for them, is only to 
 " exchange one species of paper for another, 
 
 " namely, 
 
250 
 
 " namely. Bank of England notes for bills, which/ 
 ** though not so current or so safe as bank notes, 
 ** are sufficiently worthy of credit. It is, there- 
 •' fore, simply to afford a guarantee to the trans- 
 " actions of the merchant, and thus to render 
 " that accommodation to commerce which it be- 
 ** longs to the bank to give/' 
 
 " The depreciation of paper," it may be added, 
 ", is apt to arise not so much from an extension of 
 " its quantity, as from a want of sufficient confi- 
 •* dence in it. The great object of the bank should, 
 " therefore, be to maintain the public confidence; 
 " to which it contributes by furnishing, in return 
 " for bills confessedly good, a species of paper still 
 ** better. The evil of an unfavourable exchange, 
 " and of a consequent high price of gold, arises 
 *' from an unfavourable balance of trade, and from 
 « that cause only. The true mode of preventing this 
 *' evil, or of remedying it, if unfortunately it exists, 
 " is to encrease the national industry. The way 
 *' to encourage industry is to give full scope to 
 " trade and manufactures by a liberal emission of 
 " paper. The balance of trade will not fail to be 
 " rendered favourable by that abundance of ex- 
 " portable articles which the labour thus excited 
 *' must necessarily create. The course of ex- 
 *• change will, consequently, be supported; all 
 " excess of the market price above the mint price 
 *• of gold w^ill be prevented; and thus the value 
 
 « of 
 
251 
 
 ** of our paper will be sustained by the very means 
 " of its encrease." 
 
 Suppose a reasoner, on the same side, to add» 
 that when the credit of the assignats of France was 
 overthrown, the fall, especially at the first, was 
 owing rather to the prevalence of distrust thaa to 
 the excessive quantity of the article, and that the 
 depreciation of assignats rarely bore a regular pro- 
 portion to the extension of their amount*. 
 
 It may, with equal truth, be affirmed by the ob- 
 jector, that if a reference be made to the prices of 
 corn in the London corn-market at various aeras, 
 and also to the account of the quantity of bank 
 notes stated by the bank to have been in circulation 
 at the same or at immediately preceding periods 
 the price of grain in London will by no means be 
 found to have been high in proportion as the number 
 of Bank of England notes has been great, and 
 
 * The following extract from Mr. Arthur Youfig's Tour through 
 France, seenns to establish the abovementioned fact, 
 
 " In September 1790, four hundred millions of assignats were 
 ** in circulation ; but the discount at Bourdeaux never exceeded ten, 
 ** at Paris fix, per cent. And in May 1791, after many hundred 
 •* millions more were issued, the discount was from seven to tea 
 ** per cent. Condorcet, with other theorists, expected that the 
 " prices of corn, and of other necessaries of life, would enormously 
 ** advance ; but the contrary happened to be the event — the price 
 ** of corn declined. The assignats amounted, on the dissolution of 
 *• the first assembly, to eighteen hundred millions.^ — Vol. I. 410 
 edition, page 520. 
 
 low 
 
252 
 
 low in proportion as it has been small ^ but that the 
 very contrary has often been remarkably the case. 
 
 To these objections it may be answered, that 
 they who represent an unlimited issue of Bank of 
 England paper as having no tendency to produce 
 the evils of a rise in the pricp of commodities 
 in Great Britain, of a fall in our exchangCj^ and 
 of an excess of the market price above the mint 
 price of gold, are bound to prove one of the two 
 following propositions : either, first, that, suppos- 
 ing the directors of the bank to make the most 
 enormous addition to their paper; to raise it, let 
 us suppose, to fifty millions, even this augmentation 
 will not lead to the consequences which have been 
 mentioned ; or if they do not afhrm this strong po- 
 sition, but admit that there is a certain quantity of 
 notes which will not fail to produce the evils in 
 question, then, secondly, in order to prove that the 
 bank need not place any limit to the issue of its 
 own paper, they are bound to shew that the bank 
 paper has a natural tendency sufficiently to limit 
 itself. 
 
 Let us separately investigate each of these two 
 points. 
 
 When we assume the fact of the bank paper 
 being raised from its present amount of about fifteen 
 millions to the sum of fifty millions, we are led, in 
 the first place, to enquire in whose hands the ad. 
 ditional sum of thirty-five millions would b^ placed, 
 
 and 
 
253 
 and what would be the motive for holding it ? i ad-' 
 mit, or rather it is a point on which I would insist^ 
 that the maintenance of the price of the assignats of 
 France by no means rested entirely, nor, for a time, 
 even principally, on their quantity. It depended 
 much on the opinion entertained by Frenchmen 
 respecting the value of the lands declared to be 
 purchasable by means of this particular kind of 
 paper, and respecting the fidelity of the French 
 government to its engagements.' Assignats, it is 
 true, bore no interest; but the prospect of an ulti- 
 mate profit to be reaped by the possessor of them, 
 would operate, for a time, exactly like an accruing 
 interest, in causing many persons to detain them; 
 and, therefore, although they were used as a circu- 
 lating medium, it is probable that only a part of 
 them was turned to this purpose, and that even that 
 part circulated but slowly. The reader is here de- 
 sired to recollect a point which was explained in 
 an early part of this work -, namely, that the quan- 
 tity of circulating medium which can be em- 
 ployed without injury to its value, is to be esti- 
 mated not merely by its proportion to the quantity 
 of trade or of payments, but also by the relative 
 rapidity of its circulation. A species of circu- 
 lating medium which changes hands once in ten 
 days, win need to be a hundred times as great 
 in quantity as the paper which passes through 
 ten hands in one day. When that sanguine spirit 
 which had at first inspired the holders of assignats 
 
 subsided. 
 
254 
 subsided, the article would naturally sink in value^ 
 with considerable rapidity; and in proportion as it& 
 price fell, the French government would be under the 
 necessity of extending its issues. It is, therefore, not at 
 all surprising that French assignats should, for a time, 
 have borne a price which was proportionate not so 
 much to their quantity as to their credit. Their 
 quantity, however, after a certain period, operated 
 on their credit, and became a very powerful cause 
 of their depreciation. 
 
 Bank of England notes are exactly the converse 
 to assignats in the points which have been men- 
 tioned 3 and their value, on that account, will be 
 found to depend not so properly on their credit as 
 on their quantity. It is true, that when, in conse- 
 quence of alarm, a run is made upon the bank for 
 guineas, the same confidence which is placed in 
 gold is not reposed in Bank of England paper. 
 Even in this case, however, it is only a small part of 
 the community which is eager for gold : the holders 
 of a very large proportion of the bank paper remain 
 exactly as well contented as before to use it as the 
 medium of their payments. And since the hoarders 
 of gold prefer it not to paper only, but to land, to 
 goods, and to almost every species of property, the 
 paper of the bank cannot be affirmed to fall into dis- 
 credit in consequence of applications for coin made 
 with a view to hoard it, so properly as gold may be 
 said to come into peculiar demand. In a season of 
 
 alarm. 
 
235 
 alarm, our guineas are preferred by some persons 
 both to our bank notes and to goods, on the same 
 principle on which, in a state of extreme political 
 convulsion, diamonds, because they may be still 
 more easily transported or concealed, would pro- 
 bably be preferred to gold. 
 
 By saying, therefore, that the value of bank notes 
 depends not on their credit, but on their quantity, I 
 mean to affirm that their credit, so far as it affects 
 their value, is always good, and that the common 
 fluctuations of their price, in exchange both for 
 goods and bullion, are not, in the smallest degree, 
 •to be referred to variations in the degree of confi- 
 dence placed by Englishmen in the good faith or 
 the solidity of the Bank of England. The magni- 
 tude of its capital is perfectly well known, and not 
 the slightest doubt subsists respecting the sufficiency 
 of its effects to answer much more than all its en- 
 gagements. If the rise and fall in the public con- 
 fidence in bank notes were the cause of the grada- 
 tions in their price, the period at which their value 
 >vould have been the lowest would have been that 
 which followed the suspension of the cash pay- 
 ments of the bank; an event certainly calculated, 
 more than any other which has been experienced, 
 to affect the reputation of that company. But it is 
 a most remarkable fact, and a fact decisive on 
 the present point, that the exchanges of this coun- 
 try improved, or, in other words, that Bank of 
 England paper rose in value when compared with 
 
 bullion. 
 
256 
 
 bullioDj in the months subsequent to the suspension 
 of its payments in cash. 
 
 Bank of England paper, therefore, is not apt to 
 vary in its value in consequence of the fluctuations 
 of the public confidence in it; but essentially 
 differs in this respect from the late assignats of 
 France. It presents to the holder no hope of 
 future profit from the detention of it. Not only 
 does it bear no interest (in this point, indeed, re- 
 sembling assignats), but it offers no substitute for 
 interest; it holds out no privileges, certain or con- 
 tingent, real or pretended, tempting the posses- 
 sor to detain it. There is, on the contrary, a 
 knov^n and continually encreasing loss sustained 
 by keeping it. On this account the quantity held 
 by each person is only that v^hich the amount of 
 payments to be effected by it renders, in his opi- 
 nion, necessary. 
 
 We are at present assuming, for the sake of il- 
 lustrating the subject, that thirty-five millions of 
 additional bank paper are retained in the hands of 
 the public. ' Imagine a London banker to acquire 
 his share of them. The supply of bank notes which 
 he chuses to reserve in his drawer is always esti- 
 mated by the scale of his payments ; or, to speak 
 more correctly, by the probable amount of the fluc- 
 tuations in his stock of notes, which fluctuations are 
 proportionate, or nearly proportionate, to the scale 
 of his payments. So long, therefore, as his pay- 
 ments remain the same (and they will not mate- 
 rially 
 
257 
 
 rially alter while the price of goods suffers no variai- 
 tion, supposing his transactions to retain their 
 former proportion to those of the whole king- 
 dom), he will be perfectly indisposed to hold fifty 
 thousand pounds in bank notes, in the place of each 
 fifteen thousand pounds which he has been accustom- 
 'cd to deem necessary. He will make haste to /part 
 with the whole superfluous quantity ; he will offer 
 to lend it to any safe merchants, and even at a re- 
 •duced rate of interest, in case he shall find that 
 borrowers cannot otherwise be invited. 
 
 If we imagine the merchants to become possessed 
 of the new paper, the same difficulty of accounting 
 for the detention of it remains; unless we admit that 
 the principles laid down in the two former Chap- 
 ters are just, and that the larger quantity of circu- 
 lating medium will cause goods to rise in value, and 
 will thus find for itself employment. 
 
 There seem to be only two modes in which we 
 can conceive the additional paper to be disposed 
 of. Tt may be imagined either, first, to be used in 
 transferring an encreased quantity of articles, which 
 It must, in that case, be assumed that the new paper 
 itself has tended to create ; or, secondly, in trans- 
 ferring the same articles at a higher price. 
 
 Let us examine the first of these cases. 
 
 An encreased quantity of articles can only 
 arise from additional commodities either brought 
 from abroad or produced at home through the 
 
 S exertion 
 
258 
 exertion of new industry. An extraordinary issue 
 of paper will bring goods from abroad only so 
 far as it enables the country to export either gold, 
 or additional commodities created at home, as the 
 means of paying for the foreign articles. The ex- 
 port of gold has its limit. It is, moreover, de- 
 sirable, for reasons which have been fully stated, 
 that this limit should be narrow. Whether a very 
 great emission of notes tends to encrease the quan- 
 tity of goods produced at home, is the point which 
 remains to be considered. 
 
 In examining this question, an error into which 
 it is very natural to fall must be developed. When 
 the Bank of England enlarges its paper, it aug- 
 ments, in the same degree, as we must here suppose, 
 its loans to individuals. These favoured persons im- 
 mediately conceive, and not without reason, that they 
 have obtained an additional though borrowed capital, 
 by which they can push their own particular manu- 
 facture or branch of commerce; and they are apt, 
 also, though not with equal justice, to infer, that the 
 new capital thus acquired by themselves is wholly an 
 accession to that of the kingdom ; for it does not 
 occur to them that the commerce or manufactures of 
 any other individuals can be at all reduced in conse- 
 quence of this encrease of their own. 
 
 But, first, it is obvious, that the antecedently 
 idle persons to whom we may suppose the new ca- 
 pital to give employ, are limited in number; and that, 
 
 therefore. 
 
259 
 therefore, if the encreased issue is indefinite, it will 
 set to work labourers, of whom a part will be drawn 
 from other, and, perhaps, no less useful occupa* 
 tions. It may be inferred from this consideration, 
 that there are some bounds to the benefit which is 
 to be derived from an augmentation of paper; and, 
 also, that a liberal, or, at most, a large encrease of 
 it, will have all the advantageous effects of the most 
 extravagant emission. 
 
 Let us also consider the mode in which the new 
 paper operates through the medium of these indivi* 
 dual borrowers, as unquestionably it does, in giving 
 life to fresh industry. The bank notes convey to 
 them the power of obtaining for their own use, 
 or of destining to such purposes as they please, 
 a certain portion of purchasable commodities. The 
 extraordinary emission of paper causes no immc* 
 diate difference in the total quantity of articles be- 
 longing to the kingdom. This is self-evident. But 
 it communicates to the new borrowers at the bank 
 a power of taking to themselves a krger share of th^ 
 existing goods than they would otherwise have been 
 able to command. If the holders of the new pa- 
 per thus acquire the power over a larger portion of 
 the existing stock of the kingdom, the possessors 
 of the old paper must have the power over a smaller 
 part. The same paper, therefore, will purchase 
 fewer goods, or, in other words, commodities will 
 rise in their nominal value. The proprietors of 
 
 S£ the 
 
260 
 
 tlie new paper will become greater encouragers 
 of industry than before ; the owners of the old 
 paper, being able to command less property, will 
 have less power of employing labour. For industry 
 is excited, strictly speaking, not by paper, but by 
 that stock which the paper affords the means of 
 purchasing. Money of every kind is an order for 
 goods. It is so considered by the labourer when 
 he receives it, and is almost instantly turned into 
 money's worth. It is merely the instrument by 
 which the purchasable stock of the country is dis- 
 tributed with convenience and advantage among the 
 several members of the community. 
 
 It may be said, however, and not untruly, that 
 an encreased issue of paper tends to produce a more 
 brisk demand for the existing goods, and a some- 
 what more prompt consumption of them ; that 
 the more prompt consumption supposes a dimi- 
 nution of the ordinary stock, and the application 
 of that part of it, which is consumed, to the pur- 
 pose of giving life to fresh industry; that the 
 fresh industry thus excited will be the means of gra- 
 dually creating additional stock, which will serve to 
 replace the stock by which the industry had been 
 supported ; and that the new circulating medium 
 will, in this manner, create for itself much new em- 
 ployment. 
 
 The supposition which has now been made is 
 admitted to be just. Let the reader^ however, take 
 
 notice. 
 
261 
 notice, that it assumes the demand both for goods 
 and labour to become more eager than before.— 
 Now the consequence of this encreased eagerness 
 in the demand must, unquestionably, be an en- 
 hancement of the price of labour and commodities^ 
 which is the very point for which I am contending. 
 Indeed, whatever view we take of the subject, we 
 seem obliged to admit, that, although additional in- 
 dustry will be one effect of an extraordinary emission 
 of paper, a rise in the cost of articles will be another. 
 Probably no small part of that industi^y which is 
 excited by new paper is produced through the very 
 means of the enhancement of the cost of commo- 
 dities. While paper is encreasing, and articles con- 
 tinue rising, mercantile speculations appear more 
 than ordinarily profitable. The trader, for exam- 
 ple, who sells his commodity in three months after 
 he purchased it, obtains an extra gain, which is 
 equal to such advance in the general price of things 
 as the new paper has caused during the three 
 months in question : — he confounds this gain with 
 the other profits of his commerce; and is induced/ 
 by the apparent success of his undertakings, to pur- 
 sue them with more than usual spirit. The manu* 
 facturer feels the same kind of encouragement to 
 extend his operations; and the enlarged issue of 
 paper supplies both him and the merchant with the 
 means of carrying their plans into effect. As soon, 
 however, as the circulating medium ceases to en- 
 
 S 3 crease. 
 
262 
 crease, the extra profit is at an end; and, if we as» 
 sume the augmented paper to be brought back to 
 its ordinary quantity, we must suppose industry to 
 languish for a time, through the ill success which 
 will appear to attend mercantile transactions. 
 
 Mr. Hume has an observation in his Essay on 
 Money, which, in some degree, confirms the re- 
 marks which have been made in the text, Having 
 represented an influx of money as exciting industry 
 (and we may presume an encrease of paper to have 
 exactly the same effect), ^' At first," he says, ** no 
 *^ alteration is perceived j by degrees the price rises 
 ^^ first of one commodity, then of another, till the 
 " whole, at last, reaches a just proportion with the 
 *' new quantity of specie which is in the kingdom, 
 <^ In my opinioriy it is only in this interval or 
 *' intermediate situation between the acquisition of 
 *^ money and rise of prices'" (Mr. Hume must mean, 
 no doubt, the completion ot the rise, and not the 
 commencement of it) " that the encreasing quantity 
 **- of gold and silver is favourable to industry'^,'* 
 
 It 
 
 ♦ Mr. Hume, in observing that, when money encreases, *'the price 
 ♦* rises first of one commodity, then of another, till the whole, at last, 
 ♦< reaches a just proportion with the new quantity of specie which is 
 ** in the kingdom," appears to me not sufficiently to advert to the 
 tendency of money to go abroad as soon as it shall have raised th? 
 gold prince of articles above their level in other countries, allowing 
 for the charges of transportation ; a subject which will be more 
 folly seated of ia the next Chapter, He also describes the ope- 
 
 ration 
 
263 
 It must be ^Iso admitted, that, provided we 
 assume an excessive issue of paper to lift up, as 
 it may for a time, the cost of goods though not 
 the price of labour, some augmentation of stock 
 will be the consequence ; for the labourer, accord- 
 ing to this supposition, may be forced by his ne 
 cessity to consume fewer articles, though he may 
 exercise the same industry. But this saving, as 
 well as any additional one which may arise from 
 a similar defalcation of the revenue of the unproduc- 
 tive members of the society, will be attended with a 
 
 ration of an encrease of coin in raising prices as proceeding somewhat 
 more slowly than, perhaps, it would be found to do. An augmenta* 
 tion of Bank of England notes operates, no doubt, in this respect, more 
 quickly than an encrease of money j for the London bankers, who are 
 the great holders of bank paper, are likely to be much less disposed 
 to detain, for example, a double quantity of it, than all the individuals 
 of the kingdom are to detain in their several drawers, or in their pockets, 
 a double quantity of guineas. The banking system, by committing 
 the business of payments to few hands, has made much difference 
 in respect to the time within which an encreased quantity of circa- 
 lating medium may be supposed to raise the price of articles. It 
 has given to many great holders of Bank of England paper a very 
 strong interest on the side of not keeping a superfluous quantity 
 of it. 
 
 That an encrease of the circulating medium tends to afford teni» 
 porary encouragement to industry, seems also to be proved by the 
 effects of the Mississippi scheme in France ; for it is affirmed by * 
 French writers, that the notes of Mr. Law's bank appeared for a 
 time to have a very powerful influence in extending the demand for 
 labour, and in augmenting the visible and honajide property of thd 
 kingdom, 
 
 S4 propor- 
 
264- 
 proportionate hardship and injustice. This supposi^ 
 tion also implies the acknowledgment of the point foy 
 which we are contending, that an encreased issue of 
 paper tends to raise the price of commodities. 
 
 It has thus been admitted that paper possesses 
 the faculty of enlarging the quantity of commodities 
 l^y giving life to some new industry. It has, how- 
 ever, been affirmed, that the encrease of industry 
 will by no means keep pace with the augmentation of 
 paper. The question now to be considered, is, 
 whether, if we suppose thirty-five mJIlions of new 
 paper to be suddenly issued, the fresh industry which 
 would, consequently, be excited, would create a 
 quantity of goods, the sale of which would give em- 
 ployment to all the new paper. Let it be ad- 
 mitted, for the sake of illustrating this point, that 
 the thirty-five millions of additional bank notes will 
 have the extraordinary power of calling at once 
 into being thirty-five millions of new goods ; still it 
 may be remarked, that even all this additional pro- 
 perty would by no means find employment for that 
 equal quantity of paper which is here assumed to 
 have given existence to it. 
 
 We shall be able to explain this circumstance, 
 ^s -yvejl ^s to throw some new light on the 
 general §ubjecj:, by supposing an individual. A, to 
 become, in consequence of an extraordinary issue 
 pf paper, a new borrower at the bank to the ex- 
 |:cnt of twenty thousand pounds. The twenty thou- 
 sand 
 
{ MNIVCRSfTY ] 
 
 265 ^"^SikLFonjiSt^ 
 Band pounds, while it is held in the shape of paper, 
 affording him no interest ; he will make haste to 
 part with it, by purchasing goods, stocks, land, or 
 some other article, to the extent of the sum in ques- 
 tion. Suppose him to make the purchase from B, in 
 three days after he received the notes. B is now in 
 possession of twenty thousand pounds in new bank 
 paper, created by the extraordinary emission ; and 
 is, in like manner, in haste to part with it. Ima- 
 gine him, also, to pay away the same paper in return 
 for goods at the end of three days. Thus the same 
 notes will in six days have effected two purchases 
 amounting together to forty thousand pounds. If 
 we imagine the like transaction to be repeated 
 again and again ; the same notes will in twelve days 
 have effected the purchase of goods amounting to 
 eighty thousand pounds ; in about a month to two 
 hundred thousand pounds; and in a year to, about 
 two millions. Thirty-five millions of new paper 
 will thus effect in a year the sale of goods to 
 the extent of two or three thousand millions. In 
 order, therefore, to account for the employment of 
 the thirty-five millions, we must assume, if we al- 
 low no rise in prices to take place, such a new 
 quantity of goods to be called into existence by the 
 magic influence of the new paper, as to become a 
 subject for purchases, amounting, in a year, to no 
 less than these two or three thousand millions. We 
 must assume the creation not of thirty-five mil- 
 lions 
 
1266 
 lions of property, but of five, ten, or, perhaps, twenty- 
 times that sum; or else we must suppose, what 
 is not supposable, that the newly created capital of 
 thirty-five millions changes hands as frequently as 
 the thirty-five millions of bank notes which created 
 it ; that is to say, that the new property undergoes 
 a fresh sale on every third day. 
 
 The case which has been put is inaccurate, inas- 
 much as the payments effected by bank notes are on 
 the account not merely of goods and other articles 
 sold, but likewise of numberless sums borrowed and 
 repaid. It is probable, however, that payments of 
 this latter kind will always bear a nearly uniform 
 proportion to those of the other class. The general 
 inference v^hich was intended to be drawn from the 
 case, will, therefore, be just. 
 
 In speaking formerly of the reduction of bank 
 paper, much pains were taken to point out the 
 important difference between that limitation of 
 loans which leads to a diminution of paper, and 
 that which produces no such diminution; and it was 
 then observed, that it was by the quantity of Bank 
 of England paper, and not by the amount of loans, 
 or by the amount of loans so far only as they influ- 
 ence the quantity of paper, that a judgment was 
 to be formed of the pressure on the metropolis, and 
 ©f the reduction of prices. Many of the remarks then 
 made respecting the limitation of bank paper, apply 
 with nearly equal force to the subject of its encrease. 
 
267 
 
 It bas now been fully shewn, first, that Bank of 
 England paper is an article of such a nature, that a 
 very superfluous quantity of it will never be for a 
 long time retained in any quarter; and, secondly, 
 that the vast encrease of it, which, for the sake 
 of more convenient discussion, was assumed to 
 take place, cannot possibly create such a new ca- 
 pital as shall furnish the new paper with employ- 
 ment. There remains, therefore, no other mode 
 of accounting for the uses to which the additional 
 ■supply of it can be turned, than that of supposing 
 it to be occupied in carrying on the sales of the 
 same, or nearly the same, quantity of articles as 
 before, at an advanced price, the cost of goods 
 being made to bear the same, or nearly the same, 
 proportion to their former cost, which the total 
 quantity of paper at the one period bears to the total 
 quantity at the other. 
 
 We are thus brought, though by a different 
 course, to the point at which we arrived in an early 
 part of a former Chapter. An enlarged issue of pa- 
 per, it was then observed, produces an encreased fa- 
 cility of borrowing, as well as an opinion of en- 
 creased facility ; and thus adds to the eagerness of 
 purchasers. It communicates an additional power 
 of purchasing, not only to the original borrower at 
 the bank, but successively, also, as has now been 
 shewn, to all the other individuals into whose hand? 
 the new bank notes pass in the course of their cir- 
 culation. 
 
 Very 
 
268 
 
 Very strong confirmation of the present doctrine 
 may be furnished by a reference to the case of gold. 
 No one doubts, that, in the event of an augmented 
 supply of this article from the mines, the value of it 
 would fall nearly in proportion to the extension of 
 its quantity 5 especially if it were used for the 
 sole purpose of a circulating medium, and were 
 also the only kind of circulating medium. The 
 metropolis of Great Britain is so circumstanced, 
 that the issue of an extraordinary quantity of bank 
 paper for the purpose of effecting the payments of 
 London, in a considerable degree resembles the 
 creation of an extraordinary supply of gold for the 
 general uses of the world. 
 
 It was stated in the beginning of this Chapter, as 
 one objection to the doctrine which I have been 
 endeavouring to establish, that '* to enlarge the 
 ** quantity of Bank of England notes merely in 
 ** proportion as sufficient and real bills are offered 
 " in return for them, is only to exchange one spe- 
 " cies of paper for another, namely. Bank of Eng- 
 ** land notes for bills, which, though not so eur- 
 *' rent or so safe as bank notes, are sufficiently wor- 
 " thy of credit. That it was, therefore, simply 
 ** to afford a guarantee to the transactions of the 
 ** merchant, and thus to render that accommoda* 
 ** tion to commerce which it belongs to the bank 
 " to give." This objection will be sufficiently 
 an&wered by repeating an observation which has 
 
 been 
 
269 
 been already frequently made, namely, that thej 
 effect produced by paper credit on the price of ar- 
 ticles depends not merely on the quantity of paper 
 in existence, but also on its currency, or, in other 
 words, on the rapidity of its circulation. It was 
 admitted in the objection, that bills are not cur- 
 rent like bank notes, and that it is the greater 
 currency of the latter which causes the exchange 
 to be desired. 
 
 It was mentioned, as another argument against the-- 
 doctrine which has been laid down, that corn has not 
 usually borne any sort of proportion to the quantity 
 of Bank of England paper in circulation at the same 
 time. The answer is, that the directors of the bank 
 have never augmented their notes in such a degree 
 as to be likely to produce any material alteration in 
 the general price of goods ^ that one or jnore of 
 those circumstances which were dwelt upon in 
 the preceding Chapter, may have counteracted the 
 tendency of the fluctuations of the quantity of paper 
 to produce correspondent variations in the price of 
 commodities 3 and, above all, that even a small re- 
 duction of the supply of grain can hardly fail to lead 
 to a rise in its value when' exchanged for paper, so 
 great as to forbid all comparison between the 
 effects of an alteration of the quantity of the one 
 article and of an alteration of the quantity of the 
 other. Paper has been spoken of as raising the 
 
 C08( 
 
270 
 
 cost of commodities, at the most, only in propor- 
 tion to its encreased quantity. But in the case 
 of a diminished supply of corn, the price rises 
 according to a very different ratio; and for this 
 obvious reason, that we cannot accustom ourselves 
 to the use of a reduced allowance of grain, in the 
 same manner in which we are able, by degrees, to 
 accommodate ourselves to a smaller quantity of cir* 
 culating medium*. 
 
 Let the principle which was laid down as regu- 
 lating the cost of all articles be recollected. The 
 
 question 
 
 * The following extract from the work of Sir W. Davenant, wha 
 wrote from 1695 to 1712, may give some idea of the vast effect 
 which a small failure of the supply of corn has on the price of this 
 necessary of life. 
 
 " It is observed, that but one-tenth defect in the harvest may raise 
 •' the price three-tenths ; and when we have but half our crop, which 
 " now and then happens, the remainder is spun out by thrift and 
 •• good management, and eked out by the use of other grain ; but 
 •* this will not do for above one year, and would be a small help ia 
 •* the succession of two or three unseasonable harvests. 
 
 ** We take it, that a defect in the harvest may raise the price of 
 •* corn in the following proportions : 
 
 " A defect of If ^^^^ ^^^ common rato 
 
 ** I tenth I'll 3 ^^"^^s, 
 
 «* 2 tenths I S^ I 8 tenths, 
 
 *< 3 tenths ----- j ;; J , six-tenths, 
 <* 4 tenths . - - - - I s I -2 eight-tenths, 
 
 «♦ 5 tenths J L4 live-tenths. 
 
 - So 
 
271 
 question of prices is a question of power, and of 
 power only; and, in the event of the scarcity of any 
 commodity, the buyers are more or less under the 
 power of the sellers, in proportion as the article 
 iii question is of more or less urgent necessity. 
 
 That the quantity of circulating paper must be 
 limited, in order to the due maintenance of its value, 
 is a principle on which it is of especial consequence 
 to insist, as it has been overlooked by some writers 
 on paper credit. In the work of Sir James Stewart 
 on Political (Economy, banks are discussed at 
 considerable length; but little intimation is given 
 of the necessity of confining the total quantity of 
 circulating paper, or of the tendency of an ex- 
 cessive emission to render the exchange unfavour* 
 able, and thus to cause gold to be drawn away, 
 
 ** So that, -when corn rises to treble the common rate, it may be 
 ** presumed that we want above one-third of the common produce ; 
 ** and if we should want five-tenths, or half the common produce, 
 ** the price would rise to near five times the common rate." 
 
 This scale is not likely to be very accurate. It is, indeed, by no 
 means clear, whether it proceeds on the supposition of a deficiency of 
 the antecedent crop only ; or of a deficiency of the total stock, that 
 is to say, of the antecedent crop and of the stock remaining over 
 from a former year taken together ; which are two very different 
 questions. And many circumstances may render such calculations, 
 however just, by no means equally applicable to every period. The 
 passage, therefore, is quoted merely for the purpose of giving some 
 general ideas on the subject. 
 
 On 
 
On the other hand, the duty of not giving out bank 
 paper, except for sufficient value received (a point 
 on which, at the present time, there is less occa- 
 sion to enlarge)^ is strongly urged by this v^^rker, 
 and the security of bills of exchange is implied by 
 him to be inadequate, that of land alone being 
 fully approved. Bank notes emitted without ob- 
 taining value in return, are termed by him paper 
 issued for " value consumed ;'* and are repre- 
 sented as the great source both of loss and danger 
 to a banking company. His mode of expressing 
 himself on this point is such as to make him appear 
 to lend much countenance to the error which it is 
 the object of the present Chapter to expose ; namely* 
 that of imagining that a proper limitation of bank 
 notes may be sufficiently secured by attending 
 merely to the nature of the security for which they 
 
 are given*. 
 
 Dr. 
 
 * " When paper is issued for no value received, the security of 
 ** such paper stands alone upon the original capital of the bank; 
 ** whereas, when it is issued for value received, that value is the se- 
 ** curity on which it immediately stands, and the bank stock is, pro- 
 ** perFy speaking, only subsidiary. 
 
 ** I have dwelt the longer on this circumstance (namely, that of 
 taking sufficient property in pledge for the notes issued), be- 
 ** cause many who are unacquainted with the nature of banks have 
 ** a difficulty to comprehend how they should ever be at a loss for 
 *» money, as they have a mint of their own, which requires nothing 
 •* buc paper and ink to create millions. But if they consider the 
 ** principles of banking, they will find diat every note issued for va- 
 
 <' lue 
 
S7S 
 
 Dr. A. Smith, who is a more Jate writer, has 
 asserted the necessity of a limitation of paper,! in 
 the passage which was quoted in an early part of 
 this work ; but he has done this in terms which 
 are inaccurate, and he has given an erroneous and 
 inadequate idea of the evil which may result from a 
 very extended emission. , 
 
 Mr. Locke has lent some countenance to the 
 error which I am endeavouring to expose, by his 
 way of considering the subject of the balance of 
 trade, which is the same mode in which I supposed, 
 in the beginning of this Chapter, an objector to 
 conceive of it. " The evil of an unfavourable ex- 
 " change," I imagined my opponent to say, " and 
 */ of a consequent high price of gold, arises from 
 " an unfavourable balance of trade, and from that 
 " only. The true way of preventing this evil, or 
 " of remedying it, if it unfortunately exists, is to 
 ^\ encrease the national industry ^ and the way to 
 *' encourage industry, is to give full scope to trade 
 ** and manufactures by a liberal emission of paper. 
 ** The balance of trade will not fail to be rendered 
 
 •* lue consumed, in place of value received and preserved, is neither 
 ** more nor less than a partial spending either of their capital or profits 
 <* on the bank."— .Stewart's Political (Economy, Book TV. Part 
 II. Chap. IV. 
 
 Chapter V. is a short chapter, of which the object is to shew that 
 ** banks" issuing circulating paper " ought to issue their notes oa 
 ** private not mercantile credit." By private credit, that of " landi 
 and personal estates" appears to be infant. * 
 
 T ** favourable 
 
27i 
 
 ** favourable by that abundance of exportable. ar* 
 ** tides which the labour thus excited must neces- 
 " sarily be supposed to create." ' '• 
 
 Mr. Locke's language respecting an unfavourable 
 balance of trade, and its influence in causing gold 
 to be melted down and exported, is as follows. 
 
 *' Profit," he says, " can be made by melting 
 *' down our money, but only in two cases. First, 
 " when the current prices of the same denomination 
 " are unequal and of different weights, some 
 " heavier some hghterj for then the traders in mo- 
 *' ney.cull out the heavier, and melt them down 
 " with profit, — The other case wherein our money 
 " comes to be melted down, is a losing trade, of, 
 ** which is the samfe thing in other words, an over 
 *' great consumption of foreign commodities. 
 *^ Whenever the over-balance of foreign trade 
 " makes it difficult for our merchants to get bills 
 "j of exchange, the exchange presently rises,- If 
 " the law makes the exportation of our coin penal, 
 ^Vit.will be melted down j if it leaves the expor- 
 '*' tatibn of our coin free, it will be carried out in 
 ** specie— one way or other, go it must. But this 
 " melting down carries not away one grain of our 
 ffu treasure out of England.r — The coming and going 
 " of that depends zvhollj/ upon the balance of 
 *' trade*." ' 
 
 • Further Coiuideratioas concerning raxiing the Value of Money. 
 
 The 
 
275 
 
 The error which I consider as encouraged and 
 supported by this passage of Mr. Locke (and much 
 similar language is to be found in other writers), is 
 this: — the passage implies, that it is the compara- 
 tive state of our exports and imports which regulates 
 the exchange, and not at all the state of the ex- 
 change which regulates the comparative state of our 
 exports and imports. It leads us to suppose, that 
 an unfavourable balance of trade (that is, the ex- 
 cess of the goods imported above those exported) 
 is exclusively the cause, and that the bad state df 
 the exchange is altogether the effect. The pas- 
 sage inclines us not at all to suspect a circumstance 
 which Mr. Hume admits in a note in his Essay oix 
 Money, namely, " that -an unfavourable exchange 
 becomes a new encouragement to export.'* r: 
 
 The point which I wish here to establish may be 
 still more clearly explained in the following manner. 
 It has been shewn in a former Chapter, and, in- 
 deed, it is stated by Mr. Locke, that the selling price 
 of bills determines the rate of exchange. Whea, 
 therefore, for example, persons abroad wishing t6 
 sell bills on England are more numerous than those 
 who are disposed to buy them, the price of bills 
 must drop ; and it must continue to fall until it be- 
 comes so low as to tempt some individuals to become 
 purchasers of them. They who buy the bills on 
 England, are the buyers of so many orders to re- 
 ceive in England either money or bank notes. The 
 money or bank notes thus received, unless left in 
 
 T2 some 
 
276 
 
 some English hand (and they will be so left in some 
 few cases only), must be invested in British articles, 
 and exported. The profit afforded by the fall in 
 the selling price of the bills must, therefore, be 
 sufficient to cause the speculation of the buyers of 
 the bills to answer — ^the speculation I mean of 
 cither bringing over British gold, which would not 
 otherwise have been transferred, or of purchasing 
 and exporting British commodities which would 
 •not otherwise have been at that time transported. 
 Thus, therefore, an unfavourable exchange may be 
 coTisidered not only as becoming, according to Mr. 
 Hume's expression, " a new encouragement to ex- 
 port," but as affording all that degree of encou- 
 ragement to export which is necessary to secure as 
 much actual exportation either of gold or of goods, 
 or both, as shall serve to equalize the exports 
 and imports; unless, indeed, the same cause, namely, 
 the unfavourableness of the exchange, should tempt 
 foreigners to remit money to England, and lodge 
 it for a time in our hands, with a view to the pro- 
 fit to be obtained by this species of speculation. 
 
 The principle which I would lay down on the 
 subject now under consideration, is, 1 think, simple 
 and intelligible, and it applies itself to all periods 
 of time, and to every kind of circulating medium 
 which may happen to be in use. I would be 
 ixnderstood to say, that in a country in which coin 
 ulone circulates, if, through any accident the quan- 
 tity should become greater in proportion to the goods 
 
277 
 
 which it has to transfer than It is in other countries, 
 the coin becomes cheap as compared with goods, or, 
 in other words, that goods become dear as compared 
 with coin, and that a profit on th^ exportation of 
 coin arises. This profit, indeed, soon ceases through 
 the actual exportation of the article which is ex- 
 cessive. 
 
 I would say again, that in a country in which 
 coin and paper circulate at the same time, if the 
 two taken together should, in like manner, become, 
 in the same sense of the term, excessive, a similar 
 effect will follow. There will, I mean, be a profit 
 on sending away the coin, and a consequent expor- 
 tation of it. V't."\-y:C):^'-i^' 
 
 I would say, thirdly, that in a country in which 
 paper alojie circulates, if the quantity be in the same 
 sense excessive, supposing the credit of the banks 
 which issued it to be perfect, the paper. will fall in 
 value in proportion to the excess, on an exactly 
 similar principle; or, in other words, that goo(ls 
 will rise ; and that a necessity will exist for grant- 
 ing, in the shape of exchange, a bounty on the ex- 
 portation of them equal to that which would have 
 been afforded in the two former suppositions, as- 
 suming the quantity of circulating medium to be 
 excessive in an equal degree in all the thre^cases. 
 
 It thus appears, that " the coming and Agoing 
 of gold" does not (as Mr. Locke expresses it, 
 and as was supposed in the objection at the be- 
 ginning of this Chapter) " depend wholly on the 
 
 T3 balance 
 
278 
 
 balance of trade." It depends on the quantity of 
 circulating medium issued ; or it depends, as I will 
 *alIow, on the balance of trade, if that balance is 
 admitted to depend on the quantity of circulating 
 medium issued. Mr. Locke, however, is very far 
 from leading his reader to conceive that the balance 
 of trade depends on the quantity of circulating me- 
 dium issued ; for he describes an unfavourable ba- 
 lance as resulting from a " losing trade,*' and from 
 an ** over great consumption of foreign commo- 
 dities;** terms which seeni to imply an unprospe- 
 rous state of commerce, and a too expensive dis- 
 position in the people, and which naturally lead to 
 the conclusion, that the prosperity of the country will 
 effectually secure us against the danger of the ex- 
 portation of our coin, whatever may be the quan- 
 tity of our paper. 
 
 It has now, I trust, been made sufficiently to ap- 
 pear, that banks, if they pay in gold, or if, while not 
 paying in gold, they maintain the value of their 
 notes, must observe some liniit in respect to their 
 emission of them. 
 
 If, indeed, we could suppose a country to have 
 no intercourse with any other, we might imagine 
 an unlimited issue of paper to take place without 
 producing any difference in its value when ex- 
 changed for gold. In that case it would be ne- 
 cessary to assume the price of goods to rise indefi- 
 nitely, but the people to be content to use a less and 
 less proportion of gold to paper, and on that account 
 
 to 
 
279 
 to continue to consider the relative value of gold and 
 paper as the same. This unlimited rise in the price 
 of goods, and equally indefinite fall iii th^ value of 
 gold, are every where precluded by the commerci^ 
 communications which take place between different 
 parts of the world 5 gold in exghange for goods, 
 allowing for the expence of transporting them, ne- 
 cessarily bearing that price, or nearly that price, in 
 each country which it bears in all. The variations in 
 the value of bullion, as compared with that of the 
 circulating medium, serve, therefore, to detect and 
 restrain that too great emission of notes to which 
 all countries would otherwise be prone ; and those 
 operations of the exchange, which have been da? 
 scribed, are the means by which every bank is cora^ 
 pelled to make the value of its paper conform itself 
 to the ancient standard. 
 
 Let the case of the continental bank notes, already 
 spoken of, be here adverted to. The depreciation 
 of these has been apt to originate, as I, conceive, in 
 the state of the exchanges. The unfavourable ex- 
 change has produced a difference between the va- 
 lue of bullion, and that both of the current paper of 
 those banks and of the current coin j apd, when 
 this difference has beconie permanent and consider- 
 able, a discount on the paper has established itselfj; 
 in other words, coin has ceased to bear the price of 
 paper, and has taken the price of bullion, and from 
 that time the paper alone h^s passed at the reduced 
 rate. The difference between the value of the cir- 
 
 T4 culating 
 
280 
 
 culating medium of this country and that of bullion 
 has always been sufficiently small to prevent the like 
 discount from arising ; and so long as we avoid a 
 discount, persons, in general, do not discover that 
 any depreciation of our paper exists. But even the 
 most insignificant of those depressions in the value 
 of our circulating medium, which are indicated by 
 the exchange, are to be referred to the same imme- 
 diate catise from which the depreciation of the bank 
 paper on the continent has originated. - I do not 
 mean that our smaller and their greater depreciations 
 iare alike to be referred to an excess of paper. I 
 would affirm, however, that they have equally re^ 
 suited from the circumstance of goods, at the lime 
 in question^ being too high in value (possibly, in the 
 one case, through an excess of paper, and, in the 
 other^ through a fluctuation in the markets) to bear 
 to be exported in sufficient quantity to satisfy the 
 ddbtfor which payment has been demanded ^ unless 
 an advantage in the exchange was granted to the 
 exporting merchant, 
 
 '^ It may be convenient to the reader here to reca- 
 pitulate the several points which have been lately 
 dwelt upon. 
 
 I have shewn, first, that since Bank of England 
 paper affords no profit to the holder, a very super- 
 fluous quantity is not likely to be held in any quar- 
 ter; and that the additional thirty-five millions, 
 which have been spoken of, must, therefore, be 
 supposed to be employed either in transferring an 
 '-^ ■ cncreased 
 
281 
 increased quantity of goods, which, in that case, it 
 must be assumed to have itself created, or in trans- 
 ferring the same goods at a higher price. I have, 
 then, insisted, that since the fresh industry which is 
 excited cannot be supposed to be commensurate with 
 the new paper, it is necessary to assume (conform- 
 ably to the principles of a former Chapter), that a 
 great rise in the price of commodities will take 
 place. This rise in the cost of articles in Great 
 Britain must produce, as has been also shewn, a 
 diminution of the demand for them abroad, unless 
 a compensation for their high price is given to the 
 foreigner in the rate of exchange; so that the too 
 great emission of paper will be the cause of a dis- 
 advantageous balance of trade, and also of an un- 
 favourable exchange ; or, in other words, of a low 
 valuation of the circulating medium of Great Bri- 
 tain when compared with that of other countries. 
 
 It has, likewise, been observed, that even, the 
 smallest of those depressions in the value of our 
 circulating medium, which are indicated by the 
 exchange, arise out of the same circumstance which. 
 Jias produced the greater depreciations of the con- 
 tinental bank paper; goods, it has been said, being 
 rendered too high (in the one instance, probably^ 
 by ap excess of paper, in the other by a fluctuation 
 in the markets) to bear to be exported in suffi- 
 cient quantity to satisfy the debts for which pay- 
 ment has been demanded, unless a bounty, in the 
 ^ shape 
 
282 
 
 shape of the exchange, be granted to the exporting 
 merchant* 
 
 We 
 
 '* Some proof of the tendency of a too great emission of paper 
 to render the exchange unfavourable try the means which have 
 been described, and to cause the current coin to be expprted, is 
 furnished by the followmg extracts from arrets of the French 
 government, issued a short time afte? the establishment of Mr, 
 Law's bank. The reader is desired to take notice, that this bank 
 was instituted on the same professed principles with the Bank of 
 England ; was, for a time, independent of the government, though 
 sanctioned by it ; possessed a capital of one hundred ^^illions of 
 livres, and lent money on good security. Being, however, permit- 
 ted to issue notes to the vast amount of about thirty-eight millions 
 sterling, the credit (in some degree a well founded one) which 
 this bank obtained, encouraged the formation of the Mississippi 
 scheme, and led to other doubtul undertakings. The. bank paper 
 being rendered exchangeable for the actions (or stock) of the 
 Mississippi company, though at a regulated discount, the value 
 of it, like that of the late assignats of Franpe, wa§ made to de- 
 pend on the public opinion of the profits of a speculation, and, 
 therefore, on the credit of the circulating article, rather more, 
 perhaps, than on its quantity. 
 
 Extract from the King's arret, dated 21st May, 1720.—" Th^ 
 ♦* King having caused to be examined in his council the condition 
 ** to which the kingdom was reduced before the establishment of 
 " the bank, that he might compare it with its present condition; 
 " it has appeared to the King, that the high rate of the interest 
 " of money had done more damage to the kingdom than all the 
 ** expences which the late King had been at during his several 
 " wars. By the establishment of the bank, the King has restored 
 ** things to good order. The nobility have found, in the encrease 
 " of the value of their lands, means to make themselves easy ; 
 
 *' manufactures. 
 
283 
 
 We come next to the second topic of enquiry, 
 
 namely, whether those bounds within which Bank. 
 
 of England paper must be confined, in order to 
 
 guard against a dangerous depreciation of it, are 
 
 rm^^jt&'^^'^kr .i^i^ii; likely 
 
 " manufactures, commerce, and navigation, are re-established ; 
 ^'* the lands are cultivated, and the artificer works " 
 
 By the arret of the 5th March, his Majesty ordained, *^ that 
 " actions of the India (or Mississippi) company might be con- 
 " verted into bank notes, and those notes into actions, according 
 " to the proportion which at that time was reckoned most just 
 " with respect to the vahie of the coin. It remained for his 
 ** Majesty to find an expedientybr re-establishing the value of the 
 *• coin in such proportion as might suit foreign commerce and the 
 " vent of the products of the country. His Majesty has provided 
 ** for these things by his declaration of 11 March, which orders 
 ** the reduction of the value of the coin" 
 
 This singular arret then proceeds to observe, that since " this 
 ** reduction*' of the coin " must necessarily produce a diminution 
 " of the price of commodities" (a measure calculated to produce 
 its encrease, and which would only fail to have this effect so far 
 as the too great issue of paper had already produced it), *' his 
 " Majesty," therefore, *' has judged the general interest of his 
 ** subjects required that the price or nominal value of actions and 
 ** of bank notes should be lessened for maintaining them in a just 
 " proportion "with the coin and other commodities of the kingdom, 
 ^^ for hindering the too high value of coin from sinking the public 
 ** credit f and for preventing the losses which his subjects might suffer 
 ** in commerce with foreigners** 
 
 The arret then directs that actions of 10,000' livres should be 
 reduced to 5,000, and bank notes of 1,000 to 500. 
 
 The people, after this arret, which doubled the public injury 
 under the pretence of dispensing equal justice, refused to take 
 the notcs; and the arret was revoked. Another arret, reducing 
 
 the 
 
284 
 likely to be observed, in consequence of some na- 
 tural tendency which it has to limit itself, so that it 
 is unnecessary that the bank should restrain it. 
 
 In examining this question, I mean also to enquire 
 whether the adoption merely of such rules as may 
 tend, in a general way, to confine the loans of the 
 
 Wnk, 
 
 the actions alone, was substituted. Still, however (as is observed 
 by Mr. Postlethwaite, from whom this account is taken), " the 
 " people having been frighted, would not meddle with bank notes, 
 ** except in payment for their goods, which they raised four 
 " times above their usual value, or upon a very great discount." 
 
 Another ordinance of the King, to the following effect, was then 
 jssued. — " Jiis Majesty being informed that many of his sub- 
 " jects, who, in these latter times, have got considerable fortunes, 
 ** forgetting what they owe to their country, have sent the greatest 
 " part thereof into foreign countries ; and that some others of his 
 " said subjects keep in the mid countries considerable sums in specie ^ with 
 " a design to place the same there, which has kept up the course of 
 " exchange to the advantage of foreigners" (the exportation of the 
 gold would tend so far as it went to improve the course of exchange, 
 and was an effect of the unfavourable exchange and not the cause), 
 " and has occasioned the exporting out of the kingdom a con- 
 •* siderable quantity of specie. And his Majesty, considering 
 " how much it is important to remedy an abuse so contrary to 
 ** the laws of government, though without constraining the li- 
 " berty of commerce; his Majesty, with the advice of Monsieur 
 *' the Duke of Orleans, regent, ordains, that in general all his 
 ** subjects shall be obliged to recall their funds, and cause the 
 ** same to be brought again into the kingdom within two months 
 ** from the publication of this present ordinance." 
 
 It appears from the first of these arrets, that an encreased emis- 
 'sion of paper tends to raise prices as well as to excite industry ; from 
 
 the 
 
285 
 
 bank, may be sufficient; or whether, also, any limi- 
 tation of the specific sums lent may be necessary. 
 
 First, it is obvious that the principle of lending-, 
 simply in proportion to the property of those who 
 desire to borrow, cannot be a safe one. If mere 
 capital were to give a title to bank loans, the bor- 
 rowers might become beyond measure numerous ; 
 even all proprietors of the public funds might prefer 
 a claim for assistance. : iJ/^xf] 
 
 If it should be said that the bank loans ought to 
 be afforded only to traders, and on the security of 
 real bills, that is to say, of bills drawn on the oc- 
 casion of an actual sale of goods, let it be remem- 
 bered that real bills, as was observed in an early 
 part of this work, may be multiplied to an extremely 
 great extent ; and, moreover, that it is only neces- 
 sary sufficiently to extend the customary length of 
 ^credit, in order to effect the greatest imaginable 
 multiplication of them. If the bank directors were 
 to measure their discounts by the amount of real bills 
 
 the second, that it leads, however, to a very unfavourable ex- 
 change, and to the exportation of the coin of a country; and that 
 the reduGtion of the value of the coin is the remedy which is natu- 
 rally resorted to. The same point is confirmed by the third 
 arret. 
 
 All the three arrets unite in proving the gross ignorance which at 
 this time prevailed on the subject of exchanges and of paper credit, 
 and in shewing, therefore, the unfairness of inferring from the Mbsis- 
 sippi project in France the instability of our own paper credit. In 
 the instance of our own South Sea scheme, no new bank was insti- 
 tuted, and the credit of the Bank of England paper was sustained. 
 
 offered. 
 
286 
 
 offered, it may be apprehended, that bankers and 
 other discounters, who now take this better kind of 
 paper, might become much more considerable hold- 
 ers of mere notes of hand, or of fictitious bills ; 
 and that an opportunity might thus be afforded of 
 pouring a vast additional quantity of real bills into 
 the Bank of England. 
 
 It may be imagined, that if the directors were 
 to govern their conduct by a regard partly to the 
 capital of the borrowers, partly to the species of 
 bills offered, but partly, also, to the probability of 
 punctual payment, the addition of this third check 
 to the former might suffice. But it is here to be re- 
 collected, that the bank itself, if we suppose a pro- 
 gressive enlargement of notes, must be assumed 
 to furnish perpetually encreasing means of effecting 
 payments, and thus to render punctuality in fulfilling 
 even the most extravagant engagements convenient 
 and easy to the merchants. 
 
 It only remains to enquire, lastly, whether any 
 principle of moderation and forbearance on the 
 part of the borrowers at the bank may be likely to 
 exempt the directors of that institution from the ne- 
 cessity of imposing their own limit. 
 
 It may possibly be thought, that a liberal exten- 
 sion of loans would soon satisfy all demands, and 
 that the true point at which the encrease of the pa- 
 per of the bank ought to stop, would be discovered 
 by the unwillingness of the merchants to continue 
 borrowing. 
 
 In 
 
2B7 . - 
 
 ■ In order to '4sc*^rtain how far the desire of ob- 
 taining loans at the bank may be expected at any 
 time to be carried, we must enquire into the subject 
 of the quantum of profit likely to be derived from 
 borrowing there under the existing circumstances. 
 This is to be judged of by considering two points: 
 the amount, first, of interest to be paid on the sum 
 borrowed j and, secondly, of the mercantile or other 
 gain to be obtained by the employment of the bor- 
 rowed capital. The gain which can be acquired by 
 the means of commerce is commonly the highest 
 which can be had ; and it also regulates, in a great 
 rheasure, the rate in all other cases. We may, 
 therefore, consider this question as turning prin- 
 cipally on a comparison of the rate of interest takeil 
 at the bank with the current rate of mercantile 
 profit. 
 
 The bank is prohibited, by the state of the law, 
 from demanding, even in time of war^ an interest 
 of more than five per cent., which is the same rate 
 at which it discounts in a period of profound peace. 
 It might, undoubtedly, at all seasons, sufficiently 
 limit its paper by means of the price at which it 
 lends, if the legislature did not interpose an ob- 
 stacle to the constant adoption of this principle of 
 restriction. 
 
 Any supposition that it would be safe to permit 
 the bank paper to limit itself, because this would 
 be to take the more Jiatural course, is, therefore, 
 altogether erroneous. It implies that there is no 
 
 occasion 
 
2SS 
 
 occasion to advert to the rate of interest in consider- 
 ation of which the bank paper is furnished, or to 
 change that rate according to the varying circum- 
 stances of the country. 
 
 At some seasons an interest, perhaps, of six per 
 cent, per annum, at others, of five, or even of four 
 per cent., may afford that degree of advantage 
 to borrowers which shall be about sufficient to limit, 
 in the due measure, the demand upon the bank for 
 discounts. Experience, in some measure, proves 
 the justice of this observation ; for, in time of peace, 
 the bank has found it easy to confine its paper by 
 demanding five per cent, for interest; whereas, in 
 war, and especially in the progress and towards the 
 conclusion of it, as well as for some time after- 
 wards, the directors have been subject, as I appre- 
 hend, to very earnest solicitations for discount, 
 their notes, nevertheless, not being particularly di- 
 minished. It is, therefore, unreasonable to pre- 
 sume that there will always be a disposition in the 
 borrowers at the bank to prescribe to themselves 
 exactly those bounds which a regard to the safety 
 of the bank would suggest. The interest of the two 
 parties is not the same in this respect. The bor- 
 rowers, in consequence of that artificial state of 
 things which is produced by the law against usury, 
 obtain their loans too cheap. That which they ob- 
 tain too cheap they demand in too great quantity. 
 To trust to their moderation and forbearance under 
 *uch circumstances, is to commit the safety of the 
 
 bank 
 
389 ' 
 
 bank to the discretion of those who, though both as 
 merchants and as British subjects they may ap- 
 prove in the general of the proper limitation of 
 bank paper, have, nevertheless, in this respect, an 
 individual interest which is at variance with that 
 of the Bank of England. 
 
 The temptation to borrov^r, in time of war,^too 
 largely at the bank, arises, as has been observed, 
 from the high rate of mercantile profit. Capital 
 is then scarce, and the gain accruing from the era^ 
 ployment of it is proportionably considerable. 
 
 The reader, possibly, may think that an extension 
 of bank loans, by furnishing additional capital, may 
 reduce the profit on the use of it, and may thus lessen 
 the temptation to borrow at five per cent. It has 
 been already remarked in this Chapter, that capital, 
 by which term bond fide property was intended^ 
 cannot be suddenly and materially encreased by any 
 emission of paper. That the rate of mercantile profit 
 depends on the quantity of this bond, fide capital, 
 and not on the amount of the nominal value which 
 an encreased emission of paper may give to it, is a 
 circumstance which it will now be easy to point out. 
 
 I admit, that a large extension of bank loans may 
 give a temporary check to the eagerness of the ge- 
 neral demand for them. It will cause paper to be 
 for a time over abundant, and the price paid for the 
 use of it, consequently, to fall. 
 
 It seems clear, however, on the principles already 
 stated, that when the augmented quantity gf paper 
 
 U shall 
 
290 
 
 shall have been for some time stationary, and shall 
 have produced its full effect in raising the price of 
 goods, the temptation to borrow at five per cent, 
 will be exactly the same as before ; for the existing 
 paper will then bear only the same proportion to the 
 existing quantity of goods, when sold at the existing 
 prices, which the former paper bore to the former 
 quantity of goods, when sold at the former prices : 
 the power of purchasing will, therefore, be the same ; 
 the terms of lending and borrowing must be pre- 
 sumed to be the same; the amount of circulating 
 medium alone will have altered, and it will have 
 fiimply caused the same goods to pass for a larger 
 quantity of paper. To assume under such circum- 
 stances the same rate of mercantile profit to subsist, 
 is only to suppose that the trader will be situated 
 neither rhore nor less advantageously than before ; 
 and that the annual gain which he will obtain h^ 
 trading with the same quantity of goods^ will bear 
 the ssfme proportion as before to their current cost. 
 If this observation be just, there can be no reason to 
 believe that even the most liberal extension of bank 
 loans will have the smallest tendency to produce a 
 permanent diminution of the applications to the 
 bank for discount. It is the progressive augmenta- 
 tion of bank paper, and not the magnitude of its 
 existing amount, which gives the relief. It thus 
 5ippears,that the moderation and forbearance among 
 borrowers, which were supposed likely to restrain 
 the too- great emission of paper, are only to be ex- 
 cited 
 
291 
 
 cited by the means of its perpetual encrease ; by the 
 means, that is to say, of the very evil which it wa^ 
 assumed that they would be sufficient to prevent. 
 
 The danger of enlarging the loans of the bank 
 in proportion to the extension of the demand for 
 them, may be more particularly shewn by adverting 
 to the case of the sudden transfer to foreign coun- 
 tries of capital which had been antecedently lodged 
 in this. Let us suppose the foreign owners, either, 
 of British stocks, or of property left in the hands of 
 English correspondents, to draw during the space of 
 three months to a very large amount 5 and let us 
 Imagine that, in consequence of*.such an event, the 
 exchange turns against Great Britain to the extent, 
 of five per cent. -, and moreover that, at the end of 
 the three months, the drafts ceasing, and the mer- 
 cantile state of the country improving, the exchange 
 returns to its proper level. In this case any Eng- 
 lishman who can send goods abroad on his own 
 account^ and draw for them during the three months 
 in question, will gain an extra profit of five per cent., 
 supposing him to buy them in England for the same 
 English money, and to sell them abroad for the 
 same foreign money, for which goods may be 
 bought and sold at the periods preceding^ and 
 following the interval of time of which we are 
 speaking. A similar extra profit will be obtainable 
 during the same three months by a variety of other 
 modes of employing capital. It is obvious, for ex- 
 ample, that the public funds naay be expected to 
 
 U 2 experience 
 
292 
 
 experience a sudden fall through the great sale of 
 foreign property in the stocks, which we have ima- 
 gined to take place. He, therefore, who shall buy 
 into the funds at the season of depression, and shall 
 sell out at the expiration of the three months, will 
 be likely to derive a benefit from this species of 
 speculation. It is also plain that the quantity of 
 goods in Great Britain will be reduced through the 
 enlarged exportations, as well as through the suspen- 
 sion of imports, to which the state of the exchange 
 will have given occasion. The profit, therefore, on 
 the use of the remaining stock will be generally 
 augmented. The exportation of bullion will afford 
 a gain of the same sum of five per cent., the expence 
 of transporting it being, indeed, deducted. The 
 demand upon the bank for discounts is, therefore, 
 likely to be particularly earnest during the period 
 of which we are speaking ; and it is important 
 here to notice, that the ground on which it will be 
 made will not be that which was spoken of in an 
 early part of this work. It will not be the privation 
 of that quantity of circulating medium which is 
 necessary for carrying on the accustomed payments, 
 for these will be very immaterially encreased ; the 
 cause of the extraordinary applications to the bank 
 will be the temporary advantage w^hich may be 
 gained, or the loss which may be avoided, by bor- 
 rowing, during the three months in question, at 
 the rate of five per cent. A pressure, it is true, may 
 be occasioned by the multitude of foreign drafts, 
 
 and 
 
293 
 
 and it may resemble that which would arise from 
 a diminution of Bank of England paper. Some 
 of those merchants in whose hands the foreign 
 property had been placed may not be able, with 
 sufficient readiness, to spare from their commerce 
 the sums necessary to answer the bills drawn 
 upon them. Creditors, not being permitted to 
 demand more than five per cent, interest from their 
 debtors, are apt, at particular junctures, to call in 
 their money, for the sake of taking to themselves 
 the extraordinary benefit to be obtained by the use 
 of capital. The disappointments thus brought otT, 
 persons trading with borrowed wealth are often 
 productive of much evil. The maintenance of the 
 accustomed quantity of Bank of England notes 
 may, therefore, be insufficient to furnish the means 
 of securing the usual regularity of the payments of 
 the metropolis; and a material diminution of paper 
 may be particularly inconvenient. Possibly an 
 augmentation of it may be necessary to the due 
 maintenance of credit. If we suppose, however, a 
 very great encrease of bank notes to take place 
 (and an encrease, probably, equal to the total capital 
 transferred on account of foreigners, will immediately 
 be desired), the result must be a very important fall 
 in the exchange, in addition to the fall of five per 
 cent, already mentioned ; and a new and propor- 
 tionate danger to the Bank of England. 
 
 The point which it has been the object here to 
 explain, might have been equally illustrated by ima-* 
 
 U 5 gining 
 
294- 
 
 gining either the case of a strong disposition in 
 many British subjects to transfer their own property 
 to foreign countries, in order to lodge it there; or 
 the case of a general eagerness to extend foreign 
 commerce ; for we must assume the transfer to fo- 
 reign parts of an additional British capital to take 
 place on either of these suppositions. 
 
 The preceding observations explain the reason 
 of a determination, adopted some ' time since by 
 the bank directors, to limit the total weekly amount 
 of loans furnished by them to the merchants. The 
 -cdoption of a regulation for this purpose seems to 
 have been rendered necessary by that impossibility 
 of otherwise sufficiently limiting, at all times, the 
 Bank of England paper, which it has been the de- 
 sign of this Chapter to point out. 
 
 The regulation in question I consider as intended 
 to confine within a specific, though in some degree 
 fluctuating, sum, the loans of the bank, for the sake 
 of restricting the paper. The variations in the 
 amount of Ipans fail of producing exactly corres- 
 pondent variations in the amount of paper, in pro- 
 portion as the gold of the bank fluctuates. But 
 the regulation being a weekly one, opportunity is 
 afforded of correcting this attendant imperfection 
 before any material evil can have arisen. The 
 changes vvhich occur in the amount of the loans to 
 government form another ground fqr taking into 
 weekly consideration the sum which shall, in the 
 succeeding weel^, be aijbided to the merchants. 
 
 Tq 
 
295 
 To limit the total amount of paper issued, and to 
 resort for this purpose, whenever the temptation to 
 borrow is strong, to some effectual principle of re- 
 striction ; in no case, however, materially to dimi- 
 nish the sum in circulation, but to let it vibrate only 
 within certain limits ; to afford a slow and cautious 
 extension of it, as the general trade of the king- 
 dom enlarges itself; to allow of some special, though 
 temporary, . encrease in the event of any extraor- 
 dinary alarm or difficulty, as the best means of 
 preventing a great demand at home for guineas; 
 and to lean to the side of diminution, in the case of 
 gold going abroad, and of the general exchanges 
 continuing long unfavourable; this seems to be 
 the true policy of the directors of an institution cir- 
 cumstanced like that of the Bank of England. To 
 suffer either the solicitations of merchants, or the 
 wishes of government, to determine the measure of 
 the bank issues, is unquestionably to adopt a very 
 fi^lse principle of conduct. 
 
 U 4 CHAP- 
 
296 
 
 CHAP. XI. 
 
 Of the Influence of Paper Credit on the Price of 
 Cornmodities, — Observations on some Passages of 
 Montesquieu and Hume, -^Conclusion, 
 
 A HIS subject has been in so great a 
 degree anticipated by the discussions which hav« 
 taken place; that it will scarcely be necessary to 
 do itiore than to remind the reader of the prin- 
 ciples which have been laid down, and to point 
 out the manner in which they bear upon the present 
 question. 
 
 It was observed in a former Chapter, that a very 
 considerable advance in the price of the commoditie$ 
 bought and sold in one quarter of this kingdom, 
 while there was no such rise in any other, was 
 not supposable j because the holders of the circulat- 
 ing medium current in the spot in which goods 
 were imagined to have been rendered dear, would 
 exchange it for the circulating medium of the part 
 in which they were assumed to be cheap, and would 
 then buy the commodities of the latter place, and 
 transport them to the former^ for the sake of the 
 profit on the transactior^. 
 
297 
 
 The exchangeableness of our country paper for 
 our London paper was represented as always in this 
 manner preventing the quantity of paper circulating 
 in one place from being very disproportionate to the 
 quantity circulating in another; and as also pre» 
 eluding any great local rise in the price of commo* 
 dities within our ov^rn island. 
 
 We may justly extend our views, and conceive 
 of Europe, and even of the world, as forming one 
 great kingdom, over the whole of which goods pass- 
 and repass, as suits the interest of the merchant, 
 nearly in the same manner in which they spread 
 themselves through this single country. 
 
 In one particular, indeed, the resemblance be- 
 tween the two cases fails. Country bank paper, as 
 compared with Bank of England notes, cannot 
 be, to a material degree, excessive in any part 
 of England; because, by the custom of our coun- 
 try banks, it is convertible, without any discount, 
 into the London paper. But British paper is not ex- 
 changeable for the circulating medium of the con- 
 tinent, unless a discount, or difference, be allowed. 
 Of this fluctuating discount, or difference, the va- 
 riations i|i tbe^ coursp of exchange are the mea- 
 sure. 
 
 It is true that the continental circulating: me- 
 dium, like our own, varies in value. Both, however, 
 commonly vibrate only within certain limits ; and 
 both inay be considered as fluctuating exactly so far 
 
 as 
 
298 
 
 as their value differs from that of bullion. To say 
 that bullion varies in its price, is to say that there 
 is an alteration in the general exchangeable value 
 of that article, which constitutes the standard of 
 the world. 
 
 We are led, by these observations, to divide our 
 subject into two branches of enquiry : first, into 
 the question how far our paper credit may have 
 raised the price of goods in Great Britain, by caus^ 
 ing their current price here (that is to say, their price 
 in British paper, as well as in British coin) to be 
 higher than their bullion price ; and, secondly, how 
 far also the bullion price of our comm.odities her^ 
 (that is to say, their value in exchange for the article 
 of bullion) may be suspected of having been en* 
 hanced by means of the paper credit of Great 
 Britain. 
 
 As to the first question ; the highest influence 
 which a too extended paper credit can have had in 
 raising the. current price of commodities in Great 
 Britain above their bullion price, must be measured 
 by the difference which has subsisted between the 
 market price and mint price of gold ; or, which is 
 nearly the same thing, by the fluctuation in the state 
 of our general exchanges. This difference or fluc- 
 tuation has at no period been more than about ten 
 or twelve per cent. Even this variation, however, 
 has not been fairly referable to a too great issue 
 of paper, but rather to the peculiar circumstances 
 
 of 
 
299 
 of the country; and, in particular, to our two bad 
 harvests, which sufficiently account for the un- 
 favourable state of our exchanges. 
 
 The second question is, how far the bullion price 
 of our commodities may be suspected of having been 
 raised through the influence of the paper credit of 
 Great Britain. 
 
 It was formerly stated, that the bullion price of 
 articles may be considered to be their general price: 
 because bullion necessarily bears that value, or 
 nearly that value, in each country, in exchange for 
 goods, which it bears in all, allowance being made 
 for the expence of their transmission, inclusive of 
 export and import duties, ordinary profit of the 
 merchant, freight, insurance, and other customary 
 pharges. The expence of the transportation of com- 
 modities from the several places of their growth or ma- 
 nufacture, an expence which is great in some cases, 
 and small in others, is the measure of the difference 
 subsisting between the bullion prices of the same ar- 
 ticles, at the same time, in different parts of the 
 world. Each addition to this difference implies an 
 extra profit on the transportation either of bullion 
 or of goods ; and must be supposed soon to cause 
 the one or the other to be carried over in such quan- 
 tity as to restore their due relative price. Every 
 fise, therefore, of the bullion price in Great Britain of 
 those commodities which she is accustomed to ex- 
 port, if we suppose the usual exportation to continue, 
 
 implies 
 
soa 
 
 implies an equal, or nearly equal, enhancement of 
 the bullion price of all articles of the same class in 
 every foreign p^rt in which our commodities arc 
 sold. 
 
 Great Britain so remarkably takes the lead in 
 manufactures and commerce, that she may not un- 
 justly be deemed to have the power, especially in 
 a time of general war, of prescribing to foreign 
 countries the rate at which they shall buy her com* 
 modities. 
 
 That monopoly of the supply, however, whicli I 
 am here supposing Great Britain to possess, is, 
 probably, but temporary, and, in every respect, im* 
 perfect. In most of her sales abroad she meets 
 with strong competition j for, though other coun^ 
 tries may not rival her in the quality of her goods, 
 they can, generally, furnish a substitute, which, 
 if British prices are much Hfted up, will gain, by 
 comparative cheapness, the preference. Every great 
 enhancement of the cost of our articles must lessen 
 the foreign demand for them. It must reduce our 
 exported and augment our imported goods. By thus 
 turning the balance of trade against us, and rendering 
 our exchanges unfavourable, it must cause the rise at 
 home to be a rise not in the bullion price of our ar- 
 ticles, the subject which we are now considering, 
 but in the paper or current price, the point which 
 was noticed before. If the advance is in the pa- 
 per or current price, the bank is compelled to re- 
 Strict its issues -, and the reduction of the quantity 
 
 of 
 
SOI 
 
 of bank notes lias a tendency to limit the cost not 
 only of those particular commodities which are the 
 subjects of exportation, but of every commodity 
 in the kingdom. 
 
 That the bullion price of some British articles 
 has lately been much encreased, and that the bul- 
 lion price of all, or of almost all, has in some de- 
 gree risen, are facts which cannot be doubted. But 
 that this enhancement is to be charged to an en- 
 crease of paper, is not equally to be admitted ; 
 for it is plain that other causes have powerfully 
 operated, namely, a state of war, new taxes, 
 and two bad harvests, which, by raising the price 
 of bread, have in some degree lifted up that of 
 labour, and of all commodities. Our prices may 
 have also been partly augmented by the enhance- 
 ment of the cost of raw materials brought from 
 other countries. ^ 
 
 Although it should be granted, as it must, either 
 that the amount of our paper has been enlarged in 
 proportion to the extension of pecuniary transac- 
 tions; or that an encreased ceconomy in the use of it 
 has rendered an equal quantity sufficient for more pay- 
 ments (and it seems of little moment which of these 
 two suppositions is adopted) : still it may be ques- 
 tioned whether the extended issue of paper ought 
 to be deemed the cause of the high prices ; or whe- 
 ther the high prices oughf not to be deemed the 
 cause, and the cncrease of paper the effect. 
 
 It 
 
S02- 
 
 . It was before remarked, that It seems in general 
 more fair to consider the latter to be the case, when, 
 the extension of paper is not such as to be the means 
 of reducing its value below that of bullion. To 
 prove the reasonableness of this observation, let 
 us imagine the paper credit of this country to be . 
 abolished, and our payments to be conducted by 
 a circulating medium consisting wholly of gold 5 
 and let us assume, that we still find ourselves able 
 to procure for our commodities sent abroad a higher 
 bullion price than before. In this case the bullion 
 price of articles at home will also experience a rise > 
 for the high bullion prices abroad will have the 
 effect of enlarging our exported and diminishing our 
 imported goods; of rendering our balance of trade fa- 
 vourable, and of bringing gold into the kingdom 5 
 which encrease of gold will have precisely the same 
 effect as an augmentation of paper, namely, that of 
 raising British prices. The bullion will continue to 
 flow in until it shall have brought the bullion 
 price of goods in England to a level with the bul- 
 lion price of the samo articles in foreign parts, al-* 
 lowing for charges of transportation. On the abi- 
 lity, therefore, of Great Britain to maintain a high 
 bullion price for her goods abroad, would depend 
 the bullion price of her commodities at home, in 
 the event of her employing gold as her only circu- 
 lating medium. 
 
 If we suppose paper to constitute the circulating 
 medium of Great Britain, and anencreased bullion 
 
 price 
 
30^ 
 price for her commodities abroad to be iri like man* 
 Her obtainable, tbe case will in the main be similar, 
 though in one particular it will differ. The case will 
 be similar, inasmuch as Great Britain will expe- 
 rience, exactly as if she made use only of gold, an 
 encrease in the price of her commodities at home, 
 as well as an enlargement of the quantity of her 
 circulating medium ; such an enlargement, I mean, 
 as is necessary for effecting her more extended pay- 
 ments. The case will differ, inasmuch as, instead 
 of importing the additional circulating medium 
 which is wanted, she will create it. Thaproduction, 
 therefore, of a rather less quantity of exportable ar- 
 ticles will be necessary on the one supposition thai> 
 on the other ; and the state of the exchange itself 
 will be in some degree affected by this variation in 
 the circumstances of the two cases. 
 
 It may, perhaps, be thought, that I have considered 
 the bullion price of goods in Great Britain as exclu- 
 sively depending on the bullion price of the same kind 
 of commodities abroad ; and that I ought to have 
 stated the converse to be also in some measure the 
 fact, namely, the bullion price of articles abroad to 
 depend in part on the bullion prices of Great Britain. 
 I have intended thus to represent the case. My po- 
 sition has been this, — that the bullion price of ar- 
 ticles in Great Britain conforms itself to the bullion 
 price abroad ; but that, in the formation of this bul- 
 lion price abroad, the British price has some share 
 
 of 
 
504 
 
 of influence: and this influence I have considere^i 
 to be proportioned to the degree of our monopoly 
 of the supply of the foreign markets. 
 
 There is an additional mode of considering the 
 influence of paper credit on the bullion price of ar- 
 ticles. 
 
 The encreased use of paper in each individual 
 country must contribute to lower the price of bul- 
 lion, by lessening the general demand for it in the 
 world. On every advance in the cost of commo- 
 dities, it may be suspected that the means of effect- 
 ing the encreased payments are supplied not by 
 bringing more gold into use, but rather by the en- 
 largement of that part of the circulating medium 
 v/hich consists in paper. No inconsiderable portion 
 of British gold coin is employed in eftecting the frac- 
 tional parts of payments ; and the total amount of 
 these does not encrease in the same proportion in 
 which the sum total of payments is augmented*. 
 Moreover, the art of oeconomizing gold is conti- 
 nually 
 
 ♦ The bank notes in circulation commonly are notes for 
 five, ten, fifteen, twenty, twenty-five, thirty, forty, fifty, and one 
 hundred pounds and upwards. If we suppose the priee of all articles 
 to be. doubled, then we may assume every payment of one guinea 
 to be a payment of two guineas, and to employ a double quantity 
 of gold ; every payment of two guineas to be a payment of four 
 guineas, and also to employ a double quantity of gold ; but every 
 payment of three guineas will be a payment of fix, and it may em- 
 ploy a five pound note, the fractional part only being paid in money: 
 
 This 
 
S05. 
 iiuaily advancing. The very vicissitu<ies of cbni* 
 niierce, probably, tend to improve it. A time of dis- 
 tress, such as was felt in 1793, compels many to 
 resort to new expedients, tending to spare the use 
 both of Bank of Englaiid notes and of coin. The 
 measures adopted, at first, through necessity, are 
 afterwards persisted in because they are oecono- 
 micai. To put the case which we have more re- 
 cently experienced. An unfavourable balance of 
 trade, arising out of the disadvantageous circum- 
 stances of the country, causes our guineas to g6 
 abroad. Paper is necessary to supply their place. 
 Experience of the ]o3s incurred by hoarding mo- 
 ney, and of the practicability of sustaining both 
 private and public credit during the absence of 
 gold, strengthens the general confidence in a papeir 
 currency, and encourages a permanently encreased 
 use of it. if we could suppose as large a substi- 
 tution of paper in the place of coin to take place 
 in other countries as we have lately experienced in 
 bur own J the diminution of the deiiand for buliioa 
 
 This particular payment will, therefore, require less gold, A pay- 
 trent of four guineas will be i payment of eight, and will also re- 
 quire Uiz gold. The payments of more than four guineSas, whefi, 'in 
 Hke manner, doubled, will some of thefin employ a greater and some 
 X less ijuantity of gold than before. They will employ, taking 
 them together, the same quantity. It is evident from this statementt 
 that an encrease of the quantity of the circulating medium of % 
 <:oUntr;jr employing paper in its larger payments, and coin Only ?n 
 the smaller, will consist chiefly of paper ; a circumstance which may 
 considerably tend to prevent an encreased demand for bullion on 
 the occasion of an augmentation of ptices, and which may, there- 
 fore, greatly facilitate a rise of tlie buJlioQ pricg o£ articles in tht 
 world. 
 
 X -niifht 
 
306 
 
 might be such as very materially to affect Its gene- 
 ral value, and to enhance the money price of arti* 
 cles over the world. 
 
 There is, however, a limit to this evil. The 
 annual supply of the precious metals is obtained from 
 mines, of which some afford to the proprietors a 
 higher and others a lower revenue, and some pro- 
 bably no revenue at all. If we suppose the encreased 
 use of paper to lower, in any degree, the value of 
 the precious metals ; we must assume those mines 
 which have not yielded any rent, to be no longer 
 worked ^ and the supply of gold and silver to be, in 
 consequence, somewhat reduced. If we imagine the 
 reduction of the price of the precious metals to be 
 progressive, we must conceive a period to arrive 
 when all mines will be unable to defray the charge 
 of extracting the ore, except those which now yield 
 the very highest rent. At this point the fall will ne- 
 cessarily stop. In other words, gold and silver must 
 continue to bear that price, or nearly that price, 
 at which they are now exchangeable for commo- 
 dities, a deduction being made of the total present 
 rent derived from the richest mines -, a deduction 
 which, if Dr. A. Smith's observations on this sub- 
 ject are just, cannot be very considerable. 
 ^ Mr. de Montesquieu has represented, in the fof- 
 lowingmanner,the principle which regulates the price 
 of the precious metals. He " compares the mass of 
 •** gold and silver in the whole world with the quan- 
 ^ tity of merchandize therein contained," and " every 
 "^ commodity with a certain portion of the entire 
 ^'' mass" of. gold anS' silver;'' and 'then observes, 
 :'ic:i _ that. 
 
307 
 ihatj " SIftce the property of mankind is not all at 
 ** once in trade, and as the metals or money also are 
 " not all in trade at the same time ; the price is fixed 
 " in the compound ratio of the total of things with 
 " the total of signs, and that of the total of things 
 " in trade with the total of signs in trade also." 
 This theory, though not altogether to be rejected, is 
 laid down in a manner which is very loose and fal- 
 lacious *. . 
 
 Not to mention the misconception of the subject 
 \vhich may arise from the silence of Mr. de Mon- 
 tesquieu respecting the state of the mines, it may 
 be observed, first, that he alludes, in a manner 
 so imperfect as to be scarcely intelligible^ to those 
 eflfects of the different degrees of rapidity in the 
 circulation both of money and of goods, which it has 
 been one object of this work to explain. It is on 
 the degree of the rapidity of the circulation of each, 
 combined with the consideration of quantity, and 
 not on the quantity alone, that the value of the 
 circulating medium of any country depends. 
 
 Mr. de Montesquieu also leaves out of his con- 
 sideration the custom of transacting payments by 
 means of entries in books, and of other expedients. 
 In proportion as contrivances of this sort prevail ; 
 and they must abound more and more as commer- 
 cial knowledge advances in the world j the demand 
 for bullion will be diminished. 
 
 He also does not advert to that reserve of gold 
 and ' silver in the coffers of the banks of various 
 
 * It is controverted at great length in the work of Sir JameS 
 Stewart on Political Oilconomy. T '*' 
 
 X 2 countries 
 
308 
 
 countries which merely forms a provision against 
 contingencies. The amount of this reserve will de- 
 pend on the opinion which the banks entertain re- 
 specting the extent of the sum likely to be suddenly 
 drawn from them, in consequence either of fluc- 
 tuations in the national balances of trade, or of 
 temporary interruptions of credit among individual. 
 In proportion, therefore, as the variations in the na- 
 tional balances of trade, as well as in the state of 
 commercial confidence, are greater or smaller, the 
 fund of gold which is kept out oF circulation will 
 be more or less considerable. On the amount of 
 this fund depends, in no inconsiderable degree, the 
 price of bullion in the world. 
 
 Mr. de Montesquieu likewise omits to take into 
 his account that now immense and perpetually en- 
 creasing influence in sparing the precious metals 
 which arises from the use of paper credit. The 
 false impression which he gives of this subject, may 
 chiefly be referred to his not having contemplated 
 the effects of the introduction of the banking system. 
 
 Mr. HUme has spoken strongly of the influence of 
 faper credit in sparing the use of the precious metals, 
 ^nd in proportionably lowering their value, and 
 raising that of labour and of commodities. He in- 
 veighs agdnst bank paper on this account, as well 
 as on some others ; but, in so doing, he appears to 
 assume, that paper credit causes a merely local rise 
 Iti the price of articles j a rise, I mean, which ex- 
 tends itself only over the whole of the single inde- 
 pendent country in which the paper is issued. 
 That bank Is considered by him as most advan- 
 tageous 
 
30^ 
 
 tageous to a state, which locks, up all the gol4 
 received in return for its notes [he admits that 
 it will have no proiit >on its dealings], and thus- 
 causes the total quantity of circulating medium to 
 remain the same. The price of labour, he says, 
 will, in this manner, be kept down. The Bank 
 of Amsterdam is approved by him, on account 
 of its being an establishment of this nature*. In 
 
 thus 
 
 * It has been already observed, that, when the French possessed 
 themselves of Holland, it was discovered that the Bank of Amsterdana 
 had been accustomed privately to lend its deposits of specie to the city 
 of Amsterdam, and, also, to the old Dutch government. The specie 
 thus lent, as soon as goods in exchange for it experienced even a very 
 small rise in Holland, would naturally find its way to other countries. 
 The following are the passages from Mr. Hume, referred to in the 
 text. 
 
 ** In general we may observe, that the dearness of every thing, 
 ♦' from plenty of money, is a disadvantage which attends an esta- 
 ** bllshed commerce, and sets bounds to it in every country, by 
 •* enabling the poorer states to undersell the richer in all forelga 
 " markets. 
 
 ♦' This has made me entertain a doubt concerning the benefit of 
 " banks and paper credit, which are so generally esteemed advan- 
 ** tageous to every nation. 
 
 ** That provisions and labour should become dear by the encrease 
 <* of trade and money, is, in many respects, an inconvenience ; but 
 •< an inconvenience that is unavoidable, and the effect of that public 
 •* wealth and prosperity whUh are the end of all our wishes. It is 
 •* compensated by the advantages which we reap from the possession 
 ** of these precious metals, and the weight which they give the na« 
 ** tion in all foreign wars and negotiations. But there appears no 
 ** reason for encreasing that inconvenience by a counterfeit moneys 
 ** which foreigners will not accept of in any payment, and which any 
 ** great disorder in the state will reduce to nothing. There are, it 
 '* 15 trac, many people io every rich state, who^ having large sums of 
 
 Xj <* money, 
 
310 
 
 thus representing the subject, he appears to forget, 
 that, when the total circulating medium of a coun- 
 try, whether consisting of gold, or of paper, or of 
 
 both, 
 
 ** money, would prefer paper, with good security, as being of more 
 ** easy transport, and more safe custody. If the public provide not 
 ** a bank, private bankers will take advantage of this circumstance, as 
 ** the goldsmiths formerly did in London, or as the bankers do, at 
 ** present, in Dublin : and, therefore, it is better that a public com- 
 *• pany should enjoy the benefit of that paper credit, which always 
 ** will have place in every opulent kingdom. But to endeavour 
 ** arttficiaUy to encrease such a credit, can never be the interest of 
 *« any trading nation, but must lay them under disadvantages, by 
 ** encreasing money beyond its natural proportion to labour and com- 
 ** modities, and thereby heightening their price to the merchant and 
 •* manufacturer. And, in this view, it must be ajiowed that no 
 *• bank could be more advantageous than such a one which locked 
 ** up all the money it received [this is the case with the Bank of 
 ** Amsterdam]; and never augmented the circulating coin, as is usual, 
 *' by returning part of its treasure into commerce. A public bank, 
 ** by this expedient, might cut off much of the dealings of private 
 ** bankers and money-jobbers ; and, though the state bore the charge 
 ** of salaries to the directors and tellers of this bank (for, according 
 ** to the preceding supposition, it would have no profit from its deal- 
 <' ings), the national advantage resulting from the low price of labour, 
 ** and the destruction of paper credit, would be a sufficient compen- 
 ** sation.**-^--Hume*s Essay on Money. 
 
 That the encrease of the, money of an individual state can have no 
 very great and permanent effect in raising the price of, labour, or of 
 commodities, on account of the tendency of so much of the coin as 
 is excessive to transport itself to other countries, as soon as it shall 
 have raised the cost of articles above their general level in the world 
 (the principle contended for in the text), is shewn, on the authority 
 of Mr. Hume himself, in the following passage, Mr. Hume, indeed, 
 names money alone ; but his observation is equally applicable to the 
 ca$c of money and paper taken together, of which I have spoken. 
 
 V " Suppose 
 
both, is rendered excessive ^ wh^n it has thus 
 lifted up the gold price of articles above the point 
 at which they stand in adjacent countries, the 
 gold is obliged, by the operation of the exchange, 
 to transport itself to those other parts ; and that pa- 
 per credit, therefore, enhances the prices not of that 
 single spot in which it passes, but of the adjoining 
 places, and of the world. The state which issues 
 
 «* Suppose four- fifths of all the money in Great Britain to be anni^ 
 <« hilated in one night, and the nation reduced to the same condition, with 
 *' regard to specie, as in the reigns of the Harrys and Edwards ; what 
 <* would be the consequence ? Must not theprice of all labour and com-t 
 ** modities sink in proportion, and every thing be sold as cheap as they 
 <* were in those ages? What nation would then dispute with us in any 
 " foreign market ; or pretend to navigate or to sell manufactures at the 
 «* same price which to us would afford sufficient profit ? In how little 
 ** time, therefore, must this bring back the money which we had 
 <<* lost, and raise us to the level of all the neighbouring nations ; 
 *« where, after we have arrived, we immediately lose the advantage 
 " of the cheapness of labour and commodities ; and the farther 
 ** flowing in of money is stopped by our fulness and repletion ? 
 
 *f Again ; suppose that all the money of Great Britain were mul- 
 *' tiplied five-fold in a night ; must not the contrary effect follow i 
 ** Must not all labour and commodities rise to such an exorbitant 
 ** height, that no neighbouring nations could afford to buy from us ; 
 " while their commodities, on the other hand, became, compara- 
 *' tively, so cheap, that, in spite of all laws which could be formed* 
 '* they would be run in upon us, and our*s flow out, till we fell to a 
 '* level with foreigners, and lose that great superiority of riches which. 
 <* has laid us under such disadvantages ? 
 
 " Now it is evident that the same causes which would correct thest 
 ** exorbitant inequalities^ were they to happen iniraculous/y, must pre^ 
 ** vent 'their happening in the common course of nature 'j and must for 
 ** every in all neighbouring' nations, preserve money nearly propof" 
 ** tionate to the art txnd industry of each nation*'* — Hume's Essay on 
 the Balance of Trade. 
 
 X 4 paper 
 
312 
 paper only in such quatitity as to maintain its general 
 exchanges, may be considered as substituting paper 
 in the place of gold, and as gaining additional stock 
 in return for whatever coin it may cause to be ex- 
 ported. It derives, therefore, from its pwn issue, 
 the whole advantage of this augmentation of capi- 
 tal. It participates with other countries in that 
 inconvenience of a generally encreased price of 
 cpnimodities which its paper has contributed to 
 produce. 
 
 That the popular opinion which was lately enter- 
 tained of the great influence of paper credit in 
 raising the price not only of cqmmp4ities in general, 
 but of provisions in particular, had no just founda- 
 tion, is a position which admits of easy proof. 
 
 First, that opinion has proceeded on the assumption 
 of the fact of a vast encrease of the total circulating 
 medium of the kingdom, within the last two or three 
 years, the period during whi^h the high prices 
 have subsisted. But I have §hevi^n both that the 
 amount of the notes of the Bank of England has 
 lately not been such as to imply a material augmen- 
 tation of the circulating mediuni o( the metropolis^ 
 and, also,, that the quantity pf circulating medium 
 in the country necessarily conforms itself tp that of 
 London, fot which it is exchangeable. It has ob- 
 vipusly been the use of country bank notes, and espe- 
 cially of the smaller ones^ in the place of gold, not 
 in addition to it, which has been the chief occasion 
 of the prevailing suspicion : for the common com- 
 plaint has been not only that paper has been multi- 
 plied, but, alsoj that guineas have been hardly to 
 
 be 
 
S1S~ 
 fee seen: and !t has not been ^drtsMere^; tfiat l^y 
 this double invective some sort of acknowledgement 
 is made that the one article is only that substitute for 
 the other, by which none of the supposed effect on' 
 the price of commodities can be produced. 
 
 It is sometimes said, that the additional loans 
 which the paper of the country banks has enabled 
 them to furnish, have encouraged mercantile specu-r 
 lation ; and that we may ascribe to the spirit thus 
 excited much of the late rise in the price of articles 
 in general, and of corn in particular. 
 
 There is an error in the public sentiment on this 
 subject, which it is important to correct. 
 
 It has been already shewn, that it is by the^ 
 amount not of the loans of the Bank of England, 
 but of its paper; or if of its loans, of these merely 
 as indicating the quantity of its paper, that w© 
 afe to estimate the influence on the cost of com- 
 modities. The same remark may be applied to the 
 subject of the loans and paper of country banks. 
 For the sake of more fully illustrating this point, let 
 Us examine into the several ways in which a country 
 banker may be supposed to extend his loans, without 
 augmenting the quantity of circulating medium in 
 the kingdom. 
 
 He may be enabled to do this, first, through the 
 enlargement of the deposits lodged with him. In 
 this case some of his customers may be considered 
 as leaving with him, or as lending to him, a sum 
 which is lent by him to other customers. This is 
 the same thing as if some individuals were to lend 
 to others, without the intervention of the banker. 
 
 Loans 
 
314 
 
 Loans of this nature will be admitted not to have 
 the supposed influence on prices. 
 
 A country banker may also encrease his loans, 
 without augmenting the quantity of the circulating 
 medium of the country, in the following manner. 
 He may extend the issue of his own paper, and 
 then that paper may circulate in the place of gold 
 either hoarded or exported. If the gold is hoarded ; 
 if a quantity of coin locked up by one man equals the 
 amount of the new paper issued by another j it is 
 plain that there will not be the supposed influence on 
 prices. If the gold is exported, we must consider it 
 in the same light with any other commodity sent 
 abroad. It is true that the paper, according to this 
 supposition, may be said to give existence to an ad- 
 ditional exportable article : but so also does every 
 encreased exertion of the national industry, as well 
 as every favourable harvest. An augmentation of 
 prices is no more to be inferred from the creation of 
 a new exportable commodity in the one case than 
 in the others. 
 
 The following facts furnish a convincing proof 
 that the late high prices of corn have not been 
 owing to the enlargement of Bank of England 
 paper. 
 
 By' the account which the bank rendered to Par- 
 liament, it appears, that the amount of Bank of 
 England notes was, on the 25th of February, 1795, 
 13,539,160/. In the three months immediately fol- 
 lowing the 25th of February, 1795, the average 
 price of wheat, in the London corn-market, was 
 about 57^ per quarter. 
 
 By 
 
S15 
 
 By the same bank account, it appears, that the 
 amount of Bank of England notes was, on the 25th 
 of February, 1796, 11,030,116/. In the three 
 months immediately following the 25th of February, 
 1796, the average price of wheat, in the London 
 corn-market, .was about 94^ per quarter. 
 .. Thus wheat bore a comparatively low price whei\ 
 the amount of bank notes in circulation was greater s 
 and a comparatively high price when their amount 
 was smaller. It bore the moderate price of 57^, 
 per quarter, at a time when the amount of Bank of 
 England notes was full as cortsiderable (allowing for 
 about two millions of 1/and 2/ notes) as it is knowa 
 to have been at any period. 
 
 Paper credit may be considered as tending, ii> 
 some respects^ to reduce the price of commodities. 
 It was compared, in a former chapter, to a cheap 
 species of machinery, which is substituted in the 
 place of a dear one ; and it is obvious, that, in pro- 
 portion as any instrument of manufactures or com- 
 merce is less expensive, the articles which it con- 
 tributes to produce may be afforded at a lower rate. 
 
 Paper credit, also, promotes general cheapness, 
 by sparing much expence and trouble in weighing, 
 counting, and transporting, money j and by thus 
 facilitating more particularly the larger transaction^ 
 of the merchant. Mr, Hume appears to suppose, 
 that, when a great encrease of it takes place, the 
 augmentation is artificially produced. But it has 
 been shewn, that mercantile persons naturally re- 
 sort more and more to th^ use of paper, in propor? 
 tion as wealth accumulates^ confidence improves, 
 
 and 
 
316 
 
 and commerce advances. The consumers of com- 
 modities may be considered as having an interest in 
 permitting the merchants to follow their own plans 
 of oeconomy, in this respect, in the same manner as 
 in all others. 
 
 But whatever may be the amount of that influence 
 on the price of commodities which ought to be 
 ascribed to paper credit, one point is clear, namely, 
 that, during the period in which our paper has ex- 
 tended itself, our trade has prospered, the state of 
 our agriculture has advanced, and both the capital 
 and the income of the country have been aug- 
 mented. 
 
 Tlie chief mischiefs which, according to Mr. 
 Hume, are to be apprehended from any consider- 
 able addition to our paper currency, may be stated 
 to be the following: first, the great enhancement 
 of the price of British labour and commodities, an 
 €vil with which we ought unquestionably to con- 
 nect that of the diminution of the sale of our ma- 
 nufactures in foreign markets; secondly, the incon- 
 venience to which we may be expose^ in time of 
 war through the want of sufficient means of making 
 remittances in bullion to other countries 3 and, 
 thirdly, the confusion which the failure of paper 
 credit may produce at home in the event of any 
 great disorder in the nation. 
 
 That the first consequence (the great enhance- 
 ment of the price of British labour and commodi» 
 'ties) cannot follow from the enlargement of our 
 paper currency in the degree which Mr. Hume 
 supposes, has been proved from the circumstance of 
 
 our 
 
317 
 
 our paper causing guineas to go abrcmd, and tend- 
 ing, therefore, to raise the prices of the world rather 
 than those of our own single island. That our prices/ 
 however high, liave not been such as to lessen the 
 vent abroad of our home made articles, and have, 
 therefore, not been raised above the prices of other 
 countries, is proved by those documents from our 
 custom-house which state the continually encreas- 
 ing quantity of manufactures exported by Great 
 Britain*. 
 
 That the second evil (that of our being reduced to 
 difficulty in making remittances abroad in time of 
 war through the want of bullion) is one which there 
 is less reason to dread than Mr. Hume has imagined, 
 may likewise be inferred from recent experience. We 
 have been able to maintain the credit of our fund?, 
 and to carry on all our financial operations, 
 during the whole of the late expensive and pro» 
 tracted contest, although in the commencement 
 of it our stock of circulating gold was probably 
 less than in many former periods ; and although, 
 also, in the last years of the struggle, a period in 
 which we lent considerable sums to Ireland, and 
 had to purchase immense quantities of foreign 
 
 * The British manufactures exported In 1785 amounted 
 
 
 
 ;£• 11,082,000 
 
 In 1792 
 
 to 
 
 /*i8,336,ooo 
 
 1786 
 
 to 
 
 11,830,000 
 
 1793 
 
 — 
 
 13,892,000 
 
 ^787 
 
 «- 
 
 12,053,000 
 
 «794 
 
 — 
 
 16,725,000 
 
 2788 
 
 — 
 
 12,724,000 
 
 '795 
 
 — 
 
 16,527,000 
 
 1789 
 
 — 
 
 '3>779>ooo 
 
 479^ 
 
 — 
 
 19,102,000 
 
 1790 
 
 — . 
 
 14,92^.000 
 
 1797 
 
 — 
 
 16,903,000 
 
 I79I 
 
 m^ 
 
 16,810,000 
 
 1798 
 
 — 
 
 19,771,000 
 
 gram. 
 
318 
 grain, we were in a great measure deprived of 
 current coin, and the cash payments of the Bank 
 of England remained suspended. 
 
 Mr. Hume himself has remarked, " That want of 
 money can never injure any state within itself-, for 
 that men and commodities are the real strength of 
 any community." He might have added, that Want 
 of money can never injure any state in its trans* 
 actions ivith foreign countries i provided it sufficiently 
 abounds with commodities which are in demand 
 abroad, and which it can afford to sell at a bullion 
 price lower than that for which foreign articles of a 
 similar kind can be afforded. The power of ma- 
 nufacturing at a cheap rate is far more valuable than 
 any stock of bullion. Even the greatest quantity of 
 gold which w^e can be supposed at any time to pos- 
 sess, bears but a small proportion to our extraor- 
 dinary expenditure in time of war, and affords a 
 security which is extremely slender in comparison 
 of that which we derive from the commercial ca- 
 pital, the manufacturing skill, and the other re- 
 sources of the country. 
 
 That the third evil (the confusion which the failure 
 of paper credit may produce in the event of any 
 disorder at home) is less a subject for apprehension 
 than Mr. Hume and other British writers have con- 
 ceived, is a point which a great part of the pre- 
 ceding work will have contributed to establish. 
 
 During the late scenes of trouble and consterna- 
 tion on the continent, the possession of a stock of 
 the precious metals probably added little to the 
 security of any nation. When the French armies 
 
 approached. 
 
Sl9 
 approached, or when an insurrection was pro- 
 jected, a stock of gold and silver possessed by a go^ 
 vernment bank might contribute to invite attack; 
 or if the fund should at such a juncture be ex- 
 pended in the public service, it would not long 
 continue to perform the office of a circulating me* 
 ^ium. It might even disappear after effecting a 
 single payment. 
 
 Our own island has been preserved, through the 
 favour of Providence, from those violent convul- 
 sions which have been felt on the continent. We 
 have, however, been exposed to many smaller evils, 
 and, in particular, to the interruption of our mercan- 
 tile credit. It was probable that the enemy, know- 
 ing how much our political strength depended on 
 our commercial prosperity, and our commercial 
 prosperity on t-he due maintenance of mercantile 
 confidence among us, would direct his endeavouii^ 
 to the very object of exciting alarms over the king*- 
 dom, with the view of thus disturbing the course 6f 
 our trade and manufactures. It therefore became 
 us to protect ourselves by the best means in our 
 power against this species of injury ; and the con- 
 tinuance of the law for suspending the ca§h pay- 
 ments of the Bank of England has been one of the 
 steps which parliament has deemed necessary. 
 
 There can be no doubt, that, in the situation in 
 which we have thus found ourselves placed, we 
 have been greatly benefited by the circumstance 
 of our having been previously accustomed to the 
 free use of a paper credit. In a commercial coun- 
 try, subjected to that moderate degree of occasional 
 
 alarm 
 
520 
 alarm and danger which we have experienced, gold( 
 is by no means that kind of circulating medium 
 which is the most desirable. It is apt to circulate 
 with very different degrees of rapidity, and also 
 to be suddenly withdrawn, in consequence of its 
 being an article intrinsically valuable, and capable of 
 being easily concealed. If, during the war, it had been 
 our only medium of payment, we might sometimes 
 have been almost totally deprived of the means of 
 carrying on our pecuniary transactions; and much 
 confusion in the affairs of our merchants, great 
 interruption of manufacturing labour, and very 
 serious evils to the state, might have been the con- 
 sequences. 
 
 Paper credit has, on this account, been highly 
 important to us. Our former familiarity with it 
 prepared hs for the more extended use of it. And 
 our experience of its power of supplying the want 
 of gold in times of difficulty and peril, is a circum- 
 stance which, though it ought not to encourage a 
 general disuse of coin, may justly add to the future 
 confidence of the nation. 
 
 FINIS, 
 
 OfTMt 
 
 VNIVERSITY 
 
 Of 
 
 JCotfht aed C'ir.ptoa, Printen, 
 tAMii Sbe«;, CiwUi Fair. 
 
NON-CIRCULATING BOOK 
 
m 
 
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