such sensible reduction of price. The price of superfine cloth, I have
been assured, on the contrary, has, within these five-and-twenty or thirty
years, risen somewhat in proportion to its quality, owing, it was said, to
a considerable rise in the price of the material, which consists
altogether of Spanish wool. That of the Yorkshire cloth, which is made
altogether of English wool, is said, indeed, during the course of the
present century, to have fallen a good deal in proportion to its quality.
Quality, however, is so very disputable a matter, that I look upon all
information of this kind as somewhat uncertain. In the clothing
manufacture, the division of labour is nearly the same now as it was a
century ago, and the machinery employed is not very different. There may,
however, have been some small improvements in both, which may have
occasioned some reduction of price.
But the reduction will appear much more sensible and undeniable, if we
compare the price of this manufacture in the present times with what it
was in a much remoter period, towards the end of the fifteenth century,
when the labour was probably much less subdivided, and the machinery
employed much more imperfect, than it is at present.
In 1487, being the 4th of Henry VII., it was enacted, that “whosoever
shall sell by retail a broad yard of the finest scarlet grained, or of
other grained cloth of the finest making, above sixteen shillings, shall
forfeit forty shillings for every yard so sold.” Sixteen shillings,
therefore, containing about the same quantity of silver as four-and-twenty
shillings of our present money, was, at that time, reckoned not an
unreasonable price for a yard of the finest cloth; and as this is a
sumptuary law, such cloth, it is probable, had usually been sold somewhat
dearer. A guinea may be reckoned the highest price in the present times.
Even though the quality of the cloths, therefore, should be supposed
equal, and that of the present times is most probably much superior, yet,
even upon this supposition, the money price of the finest cloth appears to
have been considerably reduced since the end of the fifteenth century. But
its real price has been much more reduced. Six shillings and eightpence
was then, and long afterwards, reckoned the average price of a quarter of
wheat. Sixteen shillings, therefore, was the price of two quarters and
more than three bushels of wheat. Valuing a quarter of wheat in the
present times at eight-and-twenty shillings, the real price of a yard of
fine cloth must, in those times, have been equal to at least three pounds
six shillings and sixpence of our present money. The man who bought it
must have parted with the command of a quantity of labour and subsistence
equal to what that sum would purchase in the present times.
The reduction in the real price of the coarse manufacture, though
considerable, has not been so great as in that of the fine.
In 1463, being the 3rd of Edward IV. it was enacted, that “no servant in
husbandry nor common labourer, nor servant to any artificer inhabiting out
of a city or burgh, shall use or wear in their clothing any cloth above
two shillings the broad yard.” In the 3rd of Edward IV., two shillings
contained very nearly the same quantity of silver as four of our present
money. But the Yorkshire cloth which is now sold at four shillings the
yard, is probably much superior to any that was then made for the wearing
of the very poorest order of common servants. Even the money price of
their clothing, therefore, may, in proportion to the quality, be somewhat
cheaper in the present than it was in those ancient times. The real price
is certainly a good deal cheaper. Tenpence was then reckoned what is
called the moderate and reasonable price of a bushel of wheat. Two
shillings, therefore, was the price of two bushels and near two pecks of
wheat, which in the present times, at three shillings and sixpence the
bushel, would be worth eight shillings and ninepence. For a yard of this
cloth the poor servant must have parted with the power of purchasing a
quantity of subsistence equal to what eight shillings and ninepence would
purchase in the present times. This is a sumptuary law, too, restraining
the luxury and extravagance of the poor. Their clothing, therefore, had
commonly been much more expensive.
The same order of people are, by the same law, prohibited from wearing
hose, of which the price should exceed fourteen-pence the pair, equal to
about eight-and-twenty pence of our present money. But fourteen-pence was
in those times the price of a bushel and near two pecks of wheat; which in
the present times, at three and sixpence the bushel, would cost five
shillings and threepence. We should in the present times consider this as
a very high price for a pair of stockings to a servant of the poorest and
lowest order. He must however, in those times, have paid what was really
equivalent to this price for them.
In the time of Edward IV. the art of knitting stockings was probably not
known in any part of Europe. Their hose were made of common cloth, which
may have been one of the causes of their dearness. The first person that
wore stockings in England is said to have been Queen Elizabeth. She
received them as a present from the Spanish ambassador.
Both in the coarse and in the fine woollen manufacture, the machinery
employed was much more imperfect in those ancient, than it is in the
present times. It has since received three very capital improvements,
besides, probably, many smaller ones, of which it may be difficult to
ascertain either the number or the importance. The three capital
improvements are, first, the exchange of the rock and spindle for the
spinning-wheel, which, with the same quantity of labour, will perform more
than double the quantity of work. Secondly, the use of several very
ingenious machines, which facilitate and abridge, in a still greater
proportion, the winding of the worsted and woollen yarn, or the proper
arrangement of the warp and woof before they are put into the loom; an
operation which, previous to the invention of those machines, must have
been extremely tedious and troublesome. Thirdly, the employment of the
fulling-mill for thickening the cloth, instead of treading it in water.
Neither wind nor water mills of any kind were known in England so early as
the beginning of the sixteenth century, nor, so far as I know, in any
other part of Europe north of the Alps. They had been introduced into
Italy some time before.
The consideration of these circumstances may, perhaps, in some measure,
explain to us why the real price both of the coarse and of the fine
manufacture was so much higher in those ancient than it is in the present
times. It cost a greater quantity of labour to bring the goods to market.
When they were brought thither, therefore, they must have purchased, or
exchanged for the price of, a greater quantity.
The coarse manufacture probably was, in those ancient times, carried on in
England in the same manner as it always has been in countries where arts
and manufactures are in their infancy. It was probably a household
manufacture, in which every different part of the work was occasionally
performed by all the different members of almost every private family, but
so as to be their work only when they had nothing else to do, and not to
be the principal business from which any of them derived the greater part
of their subsistence. The work which is performed in this manner, it has
already been observed, comes always much cheaper to market than that which
is the principal or sole fund of the workman’s subsistence. The fine
manufacture, on the other hand, was not, in those times, carried on in
England, but in the rich and commercial country of Flanders; and it was
probably conducted then, in the same manner as now, by people who derived
the whole, or the principal part of their subsistence from it. It was,
besides, a foreign manufacture, and must have paid some duty, the ancient
custom of tonnage and poundage at least, to the king. This duty, indeed,
would not probably be very great. It was not then the policy of Europe to
restrain, by high duties, the importation of foreign manufactures, but
rather to encourage it, in order that merchants might be enabled to
supply, at as easy a rate as possible, the great men with the
conveniencies and luxuries which they wanted, and which the industry of
their own country could not afford them.
The consideration of these circumstances may, perhaps, in some measure
explain to us why, in those ancient times, the real price of the coarse
manufacture was, in proportion to that of the fine, so much lower than in
the present times.
Conclusion of the Chapter.
I shall conclude this very long chapter with observing, that every
improvement in the circumstances of the society tends, either directly or
indirectly, to raise the real rent of land to increase the real wealth of
the landlord, his power of purchasing the labour, or the produce of the
labour of other people.
The extension of improvement and cultivation tends to raise it directly.
The landlord’s share of the produce necessarily increases with the
increase of the produce.
That rise in the real price of those parts of the rude produce of land,
which is first the effect of the extended improvement and cultivation, and
afterwards the cause of their being still further extended, the rise in
the price of cattle, for example, tends, too, to raise the rent of land
directly, and in a still greater proportion. The real value of the
landlord’s share, his real command of the labour of other people, not only
rises with the real value of the produce, but the proportion of his share
to the whole produce rises with it.
That produce, after the rise in its real price, requires no more labour to
collect it than before. A smaller proportion of it will, therefore, be
sufficient to replace, with the ordinary profit, the stock which employs
that labour. A greater proportion of it must consequently belong to the
landlord.
All those improvements in the productive powers of labour, which tend
directly to reduce the rent price of manufactures, tend indirectly to
raise the real rent of land. The landlord exchanges that part of his rude
produce, which is over and above his own consumption, or, what comes to
the same thing, the price of that part of it, for manufactured produce.
Whatever reduces the real price of the latter, raises that of the former.
An equal quantity of the former becomes thereby equivalent to a greater
quantity of the latter; and the landlord is enabled to purchase a greater
quantity of the conveniencies, ornaments, or luxuries which he has
occasion for.
Every increase in the real wealth of the society, every increase in the
quantity of useful labour employed within it, tends indirectly to raise
the real rent of land. A certain proportion of this labour naturally goes
to the land. A greater number of men and cattle are employed in its
cultivation, the produce increases with the increase of the stock which is
thus employed in raising it, and the rent increases with the produce.
The contrary circumstances, the neglect of cultivation and improvement,
the fall in the real price of any part of the rude produce of land, the
rise in the real price of manufactures from the decay of manufacturing art
and industry, the declension of the real wealth of the society, all tend,
on the other hand, to lower the real rent of land, to reduce the real
wealth of the landlord, to diminish his power of purchasing either the
labour, or the produce of the labour, of other people.
The whole annual produce of the land and labour of every country, or, what
comes to the same thing, the whole price of that annual produce, naturally
divides itself, it has already been observed, into three parts; the rent
of land, the wages of labour, and the profits of stock; and constitutes a
revenue to three different orders of people; to those who live by rent, to
those who live by wages, and to those who live by profit. These are the
three great, original, and constituent, orders of every civilized society,
from whose revenue that of every other order is ultimately derived.
The interest of the first of those three great orders, it appears from
what has been just now said, is strictly and inseparably connected with
the general interest of the society. Whatever either promotes or obstructs
the one, necessarily promotes or obstructs the other. When the public
deliberates concerning any regulation of commerce or police, the
proprietors of land never can mislead it, with a view to promote the
interest of their own particular order; at least, if they have any
tolerable knowledge of that interest. They are, indeed, too often
defective in this tolerable knowledge. They are the only one of the three
orders whose revenue costs them neither labour nor care, but comes to
them, as it were, of its own accord, and independent of any plan or
project of their own. That indolence which is the natural effect of the
ease and security of their situation, renders them too often, not only
ignorant, but incapable of that application of mind, which is necessary in
order to foresee and understand the consequence of any public regulation.
The interest of the second order, that of those who live by wages, is as
strictly connected with the interest of the society as that of the first.
The wages of the labourer, it has already been shewn, are never so high as
when the demand for labour is continually rising, or when the quantity
employed is every year increasing considerably. When this real wealth of
the society becomes stationary, his wages are soon reduced to what is
barely enough to enable him to bring up a family, or to continue the race
of labourers. When the society declines, they fall even below this. The
order of proprietors may perhaps gain more by the prosperity of the
society than that of labourers; but there is no order that suffers so
cruelly from its decline. But though the interest of the labourer is
strictly connected with that of the society, he is incapable either of
comprehending that interest, or of understanding its connexion with his
own. His condition leaves him no time to receive the necessary
information, and his education and habits are commonly such as to render
him unfit to judge, even though he was fully informed. In the public
deliberations, therefore, his voice is little heard, and less regarded;
except upon particular occasions, when his clamour is animated, set on,
and supported by his employers, not for his, but their own particular
purposes.
His employers constitute the third order, that of those who live by
profit. It is the stock that is employed for the sake of profit, which
puts into motion the greater part of the useful labour of every society.
The plans and projects of the employers of stock regulate and direct all
the most important operation of labour, and profit is the end proposed by
all those plans and projects. But the rate of profit does not, like rent
and wages, rise with the prosperity, and fall with the declension of the
society. On the contrary, it is naturally low in rich, and high in poor
countries, and it is always highest in the countries which are going
fastest to ruin. The interest of this third order, therefore, has not the
same connexion with the general interest of the society, as that of the
other two. Merchants and master manufacturers are, in this order, the two
classes of people who commonly employ the largest capitals, and who by
their wealth draw to themselves the greatest share of the public
consideration. As during their whole lives they are engaged in plans and
projects, they have frequently more acuteness of understanding than the
greater part of country gentlemen. As their thoughts, however, are
commonly exercised rather about the interest of their own particular
branch of business. than about that of the society, their judgment, even
when given with the greatest candour (which it has not been upon every
occasion), is much more to be depended upon with regard to the former of
those two objects, than with regard to the latter. Their superiority over
the country gentleman is, not so much in their knowledge of the public
interest, as in their having a better knowledge of their own interest than
he has of his. It is by this superior knowledge of their own interest that
they have frequently imposed upon his generosity, and persuaded him to
give up both his own interest and that of the public, from a very simple
but honest conviction, that their interest, and not his, was the interest
of the public. The interest of the dealers, however, in any particular
branch of trade or manufactures, is always in some respects different
from, and even opposite to, that of the public. To widen the market, and
to narrow the competition, is always the interest of the dealers. To widen
the market may frequently be agreeable enough to the interest of the
public; but to narrow the competition must always be against it, and can
only serve to enable the dealers, by raising their profits above what they
naturally would be, to levy, for their own benefit, an absurd tax upon the
rest of their fellow-citizens. The proposal of any new law or regulation
of commerce which comes from this order, ought always to be listened to
with great precaution, and ought never to be adopted till after having
been long and carefully examined, not only with the most scrupulous, but
with the most suspicious attention. It comes from an order of men, whose
interest is never exactly the same with that of the public, who have
generally an interest to deceive and even to oppress the public, and who
accordingly have, upon many occasions, both deceived and oppressed it.
# PRICES OF WHEAT
Year Prices/Quarter Average of different Average prices of
in each year prices in one year each year in money
of 1776
£ s d £ s d £ s d
1202 0 12 0 1 16 0
1205 0 12 0
0 13 4 0 13 5 2 0 3
0 15 0
1223 0 12 0 1 16 0
1237 0 3 4 0 10 0
1243 0 2 0 0 6 0
1244 0 2 0 0 6 0
1246 0 16 0 2 8 0
1247 0 13 5 2 0 0
1257 1 4 0 3 12 0
1258 1 0 0
0 15 0 0 17 0 2 11 0
0 16 0
1270 4 16 0
6 8 0 5 12 0 16 16 0
1286 0 2 8
0 16 0 0 9 4 1 8 0
Total 35 9 3
Average 2 19 1¼
1287 0 3 4 0 10 0
1288 0 0 8
0 1 0
0 1 4
0 1 6
0 1 8 0 3 0¼ 0 9 1¾
0 2 0
0 3 4
0 9 4
1289 0 12 0
0 6 0
0 2 0 0 10 1½ 1 10 4½
0 10 8
1 0 0
1290 0 16 0 2 8 0
1294 0 16 0 2 8 0
1302 0 4 0 0 12 0
1309 0 7 2 1 1 6
1315 1 0 0 3 0 0
1316 1 0 0
1 10 0 1 10 6 4 11 6
1 12 0
2 0 0
1317 2 4 0
0 14 0
2 13 0 1 19 6 5 18 6
4 0 0
0 6 8
1336 0 2 0 0 6 0
1338 0 3 4 0 10 0
Total 23 4 11¼
Average 1 18 8
1339 0 9 0 1 7 0
1349 0 2 0 0 5 2
1359 1 6 8 3 2 2
1361 0 2 0 0 4 8
1363 0 15 0 1 15 0
1369 1 0 0
1 4 0 1 2 0 2 9 4
1379 0 4 0 0 9 4
1387 0 2 0 0 4 8
1390 0 13 4
0 14 0 0 14 5 1 13 7
0 16 0
1401 0 16 0 1 17 6
1407 0 4 4¾
0 3 4 0 3 10 0 8 10
1416 0 16 0 1 12 0
Total 15 9 4
Average 1 5 9½
1423 0 8 0 0
1425 0 4 0 0
1434 1 6 8 4
1435 0 5 4 8
1439 1 0 0
1 6 8 1 3 4 2 6 8
1440 1 4 0 2 8 0
1444 0 4 4 0 4 2 0 4 8
0 4 0
1445 0 4 6 0 9 0
1447 0 8 0 0 16 0
1448 0 6 8 0 13 4
1449 0 5 0 0 10 0
1451 0 8 0 0 16 0
Total 12 15 4
Average 1 1 3⅓
1453 0 5 4 0 10 8
1455 0 1 2 0 2 4
1457 0 7 8 1 15 4
1459 0 5 0 0 10 0
1460 0 8 0 0 16 0
1463 0 2 0 0 1 10 0 3 8
0 1 8
1464 0 6 8 0 10 0
1486 1 4 0 1 17 0
1491 0 14 8 1 2 0
1494 0 4 0 0 6 0
1495 0 3 4 0 5 0
1497 1 0 0 1 11 0
Total 8 9 0
Average 0 14 1
1499 0 4 0 0 6 0
1504 0 5 8 0 8 6
1521 1 0 0 1 10 0
1551 0 8 0 0 8 0
1553 0 8 0 0 8 0
1554 0 8 0 0 8 0
1555 0 8 0 0 8 0
1556 0 8 0 0 8 0
1557 0 8 0
0 4 0 0 17 8½ 0 17 8½
0 5 0
2 13 4
1558 0 8 0 0 8 0
1559 0 8 0 0 8 0
1560 0 8 0 0 8 0
Total 6 0 2½
Average 0 10 0½
1561 0 8 0 0 8 0
1562 0 8 0 0 8 0
1574 2 16 0
1 4 0 2 0 0 2 0 0
1587 3 4 0 3 4 0
1594 2 16 0 2 16 0
1595 2 13 0 2 13 0
1596 4 0 0 4 0 0
1597 5 4 0
4 0 0 4 12 0 4 12 0
1598 2 16 8 2 16 8
1599 1 19 2 1 19 8
1600 1 17 8 1 17 8
1601 1 14 10 1 14 10
Total 28 9 4
Average 2 7 5½
PRICES OF THE QUARTER OF NINE BUSHELS OF THE BEST OR HIGHEST PRICED WHEAT
AT WINDSOR MARKET, ON LADY DAY AND MICHAELMAS, FROM 1595 TO 1764 BOTH
INCLUSIVE; THE PRICE OF EACH YEAR BEING THE MEDIUM BETWEEN THE HIGHEST
PRICES OF THESE TWO MARKET DAYS.
£ s d
1595 2 0 0
1596 2 8 0
1597 3 9 6
1598 2 16 8
1599 1 19 2
1600 1 17 8
1601 1 14 10
1602 1 9 4
1603 1 15 4
1604 1 10 8
1605 1 15 10
1606 1 13 0
1607 1 16 8
1608 2 16 8
1609 2 10 0
1610 1 15 10
1611 1 18 8
1612 2 2 4
1613 2 8 8
1614 2 1 8½
1615 1 18 8
1616 2 0 4
1617 2 8 8
1618 2 6 8
1619 1 15 4
1620 1 10 4
26)54 0 6½
Average 2 1 6¾
1621 1 10 4
1622 2 18 8
1623 2 12 0
1624 2 8 0
1625 2 12 0
1626 2 9 4
1627 1 16 0
1628 1 8 0
1629 2 2 0
1630 2 15 8
1631 3 8 0
1632 2 13 4
1633 2 18 0
1634 2 16 0
1635 2 16 0
1636 2 16 8
16)40 0 0
Average 2 10 0
1637 2 13 0
1638 2 17 4
1639 2 4 10
1640 2 4 8
1641 2 8 0
1646 2 8 0
1647 3 13 0
1648 4 5 0
1649 4 0 0
1650 3 16 8
1651 3 13 4
1652 2 9 6
1653 1 15 6
1654 1 6 0
1655 1 13 4
1656 2 3 0
1657 2 6 8
1658 3 5 0
1659 3 6 0
1660 2 16 6
1661 3 10 0
1662 3 14 0
1663 2 17 0
1664 2 0 6
1665 2 9 4
1666 1 16 0
1667 1 16 0
1668 2 0 0
1669 2 4 4
1670 2 1 8
1671 2 2 0
1672 2 1 0
1673 2 6 8
1674 3 8 8
1675 3 4 8
1676 1 18 0
1677 2 2 0
1678 2 19 0
1679 3 0 0
1680 2 5 0
1681 2 6 8
1682 2 4 0
1683 2 0 0
1684 2 4 0
1685 2 6 8
1686 1 14 0
1687 1 5 2
1688 2 6 0
1689 1 10 0
1690 1 14 8
1691 1 14 0
1692 2 6 8
1693 3 7 8
1694 3 4 0
1695 2 13 0
1696 3 11 0
1697 3 0 0
1698 3 8 4
1699 3 4 0
1700 2 0 0
60) 153 1 8
Average 2 11 0⅓
1701 1 17 8
1702 1 9 6
1703 1 16 0
1704 2 6 6
1705 1 10 0
1706 1 6 0
1707 1 8 6
1708 2 1 6
1709 3 18 6
1710 3 18 0
1711 2 14 0
1712 2 6 4
1713 2 11 0
1714 2 10 4
1715 2 3 0
1716 2 8 0
1717 2 5 8
1718 1 18 10
1719 1 15 0
1720 1 17 0
1721 1 17 6
1722 1 16 0
1723 1 14 8
1724 1 17 0
1725 2 8 6
1726 2 6 0
1727 2 2 0
1728 2 14 6
1729 2 6 10
1730 1 16 6
1731 1 12 10 1 12 10
1732 1 6 8 1 6 8
1733 1 8 4 1 8 4
1734 1 18 10 1 18 10
1735 2 3 0 2 3 0
1736 2 0 4 2 0 4
1737 1 18 0 1 18 0
1738 1 15 6 1 15 6
1739 1 18 6 1 18 6
1740 2 10 8 2 10 8
10) 18 12 8
1 17 3½
1741 2 6 8 2 6 8
1742 1 14 0 1 14 0
1743 1 4 10 1 4 10
1744 1 4 10 1 4 10
1745 1 7 6 1 7 6
1746 1 19 0 1 19 0
1747 1 14 10 1 14 10
1748 1 17 0 1 17 0
1749 1 17 0 1 17 0
1750 1 12 6 1 12 6
10) 16 18 2
1 13 9¾
1751 1 18 6
1752 2 1 10
1753 2 4 8
1754 1 13 8
1755 1 14 10
1756 2 5 3
1757 3 0 0
1758 2 10 0
1759 1 19 10
1760 1 16 6
1761 1 10 3
1762 1 19 0
1763 2 0 9
1764 2 6 9
64) 129 13 6
Average 2 0 6¾
BOOK II.
OF THE NATURE, ACCUMULATION, AND EMPLOYMENT OF STOCK.
INTRODUCTION.
In that rude state of society, in which there is no division of labour, in
which exchanges are seldom made, and in which every man provides every
thing for himself, it is not necessary that any stock should be
accumulated, or stored up before-hand, in order to carry on the business
of the society. Every man endeavours to supply, by his own industry, his
own occasional wants, as they occur. When he is hungry, he goes to the
forest to hunt; when his coat is worn out, he clothes himself with the
skin of the first large animal he kills: and when his hut begins to go to
ruin, he repairs it, as well as he can, with the trees and the turf that
are nearest it.
But when the division of labour has once been thoroughly introduced, the
produce of a man’s own labour can supply but a very small part of his
occasional wants. The far greater part of them are supplied by the produce
of other men’s labour, which he purchases with the produce, or, what is
the same thing, with the price of the produce, of his own. But this
purchase cannot be made till such time as the produce of his own labour
has not only been completed, but sold. A stock of goods of different
kinds, therefore, must be stored up somewhere, sufficient to maintain him,
and to supply him with the materials and tools of his work, till such time
at least as both these events can be brought about. A weaver cannot apply
himself entirely to his peculiar business, unless there is before-hand
stored up somewhere, either in his own possession, or in that of some
other person, a stock sufficient to maintain him, and to supply him with
the materials and tools of his work, till he has not only completed, but
sold his web. This accumulation must evidently be previous to his applying
his industry for so long a time to such a peculiar business.
As the accumulation of stock must, in the nature of things, be previous to
the division of labour, so labour can be more and more subdivided in
proportion only as stock is previously more and more accumulated. The
quantity of materials which the same number of people can work up,
increases in a great proportion as labour comes to be more and more
subdivided; and as the operations of each workman are gradually reduced to
a greater degree of simplicity, a variety of new machines come to be
invented for facilitating and abridging those operations. As the division
of labour advances, therefore, in order to give constant employment to an
equal number of workmen, an equal stock of provisions, and a greater stock
of materials and tools than what would have been necessary in a ruder
state of things, must be accumulated before-hand. But the number of
workmen in every branch of business generally increases with the division
of labour in that branch; or rather it is the increase of their number
which enables them to class and subdivide themselves in this manner.
As the accumulation of stock is previously necessary for carrying on this
great improvement in the productive powers of labour, so that accumulation
naturally leads to this improvement. The person who employs his stock in
maintaining labour, necessarily wishes to employ it in such a manner as to
produce as great a quantity of work as possible. He endeavours, therefore,
both to make among his workmen the most proper distribution of employment,
and to furnish them with the best machines which he can either invent or
afford to purchase. His abilities, in both these respects, are generally
in proportion to the extent of his stock, or to the number of people whom
it can employ. The quantity of industry, therefore, not only increases in
every country with the increase of the stock which employs it, but, in
consequence of that increase, the same quantity of industry produces a
much greater quantity of work.
Such are in general the effects of the increase of stock upon industry and
its productive powers.
In the following book, I have endeavoured to explain the nature of stock,
the effects of its accumulation into capital of different kinds, and the
effects of the different employments of those capitals. This book is
divided into five chapters. In the first chapter, I have endeavoured to
shew what are the different parts or branches into which the stock, either
of an individual, or of a great society, naturally divides itself. In the
second, I have endeavoured to explain the nature and operation of money,
considered as a particular branch of the general stock of the society. The
stock which is accumulated into a capital, may either be employed by the
person to whom it belongs, or it may be lent to some other person. In the
third and fourth chapters, I have endeavoured to examine the manner in
which it operates in both these situations. The fifth and last chapter
treats of the different effects which the different employments of capital
immediately produce upon the quantity, both of national industry, and of
the annual produce of land and labour.
CHAPTER I.
OF THE DIVISION OF STOCK.
When the stock which a man possesses is no more than sufficient to
maintain him for a few days or a few weeks, he seldom thinks of deriving
any revenue from it. He consumes it as sparingly as he can, and
endeavours, by his labour, to acquire something which may supply its place
before it be consumed altogether. His revenue is, in this case, derived
from his labour only. This is the state of the greater part of the
labouring poor in all countries.
But when he possesses stock sufficient to maintain him for months or
years, he naturally endeavours to derive a revenue from the greater part
of it, reserving only so much for his immediate consumption as may
maintain him till this revenue begins to come in. His whole stock,
therefore, is distinguished into two parts. That part which he expects is
to afford him this revenue is called his capital. The other is that which
supplies his immediate consumption, and which consists either, first, in
that portion of his whole stock which was originally reserved for this
purpose; or, secondly, in his revenue, from whatever source derived, as it
gradually comes in; or, thirdly, in such things as had been purchased by
either of these in former years, and which are not yet entirely consumed,
such as a stock of clothes, household furniture, and the like. In one or
other, or all of these three articles, consists the stock which men
commonly reserve for their own immediate consumption.
There are two different ways in which a capital may be employed so as to
yield a revenue or profit to its employer.
First, it may be employed in raising, manufacturing, or purchasing goods,
and selling them again with a profit. The capital employed in this manner
yields no revenue or profit to its employer, while it either remains in
his possession, or continues in the same shape. The goods of the merchant
yield him no revenue or profit till he sells them for money, and the money
yields him as little till it is again exchanged for goods. His capital is
continually going from him in one shape, and returning to him in another;
and it is only by means of such circulation, or successive changes, that
it can yield him any profit. Such capitals, therefore, may very properly
be called circulating capitals.
Secondly, it may be employed in the improvement of land, in the purchase
of useful machines and instruments of trade, or in such like things as
yield a revenue or profit without changing masters, or circulating any
further. Such capitals, therefore, may very properly be called fixed
capitals.
Different occupations require very different proportions between the fixed
and circulating capitals employed in them.
The capital of a merchant, for example, is altogether a circulating
capital. He has occasion for no machines or instruments of trade, unless
his shop or warehouse be considered as such.
Some part of the capital of every master artificer or manufacturer must be
fixed in the instruments of his trade. This part, however, is very small
in some, and very great in others, A master tailor requires no other
instruments of trade but a parcel of needles. Those of the master
shoemaker are a little, though but a very little, more expensive. Those of
the weaver rise a good deal above those of the shoemaker. The far greater
part of the capital of all such master artificers, however, is circulated
either in the wages of their workmen, or in the price of their materials,
and repaid, with a profit, by the price of the work.
In other works a much greater fixed capital is required. In a great
iron-work, for example, the furnace for melting the ore, the forge, the
slit-mill, are instruments of trade which cannot be erected without a very
great expense. In coal works, and mines of every kind, the machinery
necessary, both for drawing out the water, and for other purposes, is
frequently still more expensive.
That part of the capital of the farmer which is employed in the
instruments of agriculture is a fixed, that which is employed in the wages
and maintenance of his labouring servants is a circulating capital. He
makes a profit of the one by keeping it in his own possession, and of the
other by parting with it. The price or value of his labouring cattle is a
fixed capital, in the same manner as that of the instruments of husbandry;
their maintenance is a circulating capital, in the same manner as that of
the labouring servants. The farmer makes his profit by keeping the
labouring cattle, and by parting with their maintenance. Both the price
and the maintenance of the cattle which are bought in and fattened, not
for labour, but for sale, are a circulating capital. The farmer makes his
profit by parting with them. A flock of sheep or a herd of cattle, that,
in a breeding country, is brought in neither for labour nor for sale, but
in order to make a profit by their wool, by their milk, and by their
increase, is a fixed capital. The profit is made by keeping them. Their
maintenance is a circulating capital. The profit is made by parting with
it; and it comes back with both its own profit and the profit upon the
whole price of the cattle, in the price of the wool, the milk, and the
increase. The whole value of the seed, too, is properly a fixed capital.
Though it goes backwards and forwards between the ground and the granary,
it never changes masters, and therefore does not properly circulate. The
farmer makes his profit, not by its sale, but by its increase.
The general stock of any country or society is the same with that of all
its inhabitants or members; and, therefore, naturally divides itself into
the same three portions, each of which has a distinct function or office.
The first is that portion which is reserved for immediate consumption, and
of which the characteristic is, that it affords no revenue or profit. It
consists in the stock of food, clothes, household furniture, etc. which
have been purchased by their proper consumers, but which are not yet
entirely consumed. The whole stock of mere dwelling-houses, too,
subsisting at any one time in the country, make a part of this first
portion. The stock that is laid out in a house, if it is to be the
dwelling-house of the proprietor, ceases from that moment to serve in the
function of a capital, or to afford any revenue to its owner. A
dwelling-house, as such, contributes nothing to the revenue of its
inhabitant; and though it is, no doubt, extremely useful to him, it is as
his clothes and household furniture are useful to him, which, however,
make a part of his expense, and not of his revenue. If it is to be let to
a tenant for rent, as the house itself can produce nothing, the tenant
must always pay the rent out of some other revenue, which he derives,
either from labour, or stock, or land. Though a house, therefore, may
yield a revenue to its proprietor, and thereby serve in the function of a
capital to him, it cannot yield any to the public, nor serve in the
function of a capital to it, and the revenue of the whole body of the
people can never be in the smallest degree increased by it. Clothes and
household furniture, in the same manner, sometimes yield a revenue, and
thereby serve in the function of a capital to particular persons. In
countries where masquerades are common, it is a trade to let out
masquerade dresses for a night. Upholsterers frequently let furniture by
the month or by the year. Undertakers let the furniture of funerals by the
day and by the week. Many people let furnished houses, and get a rent, not
only for the use of the house, but for that of the furniture. The revenue,
however, which is derived from such things, must always be ultimately
drawn from some other source of revenue. Of all parts of the stock, either
of an individual or of a society, reserved for immediate consumption, what
is laid out in houses is most slowly consumed. A stock of clothes may last
several years; a stock of furniture half a century or a century; but a
stock of houses, well built and properly taken care of, may last many
centuries. Though the period of their total consumption, however, is more
distant, they are still as really a stock reserved for immediate
consumption as either clothes or household furniture.
The second of the three portions into which the general stock of the
society divides itself, is the fixed capital; of which the characteristic
is, that it affords a revenue or profit without circulating or changing
masters. It consists chiefly of the four following articles.
First, of all useful machines and instruments of trade, which facilitate
and abridge labour.
Secondly, of all those profitable buildings which are the means of
procuring a revenue, not only to the proprietor who lets them for a rent,
but to the person who possesses them, and pays that rent for them; such as
shops, warehouses, work-houses, farm-houses, with all their necessary
buildings, stables, granaries, etc. These are very different from mere
dwelling-houses. They are a sort of instruments of trade, and may be
considered in the same light.
Thirdly, of the improvements of land, of what has been profitably laid out
in clearing, draining, inclosing, manuring, and reducing it into the
condition most proper for tillage and culture. An improved farm may very
justly be regarded in the same light as those useful machines which
facilitate and abridge labour, and by means of which an equal circulating
capital can afford a much greater revenue to its employer. An improved
farm is equally advantageous and more durable than any of those machines,
frequently requiring no other repairs than the most profitable application
of the farmer’s capital employed in cultivating it.
Fourthly, of the acquired and useful abilities of all the inhabitants and
members of the society. The acquisition of such talents, by the
maintenance of the acquirer during his education, study, or
apprenticeship, always costs a real expense, which is a capital fixed and
realized, as it were, in his person. Those talents, as they make a part of
his fortune, so do they likewise that of the society to which he belongs.
The improved dexterity of a workman may be considered in the same light as
a machine or instrument of trade which facilitates and abridges labour,
and which, though it costs a certain expense, repays that expense with a
profit.
The third and last of the three portions into which the general stock of
the society naturally divides itself, is the circulating capital, of which
the characteristic is, that it affords a revenue only by circulating or
changing masters. It is composed likewise of four parts.
First, of the money, by means of which all the other three are circulated
and distributed to their proper consumers.
Secondly, of the stock of provisions which are in the possession of the
butcher, the grazier, the farmer, the corn-merchant, the brewer, etc. and
from the sale of which they expect to derive a profit.
Thirdly, of the materials, whether altogether rude, or more or less
manufactured, of clothes, furniture, and building which are not yet made
up into any of those three shapes, but which remain in the hands of the
growers, the manufacturers, the mercers, and drapers, the
timber-merchants, the carpenters and joiners, the brick-makers, etc.
Fourthly, and lastly, of the work which is made up and completed, but
which is still in the hands of the merchant and manufacturer, and not yet
disposed of or distributed to the proper consumers; such as the finished
work which we frequently find ready made in the shops of the smith, the
cabinet-maker, the goldsmith, the jeweller, the china-merchant, etc. The
circulating capital consists, in this manner, of the provisions,
materials, and finished work of all kinds that are in the hands of their
respective dealers, and of the money that is necessary for circulating and
distributing them to those who are finally to use or to consume them.
Of these four parts, three—provisions, materials, and finished work,
are either annually or in a longer or shorter period, regularly withdrawn
from it, and placed either in the fixed capital, or in the stock reserved
for immediate consumption.
Every fixed capital is both originally derived from, and requires to be
continually supported by, a circulating capital. All useful machines and
instruments of trade are originally derived from a circulating capital,
which furnishes the materials of which they are made, and the maintenance
of the workmen who make them. They require, too, a capital of the same
kind to keep them in constant repair.
No fixed capital can yield any revenue but by means of a circulating
capital. The most useful machines and instruments of trade will produce
nothing, without the circulating capital, which affords the materials they
are employed upon, and the maintenance of the workmen who employ them.
Land, however improved, will yield no revenue without a circulating
capital, which maintains the labourers who cultivate and collect its
produce.
To maintain and augment the stock which may be reserved for immediate
consumption, is the sole end and purpose both of the fixed and circulating
capitals. It is this stock which feeds, clothes, and lodges the people.
Their riches or poverty depend upon the abundant or sparing supplies which
those two capitals can afford to the stock reserved for immediate
consumption.
So great a part of the circulating capital being continually withdrawn
from it, in order to be placed in the other two branches of the general
stock of the society, it must in its turn require continual supplies
without which it would soon cease to exist. These supplies are principally
drawn from three sources; the produce of land, of mines, and of fisheries.
These afford continual supplies of provisions and materials, of which part
is afterwards wrought up into finished work and by which are replaced the
provisions, materials, and finished work, continually withdrawn from the
circulating capital. From mines, too, is drawn what is necessary for
maintaining and augmenting that part of it which consists in money. For
though, in the ordinary course of business, this part is not, like the
other three, necessarily withdrawn from it, in order to be placed in the
other two branches of the general stock of the society, it must, however,
like all other things, be wasted and worn out at last, and sometimes, too,
be either lost or sent abroad, and must, therefore, require continual,
though no doubt much smaller supplies.
Land, mines, and fisheries, require all both a fixed and circulating
capital to cultivate them; and their produce replaces, with a profit not
only those capitals, but all the others in the society. Thus the farmer
annually replaces to the manufacturer the provisions which he had
consumed, and the materials which he had wrought up the year before; and
the manufacturer replaces to the farmer the finished work which he had
wasted and worn out in the same time. This is the real exchange that is
annually made between those two orders of people, though it seldom happens
that the rude produce of the one, and the manufactured produce of the
other, are directly bartered for one another; because it seldom happens
that the farmer sells his corn and his cattle, his flax and his wool, to
the very same person of whom he chuses to purchase the clothes, furniture,
and instruments of trade, which he wants. He sells, therefore, his rude
produce for money, with which he can purchase, wherever it is to be had,
the manufactured produce he has occasion for. Land even replaces, in part
at least, the capitals with which fisheries and mines are cultivated. It
is the produce of land which draws the fish from the waters; and it is the
produce of the surface of the earth which extracts the minerals from its
bowels.
The produce of land, mines, and fisheries, when their natural fertility is
equal, is in proportion to the extent and proper application of the
capitals employed about them. When the capitals are equal, and equally
well applied, it is in proportion to their natural fertility.
In all countries where there is a tolerable security, every man of common
understanding will endeavour to employ whatever stock he can command, in
procuring either present enjoyment or future profit. If it is employed in
procuring present enjoyment, it is a stock reserved for immediate
consumption. If it is employed in procuring future profit, it must procure
this profit either by staying with him, or by going from him. In the one
case it is a fixed, in the other it is a circulating capital. A man must
be perfectly crazy, who, where there is a tolerable security, does not
employ all the stock which he commands, whether it be his own, or borrowed
of other people, in some one or other of those three ways.
In those unfortunate countries, indeed, where men are continually afraid
of the violence of their superiors, they frequently bury or conceal a
great part of their stock, in order to have it always at hand to carry
with them to some place of safety, in case of their being threatened with
any of those disasters to which they consider themselves at all times
exposed. This is said to be a common practice in Turkey, in Indostan, and,
I believe, in most other governments of Asia. It seems to have been a
common practice among our ancestors during the violence of the feudal
government. Treasure-trove was, in those times, considered as no
contemptible part of the revenue of the greatest sovereigns in Europe. It
consisted in such treasure as was found concealed in the earth, and to
which no particular person could prove any right. This was regarded, in
those times, as so important an object, that it was always considered as
belonging to the sovereign, and neither to the finder nor to the
proprietor of the land, unless the right to it had been conveyed to the
latter by an express clause in his charter. It was put upon the same
footing with gold and silver mines, which, without a special clause in the
charter, were never supposed to be comprehended in the general grant of
the lands, though mines of lead, copper, tin, and coal were, as things of
smaller consequence.
CHAPTER II.
OF MONEY, CONSIDERED AS A PARTICULAR
BRANCH OF THE GENERAL STOCK OF THE SOCIETY, OR OF THE EXPENSE OF MAINTAINING
THE NATIONAL CAPITAL.
It has been shown in the First Book, that the price of the greater part of
commodities resolves itself into three parts, of which one pays the wages
of the labour, another the profits of the stock, and a third the rent of
the land which had been employed in producing and bringing them to market:
that there are, indeed, some commodities of which the price is made up of
two of those parts only, the wages of labour, and the profits of stock;
and a very few in which it consists altogether in one, the wages of
labour; but that the price of every commodity necessarily resolves itself
into some one or other, or all, of those three parts; every part of it
which goes neither to rent nor to wages, being necessarily profit to some
body.
Since this is the case, it has been observed, with regard to every
particular commodity, taken separately, it must be so with regard to all
the commodities which compose the whole annual produce of the land and
labour of every country, taken complexly. The whole price or exchangeable
value of that annual produce must resolve itself into the same three
parts, and be parcelled out among the different inhabitants of the
country, either as the wages of their labour, the profits of their stock,
or the rent of their land.
But though the whole value of the annual produce of the land and labour of
every country, is thus divided among, and constitutes a revenue to, its
different inhabitants; yet, as in the rent of a private estate, we
distinguish between the gross rent and the neat rent, so may we likewise
in the revenue of all the inhabitants of a great country.
The gross rent of a private estate comprehends whatever is paid by the
farmer; the neat rent, what remains free to the landlord, after deducting
the expense of management, of repairs, and all other necessary charges; or
what, without hurting his estate, he can afford to place in his stock
reserved for immediate consumption, or to spend upon his table, equipage,
the ornaments of his house and furniture, his private enjoyments and
amusements. His real wealth is in proportion, not to his gross, but to his
neat rent.
The gross revenue of all the inhabitants of a great country comprehends
the whole annual produce of their land and labour; the neat revenue, what
remains free to them, after deducting the expense of maintaining first,
their fixed, and, secondly, their circulating capital, or what, without
encroaching upon their capital, they can place in their stock reserved for
immediate consumption, or spend upon their subsistence, conveniencies, and
amusements. Their real wealth, too, is in proportion, not to their gross,
but to their neat revenue.
The whole expense of maintaining the fixed capital must evidently be
excluded from the neat revenue of the society. Neither the materials
necessary for supporting their useful machines and instruments of trade,
their profitable buildings, etc. nor the produce of the labour necessary
for fashioning those materials into the proper form, can ever make any
part of it. The price of that labour may indeed make a part of it; as the
workmen so employed may place the whole value of their wages in their
stock reserved for immediate consumption. But in other sorts of labour,
both the price and the produce go to this stock; the price to that of the
workmen, the produce to that of other people, whose subsistence,
conveniencies, and amusements, are augmented by the labour of those
workmen.
The intention of the fixed capital is to increase the productive powers of
labour, or to enable the same number of labourers to perform a much
greater quantity of work. In a farm where all the necessary buildings,
fences, drains, communications, etc. are in the most perfect good order,
the same number of labourers and labouring cattle will raise a much
greater produce, than in one of equal extent and equally good ground, but
not furnished with equal conveniencies. In manufactures, the same number
of hands, assisted with the best machinery, will work up a much greater
quantity of goods than with more imperfect instruments of trade. The
expense which is properly laid out upon a fixed capital of any kind, is
always repaid with great profit, and increases the annual produce by a
much greater value than that of the support which such improvements
require. This support, however, still requires a certain portion of that
produce. A certain quantity of materials, and the labour of a certain
number of workmen, both of which might have been immediately employed to
augment the food, clothing, and lodging, the subsistence and conveniencies
of the society, are thus diverted to another employment, highly
advantageous indeed, but still different from this one. It is upon this
account that all such improvements in mechanics, as enable the same number
of workmen to perform an equal quantity of work with cheaper and simpler
machinery than had been usual before, are always regarded as advantageous
to every society. A certain quantity of materials, and the labour of a
certain number of workmen, which had before been employed in supporting a
more complex and expensive machinery, can afterwards be applied to augment
the quantity of work which that or any other machinery is useful only for
performing. The undertaker of some great manufactory, who employs a
thousand a-year in the maintenance of his machinery, if he can reduce this
expense to five hundred, will naturally employ the other five hundred in
purchasing an additional quantity of materials, to be wrought up by an
additional number of workmen. The quantity of that work, therefore, which
his machinery was useful only for performing, will naturally be augmented,
and with it all the advantage and conveniency which the society can derive
from that work.
The expense of maintaining the fixed capital in a great country, may very
properly be compared to that of repairs in a private estate. The expense
of repairs may frequently be necessary for supporting the produce of the
estate, and consequently both the gross and the neat rent of the landlord.
When by a more proper direction, however, it can be diminished without
occasioning any diminution of produce, the gross rent remains at least the
same as before, and the neat rent is necessarily augmented.
But though the whole expense of maintaining the fixed capital is thus
necessarily excluded from the neat revenue of the society, it is not the
same case with that of maintaining the circulating capital. Of the four
parts of which this latter capital is composed, money, provisions,
materials, and finished work, the three last, it has already been
observed, are regularly withdrawn from it, and placed either in the fixed
capital of the society, or in their stock reserved for immediate
consumption. Whatever portion of those consumable goods is not employed in
maintaining the former, goes all to the latter, and makes a part of the
neat revenue of the society. The maintenance of those three parts of the
circulating capital, therefore, withdraws no portion of the annual produce
from the neat revenue of the society, besides what is necessary for
maintaining the fixed capital.
The circulating capital of a society is in this respect different from
that of an individual. That of an individual is totally excluded from
making any part of his neat revenue, which must consist altogether in his
profits. But though the circulating capital of every individual makes a
part of that of the society to which he belongs, it is not upon that
account totally excluded from making a part likewise of their neat
revenue. Though the whole goods in a merchant’s shop must by no means be
placed in his own stock reserved for immediate consumption, they may in
that of other people, who, from a revenue derived from other funds, may
regularly replace their value to him, together with its profits, without
occasioning any diminution either of his capital or of theirs.
Money, therefore, is the only part of the circulating capital of a
society, of which the maintenance can occasion any diminution in their
neat revenue.
The fixed capital, and that part of the circulating capital which consists
in money, so far as they affect the revenue of the society, bear a very
great resemblance to one another.
First, as those machines and instruments of trade, etc. require a certain
expense, first to erect them, and afterwards to support them, both which
expenses, though they make a part of the gross, are deductions from the
neat revenue of the society; so the stock of money which circulates in any
country must require a certain expense, first to collect it, and
afterwards to support it; both which expenses, though they make a part of
the gross, are, in the same manner, deductions from the neat revenue of
the society. A certain quantity of very valuable materials, gold and
silver, and of very curious labour, instead of augmenting the stock
reserved for immediate consumption, the subsistence, conveniencies, and
amusements of individuals, is employed in supporting that great but
expensive instrument of commerce, by means of which every individual in
the society has his subsistence, conveniencies, and amusements, regularly
distributed to him in their proper proportions.
Secondly, as the machines and instruments of trade, etc. which compose the
fixed capital either of an individual or of a society, make no part either
of the gross or of the neat revenue of either; so money, by means of which
the whole revenue of the society is regularly distributed among all its
different members, makes itself no part of that revenue. The great wheel
of circulation is altogether different from the goods which are circulated
by means of it. The revenue of the society consists altogether in those
goods, and not in the wheel which circulates them. In computing either the
gross or the neat revenue of any society, we must always, from the whole
annual circulation of money and goods, deduct the whole value of the
money, of which not a single farthing can ever make any part of either.
It is the ambiguity of language only which can make this proposition
appear either doubtful or paradoxical. When properly explained and
understood, it is almost self-evident.
When we talk of any particular sum of money, we sometimes mean nothing but
the metal pieces of which it is composed, and sometimes we include in our
meaning some obscure reference to the goods which can be had in exchange
for it, or to the power of purchasing which the possession of it conveys.
Thus, when we say that the circulating money of England has been computed
at eighteen millions, we mean only to express the amount of the metal
pieces, which some writers have computed, or rather have supposed, to
circulate in that country. But when we say that a man is worth fifty or a
hundred pounds a-year, we mean commonly to express, not only the amount of
the metal pieces which are annually paid to him, but the value of the
goods which he can annually purchase or consume; we mean commonly to
ascertain what is or ought to be his way of living, or the quantity and
quality of the necessaries and conveniencies of life in which he can with
propriety indulge himself.
When, by any particular sum of money, we mean not only to express the
amount of the metal pieces of which it is composed, but to include in its
signification some obscure reference to the goods which can be had in
exchange for them, the wealth or revenue which it in this case denotes, is
equal only to one of the two values which are thus intimated somewhat
ambiguously by the same word, and to the latter more properly than to the
former, to the money’s worth more properly than to the money.
Thus, if a guinea be the weekly pension of a particular person, he can in
the course of the week purchase with it a certain quantity of subsistence,
conveniencies, and amusements. In proportion as this quantity is great or
small, so are his real riches, his real weekly revenue. His weekly revenue
is certainly not equal both to the guinea and to what can be purchased
with it, but only to one or other of those two equal values, and to the
latter more properly than to the former, to the guinea’s worth rather than
to the guinea.
If the pension of such a person was paid to him, not in gold, but in a
weekly bill for a guinea, his revenue surely would not so properly consist
in the piece of paper, as in what he could get for it. A guinea may be
considered as a bill for a certain quantity of necessaries and
conveniencies upon all the tradesmen in the neighbourhood. The revenue of
the person to whom it is paid, does not so properly consist in the piece
of gold, as in what he can get for it, or in what he can exchange it for.
If it could be exchanged for nothing, it would, like a bill upon a
bankrupt, be of no more value than the most useless piece of paper.
Though the weekly or yearly revenue of all the different inhabitants of
any country, in the same manner, may be, and in reality frequently is,
paid to them in money, their real riches, however, the real weekly or
yearly revenue of all of them taken together, must always be great or
small, in proportion to the quantity of consumable goods which they can
all of them purchase with this money. The whole revenue of all of them
taken together is evidently not equal to both the money and the consumable
goods, but only to one or other of those two values, and to the latter
more properly than to the former.
Though we frequently, therefore, express a person’s revenue by the metal
pieces which are annually paid to him, it is because the amount of those
pieces regulates the extent of his power of purchasing, or the value of
the goods which he can annually afford to consume. We still consider his
revenue as consisting in this power of purchasing or consuming, and not in
the pieces which convey it.
But if this is sufficiently evident, even with regard to an individual, it
is still more so with regard to a society. The amount of the metal pieces
which are annually paid to an individual, is often precisely equal to his
revenue, and is upon that account the shortest and best expression of its
value. But the amount of the metal pieces which circulate in a society,
can never be equal to the revenue of all its members. As the same guinea
which pays the weekly pension of one man to-day, may pay that of another
to-morrow, and that of a third the day thereafter, the amount of the metal
pieces which annually circulate in any country, must always be of much
less value than the whole money pensions annually paid with them. But the
power of purchasing, or the goods which can successively be bought with
the whole of those money pensions, as they are successively paid, must
always be precisely of the same value with those pensions; as must
likewise be the revenue of the different persons to whom they are paid.
That revenue, therefore, cannot consist in those metal pieces, of which
the amount is so much inferior to its value, but in the power of
purchasing, in the goods which can successively be bought with them as
they circulate from hand to hand.
Money, therefore, the great wheel of circulation, the great instrument of
commerce, like all other instruments of trade, though it makes a part, and
a very valuable part, of the capital, makes no part of the revenue of the
society to which it belongs; and though the metal pieces of which it is
composed, in the course of their annual circulation, distribute to every
man the revenue which properly belongs to him, they make themselves no
part of that revenue.
Thirdly, and lastly, the machines and instruments of trade, etc. which
compose the fixed capital, bear this further resemblance to that part of
the circulating capital which consists in money; that as every saving in
the expense of erecting and supporting those machines, which does not
diminish the introductive powers of labour, is an improvement of the neat
revenue of the society; so every saving in the expense of collecting and
supporting that part of the circulating capital which consists in money is
an improvement of exactly the same kind.
It is sufficiently obvious, and it has partly, too, been explained
already, in what manner every saving in the expense of supporting the
fixed capital is an improvement of the neat revenue of the society. The
whole capital of the undertaker of every work is necessarily divided
between his fixed and his circulating capital. While his whole capital
remains the same, the smaller the one part, the greater must necessarily
be the other. It is the circulating capital which furnishes the materials
and wages of labour, and puts industry into motion. Every saving,
therefore, in the expense of maintaining the fixed capital, which does not
diminish the productive powers of labour, must increase the fund which
puts industry into motion, and consequently the annual produce of land and
labour, the real revenue of every society.
The substitution of paper in the room of gold and silver money, replaces a
very expensive instrument of commerce with one much less costly, and
sometimes equally convenient. Circulation comes to be carried on by a new
wheel, which it costs less both to erect and to maintain than the old one.
But in what manner this operation is performed, and in what manner it
tends to increase either the gross or the neat revenue of the society, is
not altogether so obvious, and may therefore require some further
explication.
There are several different sorts of paper money; but the circulating
notes of banks and bankers are the species which is best known, and which
seems best adapted for this purpose.
When the people of any particular country have such confidence in the
fortune, probity and prudence of a particular banker, as to believe that
he is always ready to pay upon demand such of his promissory notes as are
likely to be at any time presented to him, those notes come to have the
same currency as gold and silver money, from the confidence that such
money can at any time be had for them.
A particular banker lends among his customers his own promissory notes,
to the extent, we shall suppose, of a hundred thousand pounds. As those
notes serve all the purposes of money, his debtors pay him the same
interest as if he had lent them so much money. This interest is the
source of his gain. Though some of those notes are continually coming
back upon him for payment, part of them continue to circulate for months
and years together. Though he has generally in circulation, therefore,
notes to the extent of a hundred thousand pounds, twenty thousand pounds
in gold and silver may, frequently, be a sufficient provision for
answering occasional demands. By this operation, therefore, twenty
thousand pounds in gold and silver perform all the functions which a
hundred thousand could otherwise have performed. The same exchanges may
be made, the same quantity of consumable goods may be circulated and
distributed to their proper consumers, by means of his promissory notes,
to the value of a hundred thousand pounds, as by an equal value of gold
and silver money. Eighty thousand pounds of gold and silver, therefore,
can in this manner be spared from the circulation of the country; and if
different operations of the same kind should, at the same time, be
carried on by many different banks and bankers, the whole circulation may
thus be conducted with a fifth part only of the gold and silver which
would otherwise have been requisite.
Let us suppose, for example, that the whole circulating money of some
particular country amounted, at a particular time, to one million
sterling, that sum being then sufficient for circulating the whole annual
produce of their land and labour; let us suppose, too, that some time
thereafter, different banks and bankers issued promissory notes payable to
the bearer, to the extent of one million, reserving in their different
coffers two hundred thousand pounds for answering occasional demands;
there would remain, therefore, in circulation, eight hundred thousand
pounds in gold and silver, and a million of bank notes, or eighteen
hundred thousand pounds of paper and money together. But the annual
produce of the land and labour of the country had before required only one
million to circulate and distribute it to its proper consumers, and that
annual produce cannot be immediately augmented by those operations of
banking. One million, therefore, will be sufficient to circulate it after
them. The goods to be bought and sold being precisely the same as before,
the same quantity of money will be sufficient for buying and selling them.
The channel of circulation, if I may be allowed such an expression, will
remain precisely the same as before. One million we have supposed
sufficient to fill that channel. Whatever, therefore, is poured into it
beyond this sum, cannot run into it, but must overflow. One million eight
hundred thousand pounds are poured into it. Eight hundred thousand pounds,
therefore, must overflow, that sum being over and above what can be
employed in the circulation of the country. But though this sum cannot be
employed at home, it is too valuable to be allowed to lie idle. It will,
therefore, be sent abroad, in order to seek that profitable employment
which it cannot find at home. But the paper cannot go abroad; because at a
distance from the banks which issue it, and from the country in which
payment of it can be exacted by law, it will not be received in common
payments. Gold and silver, therefore, to the amount of eight hundred
thousand pounds, will be sent abroad, and the channel of home circulation
will remain filled with a million of paper instead of a million of those
metals which filled it before.
But though so great a quantity of gold and silver is thus sent abroad, we
must not imagine that it is sent abroad for nothing, or that its
proprietors make a present of it to foreign nations. They will exchange it
for foreign goods of some kind or another, in order to supply the
consumption either of some other foreign country, or of their own.
If they employ it in purchasing goods in one foreign country, in order to
supply the consumption of another, or in what is called the carrying
trade, whatever profit they make will be in addition to the neat revenue
of their own country. It is like a new fund, created for carrying on a new
trade; domestic business being now transacted by paper, and the gold and
silver being converted into a fund for this new trade.
If they employ it in purchasing foreign goods for home consumption, they
may either, first, purchase such goods as are likely to be consumed by
idle people, who produce nothing, such as foreign wines, foreign silks,
etc.; or, secondly, they may purchase an additional stock of materials,
tools, and provisions, in order to maintain and employ an additional
number of industrious people, who reproduce, with a profit, the value of
their annual consumption.
So far as it is employed in the first way, it promotes prodigality,
increases expense and consumption, without increasing production, or
establishing any permanent fund for supporting that expense, and is in
every respect hurtful to the society.
So far as it is employed in the second way, it promotes industry; and
though it increases the consumption of the society, it provides a
permanent fund for supporting that consumption; the people who consume
reproducing, with a profit, the whole value of their annual consumption.
The gross revenue of the society, the annual produce of their land and
labour, is increased by the whole value which the labour of those workmen
adds to the materials upon which they are employed, and their neat revenue
by what remains of this value, after deducting what is necessary for
supporting the tools and instruments of their trade.
That the greater part of the gold and silver which being forced abroad by
those operations of banking, is employed in purchasing foreign goods for
home consumption, is, and must be, employed in purchasing those of this
second kind, seems not only probable, but almost unavoidable. Though some
particular men may sometimes increase their expense very considerably,
though their revenue does not increase at all, we maybe assured that no
class or order of men ever does so; because, though the principles of
common prudence do not always govern the conduct of every individual, they
always influence that of the majority of every class or order. But the
revenue of idle people, considered as a class or order, cannot, in the
smallest degree, be increased by those operations of banking. Their
expense in general, therefore, cannot be much increased by them, though
that of a few individuals among them may, and in reality sometimes is. The
demand of idle people, therefore, for foreign goods, being the same, or
very nearly the same as before, a very small part of the money which,
being forced abroad by those operations of banking, is employed in
purchasing foreign goods for home consumption, is likely to be employed in
purchasing those for their use. The greater part of it will naturally be
destined for the employment of industry, and not for the maintenance of
idleness.
When we compute the quantity of industry which the circulating capital of
any society can employ, we must always have regard to those parts of it
only which consist in provisions, materials, and finished work; the other,
which consists in money, and which serves only to circulate those three,
must always be deducted. In order to put industry into motion, three
things are requisite; materials to work upon, tools to work with, and the
wages or recompence for the sake of which the work is done. Money is
neither a material to work upon, nor a tool to work with; and though the
wages of the workman are commonly paid to him in money, his real revenue,
like that of all other men, consists, not in the money, but in the money’s
worth; not in the metal pieces, but in what can be got for them.
The quantity of industry which any capital can employ, must evidently be
equal to the number of workmen whom it can supply with materials, tools,
and a maintenance suitable to the nature of the work. Money may be
requisite for purchasing the materials and tools of the work, as well as
the maintenance of the workmen; but the quantity of industry which the
whole capital can employ, is certainly not equal both to the money which
purchases, and to the materials, tools, and maintenance, which are
purchased with it, but only to one or other of those two values, and to
the latter more properly than to the former.
When paper is substituted in the room of gold and silver money, the
quantity of the materials, tools, and maintenance, which the whole
circulating capital can supply, may be increased by the whole value of
gold and silver which used to be employed in purchasing them. The whole
value of the great wheel of circulation and distribution is added to the
goods which are circulated and distributed by means of it. The operation,
in some measure, resembles that of the undertaker of some great work, who,
in consequence of some improvement in mechanics, takes down his old
machinery, and adds the difference between its price and that of the new
to his circulating capital, to the fund from which he furnishes materials
and wages to his workmen.
What is the proportion which the circulating money of any country bears to
the whole value of the annual produce circulated by means of it, it is
perhaps impossible to determine. It has been computed by different authors
at a fifth, at a tenth, at a twentieth, and at a thirtieth, part of that
value. But how small soever the proportion which the circulating money may
bear to the whole value of the annual produce, as but a part, and
frequently but a small part, of that produce, is ever destined for the
maintenance of industry, it must always bear a very considerable
proportion to that part. When, therefore, by the substitution of paper,
the gold and silver necessary for circulation is reduced to, perhaps, a
fifth part of the former quantity, if the value of only the greater part
of the other four-fifths be added to the funds which are destined for the
maintenance of industry, it must make a very considerable addition to the
quantity of that industry, and, consequently, to the value of the annual
produce of land and labour.
An operation of this kind has, within these five-and-twenty or thirty
years, been performed in Scotland, by the erection of new banking
companies in almost every considerable town, and even in some country
villages. The effects of it have been precisely those above described. The
business of the country is almost entirely carried on by means of the
paper of those different banking companies, with which purchases and
payments of all kinds are commonly made. Silver very seldom appears,
except in the change of a twenty shilling bank note, and gold still
seldomer. But though the conduct of all those different companies has not
been unexceptionable, and has accordingly required an act of parliament to
regulate it, the country, notwithstanding, has evidently derived great
benefit from their trade. I have heard it asserted, that the trade of the
city of Glasgow doubled in about fifteen years after the first erection of
the banks there; and that the trade of Scotland has more than quadrupled
since the first erection of the two public banks at Edinburgh; of which
the one, called the Bank of Scotland, was established by act of parliament
in 1695, and the other, called the Royal Bank, by royal charter in 1727.
Whether the trade, either of Scotland in general, or of the city of
Glasgow in particular, has really increased in so great a proportion,
during so short a period, I do not pretend to know. If either of them has
increased in this proportion, it seems to be an effect too great to be
accounted for by the sole operation of this cause. That the trade and
industry of Scotland, however, have increased very considerably during
this period, and that the banks have contributed a good deal to this
increase, cannot be doubted.
The value of the silver money which circulated in Scotland before the
Union in 1707, and which, immediately after it, was brought into the Bank
of Scotland, in order to be recoined, amounted to £411,117: 10: 9
sterling. No account has been got of the gold coin; but it appears from
the ancient accounts of the mint of Scotland, that the value of the gold
annually coined somewhat exceeded that of the silver. There were a good
many people, too, upon this occasion, who, from a diffidence of repayment,
did not bring their silver into the Bank of Scotland; and there was,
besides, some English coin, which was not called in. The whole value of
the gold and silver, therefore, which circulated in Scotland before the
Union, cannot be estimated at less than a million sterling. It seems to
have constituted almost the whole circulation of that country; for though
the circulation of the Bank of Scotland, which had then no rival, was
considerable, it seems to have made but a very small part of the whole. In
the present times, the whole circulation of Scotland cannot be estimated
at less than two millions, of which that part which consists in gold and
silver, most probably, does not amount to half a million. But though the
circulating gold and silver of Scotland have suffered so great a
diminution during this period, its real riches and prosperity do not
appear to have suffered any. Its agriculture, manufactures, and trade, on
the contrary, the annual produce of its land and labour, have evidently
been augmented.
It is chiefly by discounting bills of exchange, that is, by advancing
money upon them before they are due, that the greater part of banks and
bankers issue their promissory notes. They deduct always, upon whatever
sum they advance, the legal interest till the bill shall become due. The
payment of the bill, when it becomes due, replaces to the bank the value
of what had been advanced, together with a clear profit of the interest.
The banker, who advances to the merchant whose bill he discounts, not gold
and silver, but his own promissory notes, has the advantage of being able
to discount to a greater amount by the whole value of his promissory
notes, which he finds, by experience, are commonly in circulation. He is
thereby enabled to make his clear gain of interest on so much a larger
sum.
The commerce of Scotland, which at present is not very great, was still
more inconsiderable when the two first banking companies were established;
and those companies would have had but little trade, had they confined
their business to the discounting of bills of exchange. They invented,
therefore, another method of issuing their promissory notes; by granting
what they call cash accounts, that is, by giving credit, to the extent of
a certain sum (two or three thousand pounds for example), to any
individual who could procure two persons of undoubted credit and good
landed estate to become surety for him, that whatever money should be
advanced to him, within the sum for which the credit had been given,
should be repaid upon demand, together with the legal interest. Credits of
this kind are, I believe, commonly granted by banks and bankers in all
different parts of the world. But the easy terms upon which the Scotch
banking companies accept of repayment are, so far as I know, peculiar to
them, and have perhaps been the principal cause, both of the great trade
of those companies, and of the benefit which the country has received from
it.
Whoever has a credit of this kind with one of those companies, and borrows
a thousand pounds upon it, for example, may repay this sum piece-meal, by
twenty and thirty pounds at a time, the company discounting a
proportionable part of the interest of the great sum, from the day on
which each of those small sums is paid in, till the whole be in this
manner repaid. All merchants, therefore, and almost all men of business,
find it convenient to keep such cash accounts with them, and are thereby
interested to promote the trade of those companies, by readily receiving
their notes in all payments, and by encouraging all those with whom they
have any influence to do the same. The banks, when their customers apply
to them for money, generally advance it to them in their own promissory
notes. These the merchants pay away to the manufacturers for goods, the
manufacturers to the farmers for materials and provisions, the farmers to
their landlords for rent; the landlords repay them to the merchants for
the conveniencies and luxuries with which they supply them, and the
merchants again return them to the banks, in order to balance their cash
accounts, or to replace what they may have borrowed of them; and thus
almost the whole money business of the country is transacted by means of
them. Hence the great trade of those companies.
By means of those cash accounts, every merchant can, without imprudence,
carry on a greater trade than he otherwise could do. If there are two
merchants, one in London and the other in Edinburgh, who employ equal
stocks in the same branch of trade, the Edinburgh merchant can, without
imprudence, carry on a greater trade, and give employment to a greater
number of people, than the London merchant. The London merchant must
always keep by him a considerable sum of money, either in his own coffers,
or in those of his banker, who gives him no interest for it, in order to
answer the demands continually coming upon him for payment of the goods
which he purchases upon credit. Let the ordinary amount of this sum be
supposed five hundred pounds; the value of the goods in his warehouse must
always be less, by five hundred pounds, than it would have been, had he
not been obliged to keep such a sum unemployed. Let us suppose that he
generally disposes of his whole stock upon hand, or of goods to the value
of his whole stock upon hand, once in the year. By being obliged to keep
so great a sum unemployed, he must sell in a year five hundred pounds
worth less goods than he might otherwise have done. His annual profits
must be less by all that he could have made by the sale of five hundred
pounds worth more goods; and the number of people employed in preparing
his goods for the market must be less by all those that five hundred
pounds more stock could have employed. The merchant in Edinburgh, on the
other hand, keeps no money unemployed for answering such occasional
demands. When they actually come upon him, he satisfies them from his cash
account with the bank, and gradually replaces the sum borrowed with the
money or paper which comes in from the occasional sales of his goods. With
the same stock, therefore, he can, without imprudence, have at all times
in his warehouse a larger quantity of goods than the London merchant; and
can thereby both make a greater profit himself, and give constant
employment to a greater number of industrious people who prepare those
goods for the market. Hence the great benefit which the country has
derived from this trade.
The facility of discounting bills of exchange, it may be thought, indeed,
gives the English merchants a conveniency equivalent to the cash accounts
of the Scotch merchants. But the Scotch merchants, it must be remembered,
can discount their bills of exchange as easily as the English merchants;
and have, besides, the additional conveniency of their cash accounts.
The whole paper money of 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 commerce being supposed the same) would
circulate there, if there was no paper money. If twenty shilling notes,
for example, are the lowest paper money current in Scotland, the whole of
that currency which can easily circulate there, cannot exceed the sum of
gold and silver which would be necessary for transacting the annual
exchanges of twenty shillings value and upwards usually transacted within
that country. Should the circulating paper at any time exceed that sum, as
the excess could neither be sent abroad nor be employed in the circulation
of the country, it must immediately return upon the banks, to be exchanged
for gold and silver. Many people would immediately perceive that they had
more of this paper than was necessary for transacting their business at
home; and as they could not send it abroad, they would immediately demand
payment for it from the banks. When this superfluous paper was converted
into gold and silver, they could easily find a use for it, by sending it
abroad; but they could find none while it remained in the shape of paper.
There would immediately, therefore, be a run upon the banks to the whole
extent of this superfluous paper, and if they showed any difficulty or
backwardness in payment, to a much greater extent; the alarm which this
would occasion necessarily increasing the run.
Over and above the expenses which are common to every branch of trade,
such as the expense of house-rent, the wages of servants, clerks,
accountants, etc. the expenses peculiar to a bank consist chiefly in two
articles: first, in the expense of keeping at all times in its coffers,
for answering the occasional demands of the holders of its notes, a large
sum of money, of which it loses the interest; and, secondly, in the
expense of replenishing those coffers as fast as they are emptied by
answering such occasional demands.
A banking company which issues more paper than can be employed in the
circulation of the country, and of which the excess is continually
returning upon them for payment, ought to increase the quantity of gold
and silver which they keep at all times in their coffers, not only in
proportion to this excessive increase of their circulation, but in a much
greater proportion; their notes returning upon them much faster than in
proportion to the excess of their quantity. Such a company, therefore,
ought to increase the first article of their expense, not only in
proportion to this forced increase of their business, but in a much
greater proportion.
The coffers of such a company, too, though they ought to be filled much
fuller, yet must empty themselves much faster than if their business was
confined within more reasonable bounds, and must require not only a more
violent, but a more constant and uninterrupted exertion of expense, in
order to replenish them, The coin, too, which is thus continually drawn in
such large quantities from their coffers, cannot be employed in the
circulation of the country. It comes in place of a paper which is over and
above what can be employed in that circulation, and is, therefore, over
and above what can be employed in it too. But as that coin will not be
allowed to lie idle, it must, in one shape or another, be sent abroad, in
order to find that profitable employment which it cannot find at home; and
this continual exportation of gold and silver, by enhancing the
difficulty, must necessarily enhance still farther the expense of the
bank, in finding new gold and silver in order to replenish those coffers,
which empty themselves so very rapidly. Such a company, therefore, must in
proportion to this forced increase of their business, increase the second
article of their expense still more than the first.
Let us suppose that all the paper of a particular bank, which the
circulation of the country can easily absorb and employ, amounts exactly
to forty thousand pounds, and that, for answering occasional demands, this
bank is obliged to keep at all times in its coffers ten thousand pounds in
gold and silver. Should this bank attempt to circulate forty-four thousand
pounds, the four thousand pounds which are over and above what the
circulation can easily absorb and employ, will return upon it almost as
fast as they are issued. For answering occasional demands, therefore, this
bank ought to keep at all times in its coffers, not eleven thousand pounds
only, but fourteen thousand pounds. It will thus gain nothing by the
interest of the four thousand pounds excessive circulation; and it will
lose the whole expense of continually collecting four thousand pounds in
gold and silver, which will be continually going out of its coffers as
fast as they are brought into them.
Had every particular banking company always understood and attended to its
own particular interest, the circulation never could have been overstocked
with paper money. But every particular banking company has not always
understood or attended to its own particular interest, and the circulation
has frequently been overstocked with paper money.
By issuing too great a quantity of paper, of which the excess was
continually returning, in order to be exchanged for gold and silver, the
Bank of England was for many years together obliged to coin gold to the
extent of between eight hundred thousand pounds and a million a-year; or,
at an average, about eight hundred and fifty thousand pounds. For this
great coinage, the bank (in consequence of the worn and degraded state into
which the gold coin had fallen a few years ago) was frequently obliged to
purchase gold bullion at the high price of four pounds an ounce, which it
soon after issued in coin at £3:17:10 ½ an ounce, losing in this manner
between two and a half and three per cent. upon the coinage of so very
large a sum. Though the bank, therefore, paid no seignorage, though the
government was properly at the expense of this coinage, this liberality of
government did not prevent altogether the expense of the bank.
The Scotch banks, in consequence of an excess of the same kind, were all
obliged to employ constantly agents at London to collect money for them,
at an expense which was seldom below one and a half or two per cent. This
money was sent down by the waggon, and insured by the carriers at an
additional expense of three quarters per cent. or fifteen shillings on the
hundred pounds. Those agents were not always able to replenish the coffers
of their employers so fast as they were emptied. In this case, the
resource of the banks was, to draw upon their correspondents in London
bills of exchange, to the extent of the sum which they wanted. When those
correspondents afterwards drew upon them for the payment of this sum,
together with the interest and commission, some of those banks, from the
distress into which their excessive circulation had thrown them, had
sometimes no other means of satisfying this draught, but by drawing a
second set of bills, either upon the same, or upon some other
correspondents in London; and the same sum, or rather bills for the same
sum, would in this manner make sometimes more than two or three journeys;
the debtor bank paying always the interest and commission upon the whole
accumulated sum. Even those Scotch banks which never distinguished
themselves by their extreme imprudence, were sometimes obliged to employ
this ruinous resource.
The gold coin which was paid out, either by the Bank of England or by the
Scotch banks, in exchange for that part of their paper which was over and
above what could be employed in the circulation of the country, being
likewise over and above what could be employed in that circulation, was
sometimes sent abroad in the shape of coin, sometimes melted down and sent
abroad in the shape of bullion, and sometimes melted down and sold to the
Bank of England at the high price of four pounds an ounce. It was the
newest, the heaviest, and the best pieces only, which were carefully
picked out of the whole coin, and either sent abroad or melted down. At
home, and while they remained in the shape of coin, those heavy pieces
were of no more value than the light; but they were of more value abroad,
or when melted down into bullion at home. The Bank of England,
notwithstanding their great annual coinage, found, to their astonishment,
that there was every year the same scarcity of coin as there had been the
year before; and that, notwithstanding the great quantity of good and new
coin which was every year issued from the bank, the state of the coin,
instead of growing better and better, became every year worse and worse.
Every year they found themselves under the necessity of coining nearly the
same quantity of gold as they had coined the year before; and from the
continual rise in the price of gold bullion, in consequence of the
continual wearing and clipping of the coin, the expense of this great
annual coinage became, every year, greater and greater. The Bank of
England, it is to be observed, by supplying its own coffers with coin, is
indirectly obliged to supply the whole kingdom, into which coin is
continually flowing from those coffers in a great variety of ways.
Whatever coin, therefore, was wanted to support this excessive circulation
both of Scotch and English paper money, whatever vacuities this excessive
circulation occasioned in the necessary coin of the kingdom, the Bank of
England was obliged to supply them. The Scotch banks, no doubt, paid all
of them very dearly for their own imprudence and inattention: but the Bank
of England paid very dearly, not only for its own imprudence, but for the
much greater imprudence of almost all the Scotch banks.
The over-trading of some bold projectors in both parts of the united
kingdom, was the original cause of this excessive circulation of paper
money.
What a bank can with propriety advance to a merchant or undertaker of any
kind, is not either the whole capital with which he trades, or even any
considerable part of that capital; but that part of it only which he would
otherwise be obliged to keep by him unemployed and in ready money, for
answering occasional demands. If the paper money which the bank advances
never exceeds this value, it can never exceed the value of the gold and
silver which would necessarily circulate in the country if there was no
paper money; it can never exceed the quantity which the circulation of the
country can easily absorb and employ.
When a bank discounts to a merchant a real bill of exchange, drawn by a
real creditor upon a real debtor, and which, as soon as it becomes due, is
really paid by that debtor; it only advances to him a part of the value
which he would otherwise be obliged to keep by him unemployed and in ready
money, for answering occasional demands. The payment of the bill, when it
becomes due, replaces to the bank the value of what it had advanced,
together with the interest. The coffers of the bank, so far as its
dealings are confined to such customers, resemble a water-pond, from
which, though a stream is continually running out, yet another is
continually running in, fully equal to that which runs out; so that,
without any further care or attention, the pond keeps always equally, or
very near equally full. Little or no expense can ever be necessary for
replenishing the coffers of such a bank.
A merchant, without over-trading, may frequently have occasion for a sum
of ready money, even when he has no bills to discount. When a bank,
besides discounting his bills, advances him likewise, upon such occasions,
such sums upon his cash account, and accepts of a piece-meal repayment, as
the money comes in from the occasional sale of his goods, upon the easy
terms of the banking companies of Scotland; it dispenses him entirely from
the necessity of keeping any part of his stock by him unemployed and in
ready money for answering occasional demands. When such demands actually
come upon him, he can answer them sufficiently from his cash account. The
bank, however, in dealing with such customers, ought to observe with great
attention, whether, in the course of some short period (of four, five,
six, or eight months, for example), the sum of the repayments which it
commonly receives from them, is, or is not, fully equal to that of the
advances which it commonly makes to them. If, within the course of such
short periods, the sum of the repayments from certain customers is, upon
most occasions, fully equal to that of the advances, it may safely
continue to deal with such customers. Though the stream which is in this
case continually running out from its coffers may be very large, that
which is continually running into them must be at least equally large, so
that, without any further care or attention, those coffers are likely to
be always equally or very near equally full, and scarce ever to require
any extraordinary expense to replenish them. If, on the contrary, the sum
of the repayments from certain other customers, falls commonly very much
short of the advances which it makes to them, it cannot with any safety
continue to deal with such customers, at least if they continue to deal
with it in this manner. The stream which is in this case continually
running out from its coffers, is necessarily much larger than that which
is continually running in; so that, unless they are replenished by some
great and continual effort of expense, those coffers must soon be
exhausted altogether.
The banking companies of Scotland, accordingly, were for a long time very
careful to require frequent and regular repayments from all their
customers, and did not care to deal with any person, whatever might be his
fortune or credit, who did not make, what they called, frequent and
regular operations with them. By this attention, besides saving almost
entirely the extraordinary expense of replenishing their coffers, they
gained two other very considerable advantages.