First, by this attention they were enabled to make some tolerable judgment

concerning the thriving or declining circumstances of their debtors,

without being obliged to look out for any other evidence besides what

their own books afforded them; men being, for the most part, either

regular or irregular in their repayments, according as their circumstances

are either thriving or declining. A private man who lends out his money to

perhaps half a dozen or a dozen of debtors, may, either by himself or his

agents, observe and inquire both constantly and carefully into the conduct

and situation of each of them. But a banking company, which lends money to

perhaps five hundred different people, and of which the attention is

continually occupied by objects of a very different kind, can have no

regular information concerning the conduct and circumstances of the

greater part of its debtors, beyond what its own books afford it. In

requiring frequent and regular repayments from all their customers, the

banking companies of Scotland had probably this advantage in view.

Secondly, by this attention they secured themselves from the possibility

of issuing more paper money than what the circulation of the country could

easily absorb and employ. When they observed, that within moderate periods

of time, the repayments of a particular customer were, upon most

occasions, fully equal to the advances which they had made to him, they

might be assured that the paper money which they had advanced to him had

not, at any time, exceeded the quantity of gold and silver which he would

otherwise have been obliged to keep by him for answering occasional

demands; and that, consequently, the paper money, which they had

circulated by his means, had not at any time exceeded the quantity of gold

and silver which would have circulated in the country, had there been no

paper money. The frequency, regularity, and amount of his repayments,

would sufficiently demonstrate that the amount of their advances had at no

time exceeded that part of his capital which he would otherwise have been

obliged to keep by him unemployed, and in ready money, for answering

occasional demands; that is, for the purpose of keeping the rest of his

capital in constant employment. It is this part of his capital only which,

within moderate periods of time, is continually returning to every dealer

in the shape of money, whether paper or coin, and continually going from

him in the same shape. If the advances of the bank had commonly exceeded

this part of his capital, the ordinary amount of his repayments could not,

within moderate periods of time, have equalled the ordinary amount of its

advances. The stream which, by means of his dealings, was continually

running into the coffers of the bank, could not have been equal to the

stream which, by means of the same dealings was continually running out.

The advances of the bank paper, by exceeding the quantity of gold and

silver which, had there been no such advances, he would have been obliged

to keep by him for answering occasional demands, might soon come to exceed

the whole quantity of gold and silver which ( the commerce being supposed

the same ) would have circulated in the country, had there been no paper

money; and, consequently, to exceed the quantity which the circulation of

the country could easily absorb and employ; and the excess of this paper

money would immediately have returned upon the bank, in order to be

exchanged for gold and silver. This second advantage, though equally real,

was not, perhaps, so well understood by all the different banking

companies in Scotland as the first.

When, partly by the conveniency of discounting bills, and partly by that

of cash accounts, the creditable traders of any country can be dispensed

from the necessity of keeping any part of their stock by them unemployed,

and in ready money, for answering occasional demands, they can reasonably

expect no farther assistance from hanks and bankers, who, when they have

gone thus far, cannot, consistently with their own interest and safety, go

farther. A bank cannot, consistently with its own interest, advance to a

trader the whole, or even the greater part of the circulating capital with

which he trades; because, though that capital is continually returning to

him in the shape of money, and going from him in the same shape, yet the

whole of the returns is too distant from the whole of the outgoings, and

the sum of his repayments could not equal the sum of his advances within

such moderate periods of time as suit the conveniency of a bank. Still

less could a bank afford to advance him any considerable part of his fixed

capital; of the capital which the undertaker of an iron forge, for

example, employs in erecting his forge and smelting-houses, his

work-houses, and warehouses, the dwelling-houses of his workmen, etc.; of

the capital which the undertaker of a mine employs in sinking his shafts,

in erecting engines for drawing out the water, in making roads and

waggon-ways, etc.; of the capital which the person who undertakes to

improve land employs in clearing, draining, inclosing, manuring, and

ploughing waste and uncultivated fields; in building farmhouses, with all

their necessary appendages of stables, granaries, etc. The returns of the

fixed capital are, in almost all cases, much slower than those of the

circulating capital: and such expenses, even when laid out with the

greatest prudence and judgment, very seldom return to the undertaker till

after a period of many years, a period by far too distant to suit the

conveniency of a bank. Traders and other undertakers may, no doubt with

great propriety, carry on a very considerable part of their projects with

borrowed money. In justice to their creditors, however, their own capital

ought in this case to be sufficient to insure, if I may say so, the

capital of those creditors; or to render it extremely improbable that

those creditors should incur any loss, even though the success of the

project should fall very much short of the expectation of the projectors.

Even with this precaution, too, the money which is borrowed, and which it

is meant should not be repaid till after a period of several years, ought

not to be borrowed of a bank, but ought to be borrowed upon bond or

mortgage, of such private people as propose to live upon the interest of

their money, without taking the trouble themselves to employ the capital,

and who are, upon that account, willing to lend that capital to such

people of good credit as are likely to keep it for several years. A bank,

indeed, which lends its money without the expense of stamped paper, or of

attorneys’ fees for drawing bonds and mortgages, and which accepts of

repayment upon the easy terms of the banking companies of Scotland, would,

no doubt, be a very convenient creditor to such traders and undertakers.

But such traders and undertakers would surely be most inconvenient debtors

to such a bank.

It is now more than five and twenty years since the paper money issued by

the different banking companies of Scotland was fully equal, or rather was

somewhat more than fully equal, to what the circulation of the country

could easily absorb and employ. Those companies, therefore, had so long

ago given all the assistance to the traders and other undertakers of

Scotland which it is possible for banks and bankers, consistently with

their own interest, to give. They had even done somewhat more. They had

over-traded a little, and had brought upon themselves that loss, or at

least that diminution of profit, which, in this particular business, never

fails to attend the smallest degree of over-trading. Those traders and

other undertakers, having got so much assistance from banks and bankers,

wished to get still more. The banks, they seem to have thought, could

extend their credits to whatever sum might be wanted, without incurring

any other expense besides that of a few reams of paper. They complained of

the contracted views and dastardly spirit of the directors of those banks,

which did not, they said, extend their credits in proportion to the

extension of the trade of the country; meaning, no doubt, by the extension

of that trade, the extension of their own projects beyond what they could

carry on either with their own capital, or with what they had credit to

borrow of private people in the usual way of bond or mortgage. The banks,

they seem to have thought, were in honour bound to supply the deficiency,

and to provide them with all the capital which they wanted to trade with.

The banks, however, were of a different opinion; and upon their refusing

to extend their credits, some of those traders had recourse to an

expedient which, for a time, served their purpose, though at a much

greater expense, yet as effectually as the utmost extension of bank

credits could have done. This expedient was no other than the well known

shift of drawing and redrawing; the shift to which unfortunate traders

have sometimes recourse, when they are upon the brink of bankruptcy. The

practice of raising money in this manner had been long known in England;

and, during the course of the late war, when the high profits of trade

afforded a great temptation to over-trading, is said to have been carried

on to a very great extent. From England it was brought into Scotland,

where, in proportion to the very limited commerce, and to the very

moderate capital of the country, it was soon carried on to a much greater

extent than it ever had been in England.

The practice of drawing and redrawing is so well known to all men of

business, that it may, perhaps, be thought unnecessary to give any account

of it. But as this book may come into the hands of many people who are not

men of business, and as the effects of this practice upon the banking

trade are not, perhaps, generally understood, even by men of business

themselves, I shall endeavour to explain it as distinctly as I can.

The customs of merchants, which were established when the barbarous laws

of Europe did not enforce the performance of their contracts, and which,

during the course of the two last centuries, have been adopted into the

laws of all European nations, have given such extraordinary privileges to

bills of exchange, that money is more readily advanced upon them than upon

any other species of obligation; especially when they are made payable

within so short a period as two or three months after their date. If, when

the bill becomes due, the acceptor does not pay it as soon as it is

presented, he becomes from that moment a bankrupt. The bill is protested,

and returns upon the drawer, who, if he does not immediately pay it,

becomes likewise a bankrupt. If, before it came to the person who presents

it to the acceptor for payment, it had passed through the hands of several

other persons, who had successively advanced to one another the contents

of it, either in money or goods, and who, to express that each of them had

in his turn received those contents, had all of them in their order

indorsed, that is, written their names upon the back of the bill; each

indorser becomes in his turn liable to the owner of the bill for those

contents, and, if he fails to pay, he becomes too, from that moment, a

bankrupt. Though the drawer, acceptor, and indorsers of the bill, should

all of them be persons of doubtful credit; yet, still the shortness of the

date gives some security to the owner of the bill. Though all of them may

be very likely to become bankrupts, it is a chance if they all become so

in so short a time. The house is crazy, says a weary traveller to himself,

and will not stand very long; but it is a chance if it falls to-night, and

I will venture, therefore, to sleep in it to-night.

The trader A in Edinburgh, we shall suppose, draws a bill upon B in

London, payable two months after date. In reality B in London owes nothing

to A in Edinburgh; but he agrees to accept of A’s bill, upon condition,

that before the term of payment he shall redraw upon A in Edinburgh for

the same sum, together with the interest and a commission, another bill,

payable likewise two months after date. B accordingly, before the

expiration of the first two months, redraws this bill upon A in Edinburgh;

who, again before the expiration of the second two months, draws a second

bill upon B in London, payable likewise two months after date; and before

the expiration of the third two months, B in London redraws upon A in

Edinburgh another bill payable also two months after date. This practice

has sometimes gone on, not only for several months, but for several years

together, the bill always returning upon A in Edinburgh with the

accumulated interest and commission of all the former bills. The interest

was five per cent. in the year, and the commission was never less than one

half per cent. on each draught. This commission being repeated more than

six times in the year, whatever money A might raise by this expedient

might necessarily have cost him something more than eight per cent. in the

year and sometimes a great deal more, when either the price of the

commission happened to rise, or when he was obliged to pay compound

interest upon the interest and commission of former bills. This practice

was called raising money by circulation.

In a country where the ordinary profits of stock, in the greater part of

mercantile projects, are supposed to run between six and ten per cent. it

must have been a very fortunate speculation, of which the returns could

not only repay the enormous expense at which the money was thus borrowed

for carrying it on, but afford, besides, a good surplus profit to the

projector. Many vast and extensive projects, however, were undertaken, and

for several years carried on, without any other fund to support them

besides what was raised at this enormous expense. The projectors, no

doubt, had in their golden dreams the most distinct vision of this great

profit. Upon their awakening, however, either at the end of their

projects, or when they were no longer able to carry them on, they very

seldom, I believe, had the good fortune to find it.

{The method described in the text was by no means either the most common

or the most expensive one in which those adventurers sometimes raised

money by circulation. It frequently happened, that A in Edinburgh would

enable B in London to pay the first bill of exchange, by drawing, a few

days before it became due, a second bill at three months date upon the

same B in London. This bill, being payable to his own order, A sold in

Edinburgh at par; and with its contents purchased bills upon London,

payable at sight to the order of B, to whom he sent them by the post.

Towards the end of the late war, the exchange between Edinburgh and London

was frequently three per cent. against Edinburgh, and those bills at sight

must frequently have cost A that premium. This transaction, therefore,

being repeated at least four times in the year, and being loaded with a

commission of at least one half per cent. upon each repetition, must at

that period have cost A, at least, fourteen per cent. in the year. At

other times A would enable to discharge the first bill of exchange, by

drawing, a few days before it became due, a second bill at two months

date, not upon B, but upon some third person, C, for example, in London.

This other bill was made payable to the order of B, who, upon its being

accepted by C, discounted it with some banker in London; and A enabled C

to discharge it, by drawing, a few day’s before it became due, a third

bill likewise at two months date, sometimes upon his first correspondent

B, and sometimes upon some fourth or fifth person, D or E, for example.

This third bill was made payable to the order of C, who, as soon as it was

accepted, discounted it in the same manner with some banker in London.

Such operations being repeated at least six times in the year, and being

loaded with a commission of at least one half per cent. upon each

repetition, together with the legal interest of five per cent. this method

of raising money, in the same manner as that described in the text, must

have cost A something more than eight per cent. By saving, however, the

exchange between Edinburgh and London, it was less expensive than that

mentioned in the foregoing part of this note; but then it required an

established credit with more houses than one in London, an advantage which

many of these adventurers could not always find it easy to procure.}

The bills which A in Edinburgh drew upon B in London, he regularly

discounted two months before they were due, with some bank or banker in

Edinburgh; and the bills which B in London redrew upon A in Edinburgh, he

as regularly discounted, either with the Bank of England, or with some

other banker in London. Whatever was advanced upon such circulating bills

was in Edinburgh advanced in the paper of the Scotch banks; and in London,

when they were discounted at the Bank of England in the paper of that

bank. Though the bills upon which this paper had been advanced were all of

them repaid in their turn as soon as they became due, yet the value which

had been really advanced upon the first bill was never really returned to

the banks which advanced it; because, before each bill became due, another

bill was always drawn to somewhat a greater amount than the bill which was

soon to be paid: and the discounting of this other bill was essentially

necessary towards the payment of that which was soon to be due. This

payment, therefore, was altogether fictitious. The stream which, by means

of those circulating bills of exchange, had once been made to run out from

the coffers of the banks, was never replaced by any stream which really

ran into them.

The paper which was issued upon those circulating bills of exchange

amounted, upon many occasions, to the whole fund destined for carrying on

some vast and extensive project of agriculture, commerce, or manufactures;

and not merely to that part of it which, had there been no paper money,

the projector would have been obliged to keep by him unemployed, and in

ready money, for answering occasional demands. The greater part of this

paper was, consequently, over and above the value of the gold and silver

which would have circulated in the country, had there been no paper money.

It was over and above, therefore, what the circulation of the country

could easily absorb and employ, and upon that account, immediately

returned upon the banks, in order to be exchanged for gold and silver,

which they were to find as they could. It was a capital which those

projectors had very artfully contrived to draw from those banks, not only

without their knowledge or deliberate consent, but for some time, perhaps,

without their having the most distant suspicion that they had really

advanced it.

When two people, who are continually drawing and redrawing upon one

another, discount their bills always with the same banker, he must

immediately discover what they are about, and see clearly that they are

trading, not with any capital of their own, but with the capital which he

advances to them. But this discovery is not altogether so easy when they

discount their bills sometimes with one banker, and sometimes with

another, and when the two same persons do not constantly draw and redraw

upon one another, but occasionally run the round of a great circle of

projectors, who find it for their interest to assist one another in this

method of raising money and to render it, upon that account, as difficult

as possible to distinguish between a real and a fictitious bill of

exchange, between a bill drawn by a real creditor upon a real debtor, and

a bill for which there was properly no real creditor but the bank which

discounted it, nor any real debtor but the projector who made use of the

money. When a banker had even made this discovery, he might sometimes make

it too late, and might find that he had already discounted the bills of

those projectors to so great an extent, that, by refusing to discount any

more, he would necessarily make them all bankrupts; and thus by ruining

them, might perhaps ruin himself. For his own interest and safety,

therefore, he might find it necessary, in this very perilous situation, to

go on for some time, endeavouring, however, to withdraw gradually, and,

upon that account, making every day greater and greater difficulties about

discounting, in order to force these projectors by degrees to have

recourse, either to other bankers, or to other methods of raising money:

so as that he himself might, as soon as possible, get out of the circle.

The difficulties, accordingly, which the Bank of England, which the

principal bankers in London, and which even the more prudent Scotch banks

began, after a certain time, and when all of them had already gone too

far, to make about discounting, not only alarmed, but enraged, in the

highest degree, those projectors. Their own distress, of which this

prudent and necessary reserve of the banks was, no doubt, the immediate

occasion, they called the distress of the country; and this distress of

the country, they said, was altogether owing to the ignorance,

pusillanimity, and bad conduct of the banks, which did not give a

sufficiently liberal aid to the spirited undertakings of those who exerted

themselves in order to beautify, improve, and enrich the country. It was

the duty of the banks, they seemed to think, to lend for as long a time,

and to as great an extent, as they might wish to borrow. The banks,

however, by refusing in this manner to give more credit to those to whom

they had already given a great deal too much, took the only method by

which it was now possible to save either their own credit, or the public

credit of the country.

In the midst of this clamour and distress, a new bank was established in

Scotland, for the express purpose of relieving the distress of the

country. The design was generous; but the execution was imprudent, and the

nature and causes of the distress which it meant to relieve, were not,

perhaps, well understood. This bank was more liberal than any other had

ever been, both in granting cash-accounts, and in discounting bills of

exchange. With regard to the latter, it seems to have made scarce any

distinction between real and circulating bills, but to have discounted all

equally. It was the avowed principle of this bank to advance upon any

reasonable security, the whole capital which was to be employed in those

improvements of which the returns are the most slow and distant, such as

the improvements of land. To promote such improvements was even said to be

the chief of the public-spirited purposes for which it was instituted. By

its liberality in granting cash-accounts, and in discounting bills of

exchange, it, no doubt, issued great quantities of its bank notes. But

those bank notes being, the greater part of them, over and above what the

circulation of the country could easily absorb and employ, returned upon

it, in order to be exchanged for gold and silver, as fast as they were

issued. Its coffers were never well filled. The capital which had been

subscribed to this bank, at two different subscriptions, amounted to one

hundred and sixty thousand pounds, of which eighty per cent. only was paid

up. This sum ought to have been paid in at several different instalments.

A great part of the proprietors, when they paid in their first instalment,

opened a cash-account with the bank; and the directors, thinking

themselves obliged to treat their own proprietors with the same liberality

with which they treated all other men, allowed many of them to borrow upon

this cash-account what they paid in upon all their subsequent instalments.

Such payments, therefore, only put into one coffer what had the moment

before been taken out of another. But had the coffers of this bank been

filled ever so well, its excessive circulation must have emptied them

faster than they could have been replenished by any other expedient but

the ruinous one of drawing upon London; and when the bill became due,

paying it, together with interest and commission, by another draught upon

the same place. Its coffers having been filled so very ill, it is said to

have been driven to this resource within a very few months after it began

to do business. The estates of the proprietors of this bank were worth

several millions, and, by their subscription to the original bond or

contract of the bank, were really pledged for answering all its

engagements. By means of the great credit which so great a pledge

necessarily gave it, it was, notwithstanding its too liberal conduct,

enabled to carry on business for more than two years. When it was obliged

to stop, it had in the circulation about two hundred thousand pounds in

bank notes. In order to support the circulation of those notes, which were

continually returning upon it as fast as they were issued, it had been

constantly in the practice of drawing bills of exchange upon London, of

which the number and value were continually increasing, and, when it

stopt, amounted to upwards of six hundred thousand pounds. This bank,

therefore, had, in little more than the course of two years, advanced to

different people upwards of eight hundred thousand pounds at five per

cent. Upon the two hundred thousand pounds which it circulated in bank

notes, this five per cent. might perhaps be considered as a clear gain,

without any other deduction besides the expense of management. But upon

upwards of six hundred thousand pounds, for which it was continually

drawing bills of exchange upon London, it was paying, in the way of

interest and commission, upwards of eight per cent. and was consequently

losing more than three per cent. upon more than three fourths of all its

dealings.

The operations of this bank seem to have produced effects quite opposite

to those which were intended by the particular persons who planned and

directed it. They seem to have intended to support the spirited

undertakings, for as such they considered them, which were at that time

carrying on in different parts of the country; and, at the same time, by

drawing the whole banking business to themselves, to supplant all the

other Scotch banks, particularly those established at Edinburgh, whose

backwardness in discounting bills of exchange had given some offence. This

bank, no doubt, gave some temporary relief to those projectors, and

enabled them to carry on their projects for about two years longer than

they could otherwise have done. But it thereby only enabled them to get so

much deeper into debt; so that, when ruin came, it fell so much the

heavier both upon them and upon their creditors. The operations of this

bank, therefore, instead of relieving, in reality aggravated in the

long-run the distress which those projectors had brought both upon

themselves and upon their country. It would have been much better for

themselves, their creditors, and their country, had the greater part of

them been obliged to stop two years sooner than they actually did. The

temporary relief, however, which this bank afforded to those projectors,

proved a real and permanent relief to the other Scotch banks. All the

dealers in circulating bills of exchange, which those other banks had

become so backward in discounting, had recourse to this new bank, where

they were received with open arms. Those other banks, therefore, were

enabled to get very easily out of that fatal circle, from which they could

not otherwise have disengaged themselves without incurring a considerable

loss, and perhaps, too, even some degree of discredit.

In the long-run, therefore, the operations of this bank increased the real

distress of the country, which it meant to relieve; and effectually

relieved, from a very great distress, those rivals whom it meant to

supplant.

At the first setting out of this bank, it was the opinion of some people,

that how fast soever its coffers might be emptied, it might easily

replenish them, by raising money upon the securities of those to whom it

had advanced its paper. Experience, I believe, soon convinced them that

this method of raising money was by much too slow to answer their purpose;

and that coffers which originally were so ill filled, and which emptied

themselves so very fast, could be replenished by no other expedient but

the ruinous one of drawing bills upon London, and when they became due,

paying them by other draughts on the same place, with accumulated interest

and commission. But though they had been able by this method to raise

money as fast as they wanted it, yet, instead of making a profit, they

must have suffered a loss of every such operation; so that in the long-run

they must have ruined themselves as a mercantile company, though perhaps

not so soon as by the more expensive practice of drawing and redrawing.

They could still have made nothing by the interest of the paper, which,

being over and above what the circulation of the country could absorb and

employ, returned upon them in order to be exchanged for gold and silver,

as fast as they issued it; and for the payment of which they were

themselves continually obliged to borrow money. On the contrary, the whole

expense of this borrowing, of employing agents to look out for people who

had money to lend, of negotiating with those people, and of drawing the

proper bond or assignment, must have fallen upon them, and have been so

much clear loss upon the balance of their accounts. The project of

replenishing their coffers in this manner may be compared to that of a man

who had a water-pond from which a stream was continually running out, and

into which no stream was continually running, but who proposed to keep it

always equally full, by employing a number of people to go continually

with buckets to a well at some miles distance, in order to bring water to

replenish it.

But though this operation had proved not only practicable, but profitable

to the bank, as a mercantile company; yet the country could have derived

no benefit front it, but, on the contrary, must have suffered a very

considerable loss by it. This operation could not augment, in the smallest

degree, the quantity of money to be lent. It could only have erected this

bank into a sort of general loan office for the whole country. Those who

wanted to borrow must have applied to this bank, instead of applying to

the private persons who had lent it their money. But a bank which lends

money, perhaps to five hundred different people, the greater part of whom

its directors can know very little about, is not likely to be more

judicious in the choice of its debtors than a private person who lends out

his money among a few people whom he knows, and in whose sober and frugal

conduct he thinks he has good reason to confide. The debtors of such a

bank as that whose conduct I have been giving some account of were likely,

the greater part of them, to be chimerical projectors, the drawers and

redrawers of circulating bills of exchange, who would employ the money in

extravagant undertakings, which, with all the assistance that could be

given them, they would probably never be able to complete, and which, if

they should be completed, would never repay the expense which they had

really cost, would never afford a fund capable of maintaining a quantity

of labour equal to that which had been employed about them. The sober and

frugal debtors of private persons, on the contrary, would be more likely

to employ the money borrowed in sober undertakings which were proportioned

to their capitals, and which, though they might have less of the grand and

the marvellous, would have more of the solid and the profitable; which

would repay with a large profit whatever had been laid out upon them, and

which would thus afford a fund capable of maintaining a much greater

quantity of labour than that which had been employed about them. The

success of this operation, therefore, without increasing in the smallest

degree the capital of the country, would only have transferred a great

part of it from prudent and profitable to imprudent and unprofitable

undertakings.

That the industry of Scotland languished for want of money to employ it,

was the opinion of the famous Mr Law. By establishing a bank of a

particular kind, which he seems to have imagined might issue paper to the

amount of the whole value of all the lands in the country, he proposed to

remedy this want of money. The parliament of Scotland, when he first

proposed his project, did not think proper to adopt it. It was afterwards

adopted, with some variations, by the Duke of Orleans, at that time regent

of France. The idea of the possibility of multiplying paper money to

almost any extent was the real foundation of what is called the

Mississippi scheme, the most extravagant project, both of banking and

stock-jobbing, that perhaps the world ever saw. The different operations

of this scheme are explained so fully, so clearly, and with so much order

and distinctness, by Mr Du Verney, in his Examination of the Political

Reflections upon commerce and finances of Mr Du Tot, that I shall not give

any account of them. The principles upon which it was founded are

explained by Mr Law himself, in a discourse concerning money and trade,

which he published in Scotland when he first proposed his project. The

splendid but visionary ideas which are set forth in that and some other

works upon the same principles, still continue to make an impression upon

many people, and have, perhaps, in part, contributed to that excess of

banking, which has of late been complained of, both in Scotland and in

other places.

The Bank of England is the greatest bank of circulation in Europe. It was

incorporated, in pursuance of an act of parliament, by a charter under the

great seal, dated the 27th of July 1694. It at that time advanced to

government the sum of £1,200,000 for an annuity of £100,000, or for £

96,000 a-year, interest at the rate of eight per cent. and £4,000 a-year for

the expense of management. The credit of the new government, established

by the Revolution, we may believe, must have been very low, when it was

obliged to borrow at so high an interest.

In 1697, the bank was allowed to enlarge its capital stock, by an

ingraftment of £1,001,171:10s. Its whole capital stock, therefore,

amounted at this time to £2,201,171: 10s. This ingraftment is said to have

been for the support of public credit. In 1696, tallies had been at forty,

and fifty, and sixty, per cent. discount, and bank notes at twenty per

cent. {James Postlethwaite’s History of the Public Revenue, p.301.} During

the great re-coinage of the silver, which was going on at this time, the

bank had thought proper to discontinue the payment of its notes, which

necessarily occasioned their discredit.

In pursuance of the 7th Anne, c. 7, the bank advanced and paid into the

exchequer the sum of £400,000; making in all the sum of £1,600,000, which

it had advanced upon its original annuity of £96,000 interest, and £4,000

for expense of management. In 1708, therefore, the credit of government

was as good as that of private persons, since it could borrow at six per

cent. interest, the common legal and market rate of those times. In

pursuance of the same act, the bank cancelled exchequer bills to the

amount of £ 1,775,027: 17s: 10½d. at six per cent. interest, and was at

the same time allowed to take in subscriptions for doubling its capital.

In 1703, therefore, the capital of the bank amounted to £4,402,343; and it

had advanced to government the sum of £3,375,027:17:10½d.

By a call of fifteen per cent. in 1709, there was paid in, and made stock,

£ 656,204:1:9d.; and by another of ten per cent. in 1710, £501,448:12:11d.

In consequence of those two calls, therefore, the bank capital amounted to

£ 5,559,995:14:8d.

In pursuance of the 3rd George I. c.8, the bank delivered up two millions

of exchequer Bills to be cancelled. It had at this time, therefore,

advanced to government £5,375,027:17 10d. In pursuance of the 8th George

I. c.21, the bank purchased of the South-sea company, stock to the amount

of £4,000,000: and in 1722, in consequence of the subscriptions which it

had taken in for enabling it to make this purchase, its capital stock was

increased by £ 3,400,000. At this time, therefore, the bank had advanced

to the public £ 9,375,027 17s. 10½d.; and its capital stock amounted only

to £ 8,959,995:14:8d. It was upon this occasion that the sum which the

bank had advanced to the public, and for which it received interest, began

first to exceed its capital stock, or the sum for which it paid a dividend

to the proprietors of bank stock; or, in other words, that the bank began

to have an undivided capital, over and above its divided one. It has

continued to have an undivided capital of the same kind ever since. In

1746, the bank had, upon different occasions, advanced to the public

£11,686,800, and its divided capital had been raised by different calls

and subscriptions to £ 10,780,000. The state of those two sums has

continued to be the same ever since. In pursuance of the 4th of George

III. c.25, the bank agreed to pay to government for the renewal of its

charter £110,000, without interest or re-payment. This sum, therefore did

not increase either of those two other sums.

The dividend of the bank has varied according to the variations in the

rate of the interest which it has, at different times, received for the

money it had advanced to the public, as well as according to other

circumstances. This rate of interest has gradually been reduced from eight

to three per cent. For some years past, the bank dividend has been at five

and a half per cent.

The stability of the bank of England is equal to that of the British

government. All that it has advanced to the public must be lost before its

creditors can sustain any loss. No other banking company in England can be

established by act of parliament, or can consist of more than six members.

It acts, not only as an ordinary bank, but as a great engine of state. It

receives and pays the greater part of the annuities which are due to the

creditors of the public; it circulates exchequer bills; and it advances to

government the annual amount of the land and malt taxes, which are

frequently not paid up till some years thereafter. In these different

operations, its duty to the public may sometimes have obliged it, without

any fault of its directors, to overstock the circulation with paper money.

It likewise discounts merchants’ bills, and has, upon several different

occasions, supported the credit of the principal houses, not only of

England, but of Hamburgh and Holland. Upon one occasion, in 1763, it is

said to have advanced for this purpose, in one week, about £1,600,000, a

great part of it in bullion. I do not, however, pretend to warrant either

the greatness of the sum, or the shortness of the time. Upon other

occasions, this great company has been reduced to the necessity of paying

in sixpences.

It is not by augmenting the capital of the country, but by rendering a

greater part of that capital active and productive than would otherwise be

so, that the most judicious operations of banking can increase the

industry of the country. That part of his capital which a dealer is

obliged to keep by him unemployed and in ready money, for answering

occasional demands, is so much dead stock, which, so long as it remains in

this situation, produces nothing, either to him or to his country. The

judicious operations of banking enable him to convert this dead stock into

active and productive stock; into materials to work upon; into tools to

work with; and into provisions and subsistence to work for; into stock

which produces something both to himself and to his country. The gold and

silver money which circulates in any country, and by means of which, the

produce of its land and labour is annually circulated and distributed to

the proper consumers, is, in the same manner as the ready money of the

dealer, all dead stock. It is a very valuable part of the capital of the

country, which produces nothing to the country. The judicious operations

of banking, by substituting paper in the room of a great part of this gold

and silver, enable the country to convert a great part of this dead stock

into active and productive stock; into stock which produces something to

the country. The gold and silver money which circulates in any country may

very properly be compared to a highway, which, while it circulates and

carries to market all the grass and corn of the country, produces itself

not a single pile of either. The judicious operations of banking, by

providing, if I may be allowed so violent a metaphor, a sort of waggon-way

through the air, enable the country to convert, as it were, a great part

of its highways into good pastures, and corn fields, and thereby to

increase, very considerably, the annual produce of its land and labour.

The commerce and industry of the country, however, it must be

acknowledged, though they may be somewhat augmented, cannot be altogether

so secure, when they are thus, as it were, suspended upon the Daedalian

wings of paper money, as when they travel about upon the solid ground of

gold and silver. Over and above the accidents to which they are exposed

from the unskilfulness of the conductors of this paper money, they are

liable to several others, from which no prudence or skill of those

conductors can guard them.

An unsuccessful war, for example, in which the enemy got possession of the

capital, and consequently of that treasure which supported the credit of

the paper money, would occasion a much greater confusion in a country

where the whole circulation was carried on by paper, than in one where the

greater part of it was carried on by gold and silver. The usual instrument

of commerce having lost its value, no exchanges could be made but either

by barter or upon credit. All taxes having been usually paid in paper

money, the prince would not have wherewithal either to pay his troops, or

to furnish his magazines; and the state of the country would be much more

irretrievable than if the greater part of its circulation had consisted in

gold and silver. A prince, anxious to maintain his dominions at all times

in the state in which he can most easily defend them, ought upon this

account to guard not only against that excessive multiplication of paper

money which ruins the very banks which issue it, but even against that

multiplication of it which enables them to fill the greater part of the

circulation of the country with it.

The circulation of every country may be considered as divided into two

different branches; the circulation of the dealers with one another, and

the circulation between the dealers and the consumers. Though the same

pieces of money, whether paper or metal, may be employed sometimes in the

one circulation and sometimes in the other; yet as both are constantly

going on at the same time, each requires a certain stock of money, of one

kind or another, to carry it on. The value of the goods circulated between

the different dealers never can exceed the value of those circulated

between the dealers and the consumers; whatever is bought by the dealers

being ultimately destined to be sold to the consumers. The circulation

between the dealers, as it is carried on by wholesale, requires generally

a pretty large sum for every particular transaction. That between the

dealers and the consumers, on the contrary, as it is generally carried on

by retail, frequently requires but very small ones, a shilling, or even a

halfpenny, being often sufficient. But small sums circulate much faster

than large ones. A shilling changes masters more frequently than a guinea,

and a halfpenny more frequently than a shilling. Though the annual

purchases of all the consumers, therefore, are at least equal in value to

those of all the dealers, they can generally be transacted with a much

smaller quantity of money; the same pieces, by a more rapid circulation,

serving as the instrument of many more purchases of the one kind than of

the other.

Paper money may be so regulated as either to confine itself very much to

the circulation between the different dealers, or to extend itself

likewise to a great part of that between the dealers and the consumers.

Where no bank notes are circulated under £10 value, as in London, paper

money confines itself very much to the circulation between the dealers.

When a ten pound bank note comes into the hands of a consumer, he is

generally obliged to change it at the first shop where he has occasion to

purchase five shillings worth of goods; so that it often returns into the

hands of a dealer before the consumer has spent the fortieth part of the

money. Where bank notes are issued for so small sums as 20s. as in

Scotland, paper money extends itself to a considerable part of the

circulation between dealers and consumers. Before the Act of parliament

which put a stop to the circulation of ten and five shilling notes, it

filled a still greater part of that circulation. In the currencies of

North America, paper was commonly issued for so small a sum as a shilling,

and filled almost the whole of that circulation. In some paper currencies

of Yorkshire, it was issued even for so small a sum as a sixpence.

Where the issuing of bank notes for such very small sums is allowed, and

commonly practised, many mean people are both enabled and encouraged to

become bankers. A person whose promissory note for £5, or even for 20s.

would be rejected by every body, will get it to be received without

scruple when it is issued for so small a sum as a sixpence. But the

frequent bankruptcies to which such beggarly bankers must be liable, may

occasion a very considerable inconveniency, and sometimes even a very

great calamity, to many poor people who had received their notes in

payment.

It were better, perhaps, that no bank notes were issued in any part of the

kingdom for a smaller sum than £5. Paper money would then, probably,

confine itself, in every part of the kingdom, to the circulation between

the different dealers, as much as it does at present in London, where no

bank notes are issued under £10 value; £5 being, in most part of the

kingdom, a sum which, though it will purchase, perhaps, little more than

half the quantity of goods, is as much considered, and is as seldom spent

all at once, as £10 are amidst the profuse expense of London.

Where paper money, it is to be observed, is pretty much confined to the

circulation between dealers and dealers, as at London, there is always

plenty of gold and silver. Where it extends itself to a considerable part

of the circulation between dealers and consumers, as in Scotland, and

still more in North America, it banishes gold and silver almost entirely

from the country; almost all the ordinary transactions of its interior

commerce being thus carried on by paper. The suppression of ten and five

shilling bank notes, somewhat relieved the scarcity of gold and silver in

Scotland; and the suppression of twenty shilling notes will probably

relieve it still more. Those metals are said to have become more abundant

in America, since the suppression of some of their paper currencies. They

are said, likewise, to have been more abundant before the institution of

those currencies.

Though paper money should be pretty much confined to the circulation

between dealers and dealers, yet banks and bankers might still be able to

give nearly the same assistance to the industry and commerce of the

country, as they had done when paper money filled almost the whole

circulation. The ready money which a dealer is obliged to keep by him, for

answering occasional demands, is destined altogether for the circulation

between himself and other dealers of whom he buys goods. He has no

occasion to keep any by him for the circulation between himself and the

consumers, who are his customers, and who bring ready money to him,

instead of taking any from him. Though no paper money, therefore, was

allowed to be issued, but for such sums as would confine it pretty much to

the circulation between dealers and dealers; yet partly by discounting

real bills of exchange, and partly by lending upon cash-accounts, banks

and bankers might still be able to relieve the greater part of those

dealers from the necessity of keeping any considerable part of their stock

by them unemployed, and in ready money, for answering occasional demands.

They might still be able to give the utmost assistance which banks and

bankers can with propriety give to traders of every kind.

To restrain private people, it may be said, from receiving in payment the

promissory notes of a banker for any sum, whether great or small, when

they themselves are willing to receive them; or, to restrain a banker from

issuing such notes, when all his neighbours are willing to accept of them,

is a manifest violation of that natural liberty, which it is the proper

business of law not to infringe, but to support. Such regulations may, no

doubt, be considered as in some respect a violation of natural liberty.

But those exertions of the natural liberty of a few individuals, which

might endanger the security of the whole society, are, and ought to be,

restrained by the laws of all governments; of the most free, as well as or

the most despotical. The obligation of building party walls, in order to

prevent the communication of fire, is a violation of natural liberty,

exactly of the same kind with the regulations of the banking trade which

are here proposed.

A paper money, consisting in bank notes, issued by people of undoubted

credit, payable upon demand, without any condition, and, in fact, always

readily paid as soon as presented, is, in every respect, equal in value to

gold and silver money, since gold and silver money can at anytime be had

for it. Whatever is either bought or sold for such paper, must necessarily

be bought or sold as cheap as it could have been for gold and silver.

The increase of paper money, it has been said, by augmenting the quantity,

and consequently diminishing the value, of the whole currency, necessarily

augments the money price of commodities. But as the quantity of gold and

silver, which is taken from the currency, is always equal to the quantity

of paper which is added to it, paper money does not necessarily increase

the quantity of the whole currency. From the beginning of the last century

to the present time, provisions never were cheaper in Scotland than in

1759, though, from the circulation of ten and five shilling bank notes,

there was then more paper money in the country than at present. The

proportion between the price of provisions in Scotland and that in England

is the same now as before the great multiplication of banking companies in

Scotland. Corn is, upon most occasions, fully as cheap in England as in

France, though there is a great deal of paper money in England, and scarce

any in France. In 1751 and 1752, when Mr Hume published his Political

Discourses, and soon after the great multiplication of paper money in

Scotland, there was a very sensible rise in the price of provisions,

owing, probably, to the badness of the seasons, and not to the

multiplication of paper money.

It would be otherwise, indeed, with a paper money, consisting in

promissory notes, of which the immediate payment depended, in any respect,

either upon the good will of those who issued them, or upon a condition

which the holder of the notes might not always have it in his power to

fulfil, or of which the payment was not exigible till after a certain

number of years, and which, in the mean time, bore no interest. Such a

paper money would, no doubt, fall more or less below the value of gold and

silver, according as the difficulty or uncertainty of obtaining immediate

payment was supposed to be greater or less, or according to the greater or

less distance of time at which payment was exigible.

Some years ago the different banking companies of Scotland were in the

practice of inserting into their bank notes, what they called an optional

clause; by which they promised payment to the bearer, either as soon as

the note should be presented, or, in the option of the directors, six

months after such presentment, together with the legal interest for the

said six months. The directors of some of those banks sometimes took

advantage of this optional clause, and sometimes threatened those who

demanded gold and silver in exchange for a considerable number of their

notes, that they would take advantage of it, unless such demanders would

content themselves with a part of what they demanded. The promissory notes

of those banking companies constituted, at that time, the far greater part

of the currency of Scotland, which this uncertainty of payment necessarily

degraded below value of gold and silver money. During the continuance of

this abuse (which prevailed chiefly in 1762, 1763, and 1764), while the

exchange between London and Carlisle was at par, that between London and

Dumfries would sometimes be four per cent. against Dumfries, though this

town is not thirty miles distant from Carlisle. But at Carlisle, bills

were paid in gold and silver; whereas at Dumfries they were paid in Scotch

bank notes; and the uncertainty of getting these bank notes exchanged for

gold and silver coin, had thus degraded them four per cent. below the

value of that coin. The same act of parliament which suppressed ten and

five shilling bank notes, suppressed likewise this optional clause, and

thereby restored the exchange between England and Scotland to its natural

rate, or to what the course of trade and remittances might happen to make

it.

In the paper currencies of Yorkshire, the payment of so small a sum as 6d.

sometimes depended upon the condition, that the holder of the note should

bring the change of a guinea to the person who issued it; a condition

which the holders of such notes might frequently find it very difficult to

fulfil, and which must have degraded this currency below the value of gold

and silver money. An act of parliament, accordingly, declared all such

clauses unlawful, and suppressed, in the same manner as in Scotland, all

promissory notes, payable to the bearer, under 20s. value.

The paper currencies of North America consisted, not in bank notes payable

to the bearer on demand, but in a government paper, of which the payment

was not exigible till several years after it was issued; and though the

colony governments paid no interest to the holders of this paper, they

declared it to be, and in fact rendered it, a legal tender of payment for

the full value for which it was issued. But allowing the colony security

to be perfectly good, £100, payable fifteen years hence, for example, in a

country where interest is at six per cent., is worth little more than £40

ready money. To oblige a creditor, therefore, to accept of this as full

payment for a debt of £100, actually paid down in ready money, was an act

of such violent injustice, as has scarce, perhaps, been attempted by the

government of any other country which pretended to be free. It bears the

evident marks of having originally been, what the honest and downright

Doctor Douglas assures us it was, a scheme of fraudulent debtors to cheat

their creditors. The government of Pennsylvania, indeed, pretended, upon

their first emission of paper money, in 1722, to render their paper of

equal value with gold and silver, by enacting penalties against all those

who made any difference in the price of their goods when they sold them

for a colony paper, and when they sold them for gold and silver, a

regulation equally tyrannical, but much less, effectual, than that which

it was meant to support. A positive law may render a shilling a legal

tender for a guinea, because it may direct the courts of justice to

discharge the debtor who has made that tender; but no positive law can

oblige a person who sells goods, and who is at liberty to sell or not to

sell as he pleases, to accept of a shilling as equivalent to a guinea in

the price of them. Notwithstanding any regulation of this kind, it

appeared, by the course of exchange with Great Britain, that £100 sterling

was occasionally considered as equivalent, in some of the colonies, to

£130, and in others to so great a sum as £1100 currency; this difference

in the value arising from the difference in the quantity of paper emitted

in the different colonies, and in the distance and probability of the term

of its final discharge and redemption.

No law, therefore, could be more equitable than the act of parliament, so

unjustly complained of in the colonies, which declared, that no paper

currency to be emitted there in time coming, should be a legal tender of

payment.

Pennsylvania was always more moderate in its emissions of paper money than

any other of our colonies. Its paper currency, accordingly, is said never

to have sunk below the value of the gold and silver which was current in

the colony before the first emission of its paper money. Before that

emission, the colony had raised the denomination of its coin, and had, by

act of assembly, ordered 5s. sterling to pass in the colonies for 6s:3d.,

and afterwards for 6s:8d. A pound, colony currency, therefore, even when

that currency was gold and silver, was more than thirty per cent. below

the value of £1 sterling; and when that currency was turned into paper, it

was seldom much more than thirty per cent. below that value. The pretence

for raising the denomination of the coin was to prevent the exportation of

gold and silver, by making equal quantities of those metals pass for

greater sums in the colony than they did in the mother country. It was

found, however, that the price of all goods from the mother country rose

exactly in proportion as they raised the denomination of their coin, so

that their gold and silver were exported as fast as ever.

The paper of each colony being received in the payment of the provincial

taxes, for the full value for which it had been issued, it necessarily

derived from this use some additional value, over and above what it would

have had, from the real or supposed distance of the term of its final

discharge and redemption. This additional value was greater or less,

according as the quantity of paper issued was more or less above what

could be employed in the payment of the taxes of the particular colony

which issued it. It was in all the colonies very much above what could be

employed in this manner.

A prince, who should enact that a certain proportion of his taxes should

be paid in a paper money of a certain kind, might thereby give a certain

value to this paper money, even though the term of its final discharge and

redemption should depend altogether upon the will of the prince. If the

bank which issued this paper was careful to keep the quantity of it always

somewhat below what could easily be employed in this manner, the demand

for it might be such as to make it even bear a premium, or sell for

somewhat more in the market than the quantity of gold or silver currency

for which it was issued. Some people account in this manner for what is

called the agio of the bank of Amsterdam, or for the superiority of bank

money over current money, though this bank money, as they pretend, cannot

be taken out of the bank at the will of the owner. The greater part of

foreign bills of exchange must be paid in bank money, that is, by a

transfer in the books of the bank; and the directors of the bank, they

allege, are careful to keep the whole quantity of bank money always below

what this use occasions a demand for. It is upon this account, they say,

the bank money sells for a premium, or bears an agio of four or five per

cent. above the same nominal sum of the gold and silver currency of the

country. This account of the bank of Amsterdam, however, it will appear

hereafter, is in a great measure chimerical.

A paper currency which falls below the value of gold and silver coin, does

not thereby sink the value of those metals, or occasion equal quantities

of them to exchange for a smaller quantity of goods of any other kind. The

proportion between the value of gold and silver and that of goods of any

other kind, depends in all cases, not upon the nature and quantity of any

particular paper money, which may be current in any particular country,

but upon the richness or poverty of the mines, which happen at any

particular time to supply the great market of the commercial world with

those metals. It depends upon the proportion between the quantity of

labour which is necessary in order to bring a certain quantity of gold and

silver to market, and that which is necessary in order to bring thither a

certain quantity of any other sort of goods.

If bankers are restrained from issuing any circulating bank notes, or

notes payable to the bearer, for less than a certain sum; and if they are

subjected to the obligation of an immediate and unconditional payment of

such bank notes as soon as presented, their trade may, with safety to the

public, be rendered in all other respects perfectly free. The late

multiplication of banking companies in both parts of the united kingdom,

an event by which many people have been much alarmed, instead of

diminishing, increases the security of the public. It obliges all of them

to be more circumspect in their conduct, and, by not extending their

currency beyond its due proportion to their cash, to guard themselves

against those malicious runs, which the rivalship of so many competitors

is always ready to bring upon them. It restrains the circulation of each

particular company within a narrower circle, and reduces their circulating

notes to a smaller number. By dividing the whole circulation into a

greater number of parts, the failure of any one company, an accident

which, in the course of things, must sometimes happen, becomes of less

consequence to the public. This free competition, too, obliges all bankers

to be more liberal in their dealings with their customers, lest their

rivals should carry them away. In general, if any branch of trade, or any

division of labour, be advantageous to the public, the freer and more

general the competition, it will always be the more so.

CHAPTER III.

OF THE ACCUMULATION OF CAPITAL, OR OF

PRODUCTIVE AND UNPRODUCTIVE LABOUR.

There is one sort of labour which adds to the value of the subject upon

which it is bestowed; there is another which has no such effect. The

former as it produces a value, may be called productive, the latter,

unproductive labour. {Some French authors of great learning and ingenuity

have used those words in a different sense. In the last chapter of the

fourth book, I shall endeavour to shew that their sense is an improper

one.} Thus the labour of a manufacturer adds generally to the value of the

materials which he works upon, that of his own maintenance, and of his

master’s profit. The labour of a menial servant, on the contrary, adds to

the value of nothing. Though the manufacturer has his wages advanced to

him by his master, he in reality costs him no expense, the value of those

wages being generally restored, together with a profit, in the improved

value of the subject upon which his labour is bestowed. But the

maintenance of a menial servant never is restored. A man grows rich by

employing a multitude of manufacturers; he grows poor by maintaining a

multitude or menial servants. The labour of the latter, however, has its

value, and deserves its reward as well as that of the former. But the

labour of the manufacturer fixes and realizes itself in some particular

subject or vendible commodity, which lasts for some time at least after

that labour is past. It is, as it were, a certain quantity of labour

stocked and stored up, to be employed, if necessary, upon some other

occasion. That subject, or, what is the same thing, the price of that

subject, can afterwards, if necessary, put into motion a quantity of

labour equal to that which had originally produced it. The labour of the

menial servant, on the contrary, does not fix or realize itself in any

particular subject or vendible commodity. His services generally perish in

the very instant of their performance, and seldom leave any trace of value

behind them, for which an equal quantity of service could afterwards be

procured.

The labour of some of the most respectable orders in the society is, like

that of menial servants, unproductive of any value, and does not fix or

realize itself in any permanent subject, or vendible commodity, which

endures after that labour is past, and for which an equal quantity of

labour could afterwards be procured. The sovereign, for example, with all

the officers both of justice and war who serve under him, the whole army

and navy, are unproductive labourers. They are the servants of the public,

and are maintained by a part of the annual produce of the industry of

other people. Their service, how honourable, how useful, or how necessary

soever, produces nothing for which an equal quantity of service can

afterwards be procured. The protection, security, and defence, of the

commonwealth, the effect of their labour this year, will not purchase its

protection, security, and defence, for the year to come. In the same class

must be ranked, some both of the gravest and most important, and some of

the most frivolous professions; churchmen, lawyers, physicians, men of

letters of all kinds; players, buffoons, musicians, opera-singers,

opera-dancers, etc. The labour of the meanest of these has a certain

value, regulated by the very same principles which regulate that of every

other sort of labour; and that of the noblest and most useful, produces

nothing which could afterwards purchase or procure an equal quantity of

labour. Like the declamation of the actor, the harangue of the orator, or

the tune of the musician, the work of all of them perishes in the very

instant of its production.

Both productive and unproductive labourers, and those who do not labour at

all, are all equally maintained by the annual produce of the land and

labour of the country. This produce, how great soever, can never be

infinite, but must have certain limits. According, therefore, as a smaller

or greater proportion of it is in any one year employed in maintaining

unproductive hands, the more in the one case, and the less in the other,

will remain for the productive, and the next year’s produce will be

greater or smaller accordingly; the whole annual produce, if we except the

spontaneous productions of the earth, being the effect of productive

labour.

Though the whole annual produce of the land and labour of every country is

no doubt ultimately destined for supplying the consumption of its

inhabitants, and for procuring a revenue to them; yet when it first comes

either from the ground, or from the hands of the productive labourers, it

naturally divides itself into two parts. One of them, and frequently the

largest, is, in the first place, destined for replacing a capital, or for

renewing the provisions, materials, and finished work, which had been

withdrawn from a capital; the other for constituting a revenue either to

the owner of this capital, as the profit of his stock, or to some other

person, as the rent of his land. Thus, of the produce of land, one part

replaces the capital of the farmer; the other pays his profit and the rent

of the landlord; and thus constitutes a revenue both to the owner of this

capital, as the profits of his stock, and to some other person as the rent

of his land. Of the produce of a great manufactory, in the same manner,

one part, and that always the largest, replaces the capital of the

undertaker of the work; the other pays his profit, and thus constitutes a

revenue to the owner of this capital.

That part of the annual produce of the land and labour of any country

which replaces a capital, never is immediately employed to maintain any

but productive hands. It pays the wages of productive labour only. That

which is immediately destined for constituting a revenue, either as profit

or as rent, may maintain indifferently either productive or unproductive

hands.

Whatever part of his stock a man employs as a capital, he always expects

it to be replaced to him with a profit. He employs it, therefore, in

maintaining productive hands only; and after having served in the function

of a capital to him, it constitutes a revenue to them. Whenever he employs

any part of it in maintaining unproductive hands of any kind, that part is

from that moment withdrawn from his capital, and placed in his stock

reserved for immediate consumption.

Unproductive labourers, and those who do not labour at all, are all

maintained by revenue; either, first, by that part of the annual produce

which is originally destined for constituting a revenue to some particular

persons, either as the rent of land, or as the profits of stock; or,

secondly, by that part which, though originally destined for replacing a

capital, and for maintaining productive labourers only, yet when it comes

into their hands, whatever part of it is over and above their necessary

subsistence, may be employed in maintaining indifferently either

productive or unproductive hands. Thus, not only the great landlord or the

rich merchant, but even the common workman, if his wages are considerable,

may maintain a menial servant; or he may sometimes go to a play or a

puppet-show, and so contribute his share towards maintaining one set of

unproductive labourers; or he may pay some taxes, and thus help to

maintain another set, more honourable and useful, indeed, but equally

unproductive. No part of the annual produce, however, which had been

originally destined to replace a capital, is ever directed towards

maintaining unproductive hands, till after it has put into motion its full

complement of productive labour, or all that it could put into motion in

the way in which it was employed. The workman must have earned his wages

by work done, before he can employ any part of them in this manner. That

part, too, is generally but a small one. It is his spare revenue only, of

which productive labourers have seldom a great deal. They generally have

some, however; and in the payment of taxes, the greatness of their number

may compensate, in some measure, the smallness of their contribution. The

rent of land and the profits of stock are everywhere, therefore, the

principal sources from which unproductive hands derive their subsistence.

These are the two sorts of revenue of which the owners have generally most

to spare. They might both maintain indifferently, either productive or

unproductive hands. They seem, however, to have some predilection for the

latter. The expense of a great lord feeds generally more idle than

industrious people. The rich merchant, though with his capital he

maintains industrious people only, yet by his expense, that is, by the

employment of his revenue, he feeds commonly the very same sort as the

great lord.

The proportion, therefore, between the productive and unproductive hands,

depends very much in every country upon the proportion between that part

of the annual produce, which, as soon as it comes either from the ground,

or from the hands of the productive labourers, is destined for replacing a

capital, and that which is destined for constituting a revenue, either as

rent or as profit. This proportion is very different in rich from what it

is in poor countries.

Thus, at present, in the opulent countries of Europe, a very large,

frequently the largest, portion of the produce of the land, is destined

for replacing the capital of the rich and independent farmer; the other

for paying his profits, and the rent of the landlord. But anciently,

during the prevalency of the feudal government, a very small portion of

the produce was sufficient to replace the capital employed in cultivation.

It consisted commonly in a few wretched cattle, maintained altogether by

the spontaneous produce of uncultivated land, and which might, therefore,

be considered as a part of that spontaneous produce. It generally, too,

belonged to the landlord, and was by him advanced to the occupiers of the

land. All the rest of the produce properly belonged to him too, either as

rent for his land, or as profit upon this paltry capital. The occupiers of

land were generally bond-men, whose persons and effects were equally his

property. Those who were not bond-men were tenants at will; and though the

rent which they paid was often nominally little more than a quit-rent, it

really amounted to the whole produce of the land. Their lord could at all

times command their labour in peace and their service in war. Though they

lived at a distance from his house, they were equally dependent upon him

as his retainers who lived in it. But the whole produce of the land

undoubtedly belongs to him, who can dispose of the labour and service of

all those whom it maintains. In the present state of Europe, the share of

the landlord seldom exceeds a third, sometimes not a fourth part of the

whole produce of the land. The rent of land, however, in all the improved

parts of the country, has been tripled and quadrupled since those ancient

times; and this third or fourth part of the annual produce is, it seems,

three or four times greater than the whole had been before. In the

progress of improvement, rent, though it increases in proportion to the

extent, diminishes in proportion to the produce of the land.

In the opulent countries of Europe, great capitals are at present employed

in trade and manufactures. In the ancient state, the little trade that was

stirring, and the few homely and coarse manufactures that were carried on,

required but very small capitals. These, however, must have yielded very

large profits. The rate of interest was nowhere less than ten per cent.

and their profits must have been sufficient to afford this great interest.

At present, the rate of interest, in the improved parts of Europe, is

nowhere higher than six per cent.; and in some of the most improved, it is

so low as four, three, and two per cent. Though that part of the revenue

of the inhabitants which is derived from the profits of stock, is always

much greater in rich than in poor countries, it is because the stock is

much greater; in proportion to the stock, the profits are generally much

less.

That part of the annual produce, therefore, which, as soon as it comes

either from the ground, or from the hands of the productive labourers, is

destined for replacing a capital, is not only much greater in rich than in

poor countries, but bears a much greater proportion to that which is

immediately destined for constituting a revenue either as rent or as

profit. The funds destined for the maintenance of productive labour are

not only much greater in the former than in the latter, but bear a much

greater proportion to those which, though they may be employed to maintain

either productive or unproductive hands, have generally a predilection for

the latter.

The proportion between those different funds necessarily determines in

every country the general character of the inhabitants as to industry or

idleness. We are more industrious than our forefathers, because, in the

present times, the funds destined for the maintenance of industry are much

greater in proportion to those which are likely to be employed in the

maintenance of idleness, than they were two or three centuries ago. Our

ancestors were idle for want of a sufficient encouragement to industry. It

is better, says the proverb, to play for nothing, than to work for

nothing. In mercantile and manufacturing towns, where the inferior ranks

of people are chiefly maintained by the employment of capital, they are in

general industrious, sober, and thriving; as in many English, and in most

Dutch towns. In those towns which are principally supported by the

constant or occasional residence of a court, and in which the inferior

ranks of people are chiefly maintained by the spending of revenue, they

are in general idle, dissolute, and poor; as at Rome, Versailles,

Compeigne, and Fontainbleau. If you except Rouen and Bourdeaux, there is

little trade or industry in any of the parliament towns of France; and the

inferior ranks of people, being chiefly maintained by the expense of the

members of the courts of justice, and of those who come to plead before

them, are in general idle and poor. The great trade of Rouen and Bourdeaux

seems to be altogether the effect of their situation. Rouen is necessarily

the entrepot of almost all the goods which are brought either from foreign

countries, or from the maritime provinces of France, for the consumption

of the great city of Paris. Bourdeaux is, in the same manner, the entrepot

of the wines which grow upon the banks of the Garronne, and of the rivers

which run into it, one of the richest wine countries in the world, and

which seems to produce the wine fittest for exportation, or best suited to

the taste of foreign nations. Such advantageous situations necessarily

attract a great capital by the great employment which they afford it; and

the employment of this capital is the cause of the industry of those two

cities. In the other parliament towns of France, very little more capital

seems to be employed than what is necessary for supplying their own

consumption; that is, little more than the smallest capital which can be

employed in them. The same thing may be said of Paris, Madrid, and Vienna.

Of those three cities, Paris is by far the most industrious, but Paris

itself is the principal market of all the manufactures established at

Paris, and its own consumption is the principal object of all the trade

which it carries on. London, Lisbon, and Copenhagen, are, perhaps, the

only three cities in Europe, which are both the constant residence of a

court, and can at the same time be considered as trading cities, or as

cities which trade not only for their own consumption, but for that of

other cities and countries. The situation of all the three is extremely

advantageous, and naturally fits them to be the entrepots of a great part

of the goods destined for the consumption of distant places. In a city

where a great revenue is spent, to employ with advantage a capital for any

other purpose than for supplying the consumption of that city, is probably

more difficult than in one in which the inferior ranks of people have no

other maintenance but what they derive from the employment of such a

capital. The idleness of the greater part of the people who are maintained

by the expense of revenue, corrupts, it is probable, the industry of those

who ought to be maintained by the employment of capital, and renders it

less advantageous to employ a capital there than in other places. There

was little trade or industry in Edinburgh before the Union. When the

Scotch parliament was no longer to be assembled in it, when it ceased to

be the necessary residence of the principal nobility and gentry of

Scotland, it became a city of some trade and industry. It still continues,

however, to be the residence of the principal courts of justice in

Scotland, of the boards of customs and excise, etc. A considerable

revenue, therefore, still continues to be spent in it. In trade and

industry, it is much inferior to Glasgow, of which the inhabitants are

chiefly maintained by the employment of capital. The inhabitants of a

large village, it has sometimes been observed, after having made

considerable progress in manufactures, have become idle and poor, in

consequence of a great lord’s having taken up his residence in their

neighbourhood.

The proportion between capital and revenue, therefore, seems everywhere to

regulate the proportion between industry and idleness. Wherever capital

predominates, industry prevails; wherever revenue, idleness. Every

increase or diminution of capital, therefore, naturally tends to increase

or diminish the real quantity of industry, the number of productive hands,

and consequently the exchangeable value of the annual produce of the land

and labour of the country, the real wealth and revenue of all its

inhabitants.

Capitals are increased by parsimony, and diminished by prodigality and

misconduct.

Whatever a person saves from his revenue he adds to his capital, and

either employs it himself in maintaining an additional number of

productive hands, or enables some other person to do so, by lending it to

him for an interest, that is, for a share of the profits. As the capital

of an individual can be increased only by what he saves from his annual

revenue or his annual gains, so the capital of a society, which is the

same with that of all the individuals who compose it, can be increased

only in the same manner.

Parsimony, and not industry, is the immediate cause of the increase of

capital. Industry, indeed, provides the subject which parsimony

accumulates; but whatever industry might acquire, if parsimony did not

save and store up, the capital would never be the greater.

Parsimony, by increasing the fund which is destined for the maintenance of

productive hands, tends to increase the number of those hands whose labour

adds to the value of the subject upon which it is bestowed. It tends,

therefore, to increase the exchangeable value of the annual produce of the

land and labour of the country. It puts into motion an additional quantity

of industry, which gives an additional value to the annual produce.

What is annually saved, is as regularly consumed as what is annually

spent, and nearly in the same time too: but it is consumed by a different

set of people. That portion of his revenue which a rich man annually

spends, is, in most cases, consumed by idle guests and menial servants,

who leave nothing behind them in return for their consumption. That

portion which he annually saves, as, for the sake of the profit, it is

immediately employed as a capital, is consumed in the same manner, and

nearly in the same time too, but by a different set of people: by

labourers, manufacturers, and artificers, who reproduce, with a profit,

the value of their annual consumption. His revenue, we shall suppose, is

paid him in money. Had he spent the whole, the food, clothing, and

lodging, which the whole could have purchased, would have been distributed

among the former set of people. By saving a part of it, as that part is,

for the sake of the profit, immediately employed as a capital, either by

himself or by some other person, the food, clothing, and lodging, which

may be purchased with it, are necessarily reserved for the latter. The

consumption is the same, but the consumers are different.

By what a frugal man annually saves, he not only affords maintenance to an

additional number of productive hands, for that of the ensuing year, but

like the founder of a public work-house he establishes, as it were, a

perpetual fund for the maintenance of an equal number in all times to

come. The perpetual allotment and destination of this fund, indeed, is not

always guarded by any positive law, by any trust-right or deed of

mortmain. It is always guarded, however, by a very powerful principle, the

plain and evident interest of every individual to whom any share of it

shall ever belong. No part of it can ever afterwards be employed to

maintain any but productive hands, without an evident loss to the person

who thus perverts it from its proper destination.

The prodigal perverts it in this manner: By not confining his expense

within his income, he encroaches upon his capital. Like him who perverts

the revenues of some pious foundation to profane purposes, he pays the

wages of idleness with those funds which the frugality of his forefathers

had, as it were, consecrated to the maintenance of industry. By

diminishing the funds destined for the employment of productive labour, he

necessarily diminishes, so far as it depends upon him, the quantity of

that labour which adds a value to the subject upon which it is bestowed,

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

of the whole country, the real wealth and revenue of its inhabitants. If

the prodigality of some were not compensated by the frugality of others,

the conduct of every prodigal, by feeding the idle with the bread of the

industrious, would tend not only to beggar himself, but to impoverish his

country.

Though the expense of the prodigal should be altogether in home made, and

no part of it in foreign commodities, its effect upon the productive funds

of the society would still be the same. Every year there would still be a

certain quantity of food and clothing, which ought to have maintained

productive, employed in maintaining unproductive hands. Every year,

therefore, there would still be some diminution in what would otherwise

have been the value of the annual produce of the land and labour of the

country.

This expense, it may be said, indeed, not being in foreign goods, and not

occasioning any exportation of gold and silver, the same quantity of money

would remain in the country as before. But if the quantity of food and

clothing which were thus consumed by unproductive, had been distributed

among productive hands, they would have reproduced, together with a

profit, the full value of their consumption. The same quantity of money

would, in this case, equally have remained in the country, and there

would, besides, have been a reproduction of an equal value of consumable

goods. There would have been two values instead of one.

The same quantity of money, besides, can not long remain in any country in

which the value of the annual produce diminishes. The sole use of money is

to circulate consumable goods. By means of it, provisions, materials, and

finished work, are bought and sold, and distributed to their proper

consumers. The quantity of money, therefore, which can be annually

employed in any country, must be determined by the value of the consumable

goods annually circulated within it. These must consist, either in the

immediate produce of the land and labour of the country itself, or in

something which had been purchased with some part of that produce. Their

value, therefore, must diminish as the value of that produce diminishes,

and along with it the quantity of money which can be employed in

circulating them. But the money which, by this annual diminution of

produce, is annually thrown out of domestic circulation, will not be

allowed to lie idle. The interest of whoever possesses it requires that it

should be employed; but having no employment at home, it will, in spite of

all laws and prohibitions, be sent abroad, and employed in purchasing

consumable goods, which may be of some use at home. Its annual exportation

will, in this manner, continue for some time to add something to the

annual consumption of the country beyond the value of its own annual

produce. What in the days of its prosperity had been saved from that

annual produce, and employed in purchasing gold and silver, will

contribute, for some little time, to support its consumption in adversity.

The exportation of gold and silver is, in this case, not the cause, but

the effect of its declension, and may even, for some little time,

alleviate the misery of that declension.

The quantity of money, on the contrary, must in every country naturally

increase as the value of the annual produce increases. The value of the

consumable goods annually circulated within the society being greater,

will require a greater quantity of money to circulate them. A part of the

increased produce, therefore, will naturally be employed in purchasing,

wherever it is to be had, the additional quantity of gold and silver

necessary for circulating the rest. The increase of those metals will, in

this case, be the effect, not the cause, of the public prosperity. Gold

and silver are purchased everywhere in the same manner. The food,

clothing, and lodging, the revenue and maintenance, of all those whose

labour or stock is employed in bringing them from the mine to the market,

is the price paid for them in Peru as well as in England. The country

which has this price to pay, will never belong without the quantity of

those metals which it has occasion for; and no country will ever long

retain a quantity which it has no occasion for.

Whatever, therefore, we may imagine the real wealth and revenue of a

country to consist in, whether in the value of the annual produce of its

land and labour, as plain reason seems to dictate, or in the quantity of

the precious metals which circulate within it, as vulgar prejudices

suppose; in either view of the matter, every prodigal appears to be a

public enemy, and every frugal man a public benefactor.

The effects of misconduct are often the same as those of prodigality.

Every injudicious and unsuccessful project in agriculture, mines,

fisheries, trade, or manufactures, tends in the same manner to diminish

the funds destined for the maintenance of productive labour. In every such

project, though the capital is consumed by productive hands only, yet as,

by the injudicious manner in which they are employed, they do not

reproduce the full value of their consumption, there must always be some

diminution in what would otherwise have been the productive funds of the

society.

It can seldom happen, indeed, that the circumstances of a great nation can

be much affected either by the prodigality or misconduct of individuals;

the profusion or imprudence of some being always more than compensated by

the frugality and good conduct of others.

With regard to profusion, the principle which prompts to expense is the

passion for present enjoyment; which, though sometimes violent and very

difficult to be restrained, is in general only momentary and occasional.

But the principle which prompts to save, is the desire of bettering our

condition; a desire which, though generally calm and dispassionate, comes

with us from the womb, and never leaves us till we go into the grave. In

the whole interval which separates those two moments, there is scarce,

perhaps, a single instance, in which any man is so perfectly and

completely satisfied with his situation, as to be without any wish of

alteration or improvement of any kind. An augmentation of fortune is the

means by which the greater part of men propose and wish to better their

condition. It is the means the most vulgar and the most obvious; and the

most likely way of augmenting their fortune, is to save and accumulate

some part of what they acquire, either regularly and annually, or upon

some extraordinary occasion. Though the principle of expense, therefore,

prevails in almost all men upon some occasions, and in some men upon

almost all occasions; yet in the greater part of men, taking the whole

course of their life at an average, the principle of frugality seems not

only to predominate, but to predominate very greatly.

With regard to misconduct, the number of prudent and successful

undertakings is everywhere much greater than that of injudicious and

unsuccessful ones. After all our complaints of the frequency of

bankruptcies, the unhappy men who fall into this misfortune, make but a

very small part of the whole number engaged in trade, and all other sorts

of business; not much more, perhaps, than one in a thousand. Bankruptcy

is, perhaps, the greatest and most humiliating calamity which can befal an

innocent man. The greater part of men, therefore, are sufficiently careful

to avoid it. Some, indeed, do not avoid it; as some do not avoid the

gallows.

Great nations are never impoverished by private, though they sometimes are

by public prodigality and misconduct. The whole, or almost the whole

public revenue is, in most countries, employed in maintaining unproductive

hands. Such are the people who compose a numerous and splendid court, a

great ecclesiastical establishment, great fleets and armies, who in time

of peace produce nothing, and in time of war acquire nothing which can

compensate the expense of maintaining them, even while the war lasts. Such

people, as they themselves produce nothing, are all maintained by the

produce of other men’s labour. When multiplied, therefore, to an

unnecessary number, they may in a particular year consume so great a share

of this produce, as not to leave a sufficiency for maintaining the

productive labourers, who should reproduce it next year. The next year’s

produce, therefore, will be less than that of the foregoing; and if the

same disorder should continue, that of the third year will be still less

than that of the second. Those unproductive hands who should be maintained

by a part only of the spare revenue of the people, may consume so great a

share of their whole revenue, and thereby oblige so great a number to

encroach upon their capitals, upon the funds destined for the maintenance

of productive labour, that all the frugality and good conduct of

individuals may not be able to compensate the waste and degradation of

produce occasioned by this violent and forced encroachment.

This frugality and good conduct, however, is, upon most occasions, it

appears from experience, sufficient to compensate, not only the private

prodigality and misconduct of individuals, but the public extravagance of

government. The uniform, constant, and uninterrupted effort of every man

to better his condition, the principle from which public and national, as

well as private opulence is originally derived, is frequently powerful

enough to maintain the natural progress of things towards improvement, in

spite both of the extravagance of government, and of the greatest errors

of administration. Like the unknown principle of animal life, it

frequently restores health and vigour to the constitution, in spite not

only of the disease, but of the absurd prescriptions of the doctor.

The annual produce of the land and labour of any nation can be increased

in its value by no other means, but by increasing either the number of its

productive labourers, or the productive powers of those labourers who had

before been employed. The number of its productive labourers, it is

evident, can never be much increased, but in consequence of an increase of

capital, or of the funds destined for maintaining them. The productive

powers of the same number of labourers cannot be increased, but in

consequence either of some addition and improvement to those machines and

instruments which facilitate and abridge labour, or of more proper

division and distribution of employment. In either case, an additional

capital is almost always required. It is by means of an additional capital

only, that the undertaker of any work can either provide his workmen with

better machinery, or make a more proper distribution of employment among

them. When the work to be done consists of a number of parts, to keep

every man constantly employed in one way, requires a much greater capital

than where every man is occasionally employed in every different part of

the work. When we compare, therefore, the state of a nation at two

different periods, and find that the annual produce of its land and labour

is evidently greater at the latter than at the former, that its lands are

better cultivated, its manufactures more numerous and more flourishing,

and its trade more extensive; we may be assured that its capital must have

increased during the interval between those two periods, and that more

must have been added to it by the good conduct of some, than had been

taken from it either by the private misconduct of others, or by the public

extravagance of government. But we shall find this to have been the case

of almost all nations, in all tolerably quiet and peaceable times, even of

those who have not enjoyed the most prudent and parsimonious governments.

To form a right judgment of it, indeed, we must compare the state of the

country at periods somewhat distant from one another. The progress is

frequently so gradual, that, at near periods, the improvement is not only

not sensible, but, from the declension either of certain branches of

industry, or of certain districts of the country, things which sometimes

happen, though the country in general is in great prosperity, there

frequently arises a suspicion, that the riches and industry of the whole

are decaying.

The annual produce of the land and labour of England, for example, is

certainly much greater than it was a little more than a century ago, at

the restoration of Charles II. Though at present few people, I believe,

doubt of this, yet during this period five years have seldom passed away,

in which some book or pamphlet has not been published, written, too, with

such abilities as to gain some authority with the public, and pretending

to demonstrate that the wealth of the nation was fast declining; that the

country was depopulated, agriculture neglected, manufactures decaying, and

trade undone. Nor have these publications been all party pamphlets, the

wretched offspring of falsehood and venality. Many of them have been

written by very candid and very intelligent people, who wrote nothing but

what they believed, and for no other reason but because they believed it.

The annual produce of the land and labour of England, again, was certainly

much greater at the Restoration than we can suppose it to have been about

a hundred years before, at the accession of Elizabeth. At this period,

too, we have all reason to believe, the country was much more advanced in

improvement, than it had been about a century before, towards the close of

the dissensions between the houses of York and Lancaster. Even then it

was, probably, in a better condition than it had been at the Norman

conquest: and at the Norman conquest, than during the confusion of the

Saxon heptarchy. Even at this early period, it was certainly a more

improved country than at the invasion of Julius Caesar, when its

inhabitants were nearly in the same state with the savages in North

America.

In each of those periods, however, there was not only much private and

public profusion, many expensive and unnecessary wars, great perversion of

the annual produce from maintaining productive to maintain unproductive

hands; but sometimes, in the confusion of civil discord, such absolute

waste and destruction of stock, as might be supposed, not only to retard,

as it certainly did, the natural accumulation of riches, but to have left

the country, at the end of the period, poorer than at the beginning. Thus,

in the happiest and most fortunate period of them all, that which has

passed since the Restoration, how many disorders and misfortunes have

occurred, which, could they have been foreseen, not only the

impoverishment, but the total ruin of the country would have been expected

from them? The fire and the plague of London, the two Dutch wars, the

disorders of the revolution, the war in Ireland, the four expensive French

wars of 1688, 1701, 1742, and 1756, together with the two rebellions of

1715 and 1745. In the course of the four French wars, the nation has

contracted more than £145,000,000 of debt, over and above all the other

extraordinary annual expense which they occasioned; so that the whole

cannot be computed at less than £200,000,000. So great a share of the

annual produce of the land and labour of the country, has, since the

Revolution, been employed upon different occasions, in maintaining an

extraordinary number of unproductive hands. But had not those wars given

this particular direction to so large a capital, the greater part of it

would naturally have been employed in maintaining productive hands, whose

labour would have replaced, with a profit, the whole value of their

consumption. The value of the annual produce of the land and labour of the

country would have been considerably increased by it every year, and every

years increase would have augmented still more that of the following year.

More houses would have been built, more lands would have been improved,

and those which had been improved before would have been better

cultivated; more manufactures would have been established, and those which

had been established before would have been more extended; and to what

height the real wealth and revenue of the country might by this time have

been raised, it is not perhaps very easy even to imagine.

But though the profusion of government must undoubtedly have retarded the

natural progress of England towards wealth and improvement, it has not

been able to stop it. The annual produce of its land and labour is

undoubtedly much greater at present than it was either at the Restoration

or at the Revolution. The capital, therefore, annually employed in

cultivating this land, and in maintaining this labour, must likewise be

much greater. In the midst of all the exactions of government, this

capital has been silently and gradually accumulated by the private

frugality and good conduct of individuals, by their universal, continual,

and uninterrupted effort to better their own condition. It is this effort,

protected by law, and allowed by liberty to exert itself in the manner

that is most advantageous, which has maintained the progress of England

towards opulence and improvement in almost all former times, and which, it

is to be hoped, will do so in all future times. England, however, as it

has never been blessed with a very parsimonious government, so parsimony

has at no time been the characteristic virtue of its inhabitants. It is

the highest impertinence and presumption, therefore, in kings and

ministers to pretend to watch over the economy of private people, and to

restrain their expense, either by sumptuary laws, or by prohibiting the

importation of foreign luxuries. They are themselves always, and without

any exception, the greatest spendthrifts in the society. Let them look

well after their own expense, and they may safely trust private people

with theirs. If their own extravagance does not ruin the state, that of

the subject never will.

As frugality increases, and prodigality diminishes, the public capital, so

the conduct of those whose expense just equals their revenue, without

either accumulating or encroaching, neither increases nor diminishes it.

Some modes of expense, however, seem to contribute more to the growth of

public opulence than others.

The revenue of an individual may be spent, either in things which are

consumed immediately, and in which one day’s expense can neither alleviate

nor support that of another; or it may be spent in things mere durable,

which can therefore be accumulated, and in which every day’s expense may,

as he chooses, either alleviate, or support and heighten, the effect of

that of the following day. A man of fortune, for example, may either spend

his revenue in a profuse and sumptuous table, and in maintaining a great

number of menial servants, and a multitude of dogs and horses; or,

contenting himself with a frugal table, and few attendants, he may lay out

the greater part of it in adorning his house or his country villa, in

useful or ornamental buildings, in useful or ornamental furniture, in

collecting books, statues, pictures; or in things more frivolous, jewels,

baubles, ingenious trinkets of different kinds; or, what is most trifling

of all, in amassing a great wardrobe of fine clothes, like the favourite

and minister of a great prince who died a few years ago. Were two men of

equal fortune to spend their revenue, the one chiefly in the one way, the

other in the other, the magnificence of the person whose expense had been

chiefly in durable commodities, would be continually increasing, every

day’s expense contributing something to support and heighten the effect of

that of the following day; that of the other, on the contrary, would be no

greater at the end of the period than at the beginning. The former too

would, at the end of the period, be the richer man of the two. He would

have a stock of goods of some kind or other, which, though it might not be

worth all that it cost, would always be worth something. No trace or

vestige of the expense of the latter would remain, and the effects of ten

or twenty years’ profusion would be as completely annihilated as if they

had never existed.

As the one mode of expense is more favourable than the other to the

opulence of an individual, so is it likewise to that of a nation. The

houses, the furniture, the clothing of the rich, in a little time, become

useful to the inferior and middling ranks of people. They are able to

purchase them when their superiors grow weary of them; and the general

accommodation of the whole people is thus gradually improved, when this

mode of expense becomes universal among men of fortune. In countries which

have long been rich, you will frequently find the inferior ranks of people

in possession both of houses and furniture perfectly good and entire, but

of which neither the one could have been built, nor the other have been

made for their use. What was formerly a seat of the family of Seymour, is

now an inn upon the Bath road. The marriage-bed of James I. of Great

Britain, which his queen brought with her from Denmark, as a present fit

for a sovereign to make to a sovereign, was, a few years ago, the ornament

of an alehouse at Dunfermline. In some ancient cities, which either have

been long stationary, or have gone somewhat to decay, you will sometimes

scarce find a single house which could have been built for its present

inhabitants. If you go into those houses, too, you will frequently find

many excellent, though antiquated pieces of furniture, which are still

very fit for use, and which could as little have been made for them. Noble

palaces, magnificent villas, great collections of books, statues,

pictures, and other curiosities, are frequently both an ornament and an

honour, not only to the neighbourhood, but to the whole country to which

they belong. Versailles is an ornament and an honour to France, Stowe and

Wilton to England. Italy still continues to command some sort of

veneration, by the number of monuments of this kind which it possesses,

though the wealth which produced them has decayed, and though the genius

which planned them seems to be extinguished, perhaps from not having the

same employment.

The expense, too, which is laid out in durable commodities, is favourable

not only to accumulation, but to frugality. If a person should at any time

exceed in it, he can easily reform without exposing himself to the censure

of the public. To reduce very much the number of his servants, to reform

his table from great profusion to great frugality, to lay down his

equipage after he has once set it up, are changes which cannot escape the

observation of his neighbours, and which are supposed to imply some

acknowledgment of preceding bad conduct. Few, therefore, of those who have

once been so unfortunate as to launch out too far into this sort of

expense, have afterwards the courage to reform, till ruin and bankruptcy

oblige them. But if a person has, at any time, been at too great an

expense in building, in furniture, in books, or pictures, no imprudence

can be inferred from his changing his conduct. These are things in which

further expense is frequently rendered unnecessary by former expense; and

when a person stops short, he appears to do so, not because he has

exceeded his fortune, but because he has satisfied his fancy.

The expense, besides, that is laid out in durable commodities, gives

maintenance, commonly, to a greater number of people than that which is

employed in the most profuse hospitality. Of two or three hundred weight

of provisions, which may sometimes be served up at a great festival, one

half, perhaps, is thrown to the dunghill, and there is always a great deal

wasted and abused. But if the expense of this entertainment had been

employed in setting to work masons, carpenters, upholsterers, mechanics,

etc. a quantity of provisions of equal value would have been distributed

among a still greater number of people, who would have bought them in

pennyworths and pound weights, and not have lost or thrown away a single

ounce of them. In the one way, besides, this expense maintains productive,

in the other unproductive hands. In the one way, therefore, it increases,

in the other it does not increase the exchangeable value of the annual

produce of the land and labour of the country.

I would not, however, by all this, be understood to mean, that the one

species of expense always betokens a more liberal or generous spirit than

the other. When a man of fortune spends his revenue chiefly in

hospitality, he shares the greater part of it with his friends and

companions; but when he employs it in purchasing such durable commodities,

he often spends the whole upon his own person, and gives nothing to any

body without an equivalent. The latter species of expense, therefore,

especially when directed towards frivolous objects, the little ornaments

of dress and furniture, jewels, trinkets, gew-gaws, frequently indicates,

not only a trifling, but a base and selfish disposition. All that I mean

is, that the one sort of expense, as it always occasions some accumulation

of valuable commodities, as it is more favourable to private frugality,

and, consequently, to the increase of the public capital, and as it

maintains productive rather than unproductive hands, conduces more than

the other to the growth of public opulence.

CHAPTER IV.

OF STOCK LENT AT INTEREST.

The stock which is lent at interest is always considered as a capital by

the lender. He expects that in due time it is to be restored to him, and

that, in the mean time, the borrower is to pay him a certain annual rent

for the use of it. The borrower may use it either as a capital, or as a

stock reserved for immediate consumption. If he uses it as a capital, he

employs it in the maintenance of productive labourers, who reproduce the

value, with a profit. He can, in this case, both restore the capital, and

pay the interest, without alienating or encroaching upon any other source

of revenue. If he uses it as a stock reserved for immediate consumption,

he acts the part of a prodigal, and dissipates, in the maintenance of the

idle, what was destined for the support of the industrious. He can, in

this case, neither restore the capital nor pay the interest, without

either alienating or encroaching upon some other source of revenue, such

as the property or the rent of land.

The stock which is lent at interest is, no doubt, occasionally employed in

both these ways, but in the former much more frequently than in the

latter. The man who borrows in order to spend will soon be ruined, and he

who lends to him will generally have occasion to repent of his folly. To

borrow or to lend for such a purpose, therefore, is, in all cases, where

gross usury is out of the question, contrary to the interest of both

parties; and though it no doubt happens sometimes, that people do both the

one and the other, yet, from the regard that all men have for their own

interest, we may be assured, that it cannot happen so very frequently as

we are sometimes apt to imagine. Ask any rich man of common prudence, to

which of the two sorts of people he has lent the greater part of his

stock, to those who he thinks will employ it profitably, or to those who

will spend it idly, and he will laugh at you for proposing the question.

Even among borrowers, therefore, not the people in the world most famous

for frugality, the number of the frugal and industrious surpasses

considerably that of the prodigal and idle.

The only people to whom stock is commonly lent, without their being

expected to make any very profitable use of it, are country gentlemen, who

borrow upon mortgage. Even they scarce ever borrow merely to spend. What

they borrow, one may say, is commonly spent before they borrow it. They

have generally consumed so great a quantity of goods, advanced to them

upon credit by shop-keepers and tradesmen, that they find it necessary to

borrow at interest, in order to pay the debt. The capital borrowed

replaces the capitals of those shop-keepers and tradesmen which the

country gentlemen could not have replaced from the rents of their estates.

It is not properly borrowed in order to be spent, but in order to replace

a capital which had been spent before.

Almost all loans at interest are made in money, either of paper, or of

gold and silver; but what the borrower really wants, and what the lender

readily supplies him with, is not the money, but the money’s worth, or the

goods which it can purchase. If he wants it as a stock for immediate

consumption, it is those goods only which he can place in that stock. If

he wants it as a capital for employing industry, it is from those goods

only that the industrious can be furnished with the tools, materials, and

maintenance necessary for carrying on their work. By means of the loan,

the lender, as it were, assigns to the borrower his right to a certain

portion of the annual produce of the land and labour of the country, to be

employed as the borrower pleases.

The quantity of stock, therefore, or, as it is commonly expressed, of

money, which can be lent at interest in any country, is not regulated by

the value of the money, whether paper or coin, which serves as the

instrument of the different loans made in that country, but by the value

of that part of the annual produce, which, as soon as it comes either from

the ground, or from the hands of the productive labourers, is destined,

not only for replacing a capital, but such a capital as the owner does not

care to be at the trouble of employing himself. As such capitals are

commonly lent out and paid back in money, they constitute what is called

the monied interest. It is distinct, not only from the landed, but from

the trading and manufacturing interests, as in these last the owners

themselves employ their own capitals. Even in the monied interest,

however, the money is, as it were, but the deed of assignment, which

conveys from one hand to another those capitals which the owners do not

care to employ themselves. Those capitals may be greater, in almost any

proportion, than the amount of the money which serves as the instrument of

their conveyance; the same pieces of money successively serving for many

different loans, as well as for many different purchases. A, for example,

lends to W £1000, with which W immediately purchases of B £1000 worth of

goods. B having no occasion for the money himself, lends the identical

pieces to X, with which X immediately purchases of C another £1000 worth

of goods. C, in the same manner, and for the same reason, lends them to Y,

who again purchases goods with them of D. In this manner, the same pieces,

either of coin or of paper, may, in the course of a few days, serve as the

Instrument of three different loans, and of three different purchases,

each of which is, in value, equal to the whole amount of those pieces.

What the three monied men, A, B, and C, assigned to the three borrowers,

W, X, and Y, is the power of making those purchases. In this power consist

both the value and the use of the loans. The stock lent by the three

monied men is equal to the value of the goods which can be purchased with

it, and is three times greater than that of the money with which the

purchases are made. Those loans, however, may be all perfectly well

secured, the goods purchased by the different debtors being so employed

as, in due time, to bring back, with a profit, an equal value either of

coin or of paper. And as the same pieces of money can thus serve as the

instrument of different loans to three, or, for the same reason, to thirty

times their value, so they may likewise successively serve as the

instrument of repayment.

A capital lent at interest may, in this manner, be considered as an

assignment, from the lender to the borrower, of a certain considerable

portion of the annual produce, upon condition that the burrower in return

shall, during the continuance of the loan, annually assign to the lender a

small portion, called the interest; and, at the end of it, a portion

equally considerable with that which had originally been assigned to him,

called the repayment. Though money, either coin or paper, serves generally

as the deed of assignment, both to the smaller and to the more

considerable portion, it is itself altogether different from what is

assigned by it.

In proportion as that share of the annual produce which, as soon as it

comes either from the ground, or from the hands of the productive

labourers, is destined for replacing a capital, increases in any country,

what is called the monied interest naturally increases with it. The

increase of those particular capitals from which the owners wish to derive

a revenue, without being at the trouble of employing them themselves,

naturally accompanies the general increase of capitals; or, in other

words, as stock increases, the quantity of stock to be lent at interest

grows gradually greater and greater.

As the quantity of stock to be lent at interest increases, the interest,

or the price which must be paid for the use of that stock, necessarily

diminishes, not only from those general causes which make the market price

of things commonly diminish as their quantity increases, but from other

causes which are peculiar to this particular case. As capitals increase in

any country, the profits which can be made by employing them necessarily

diminish. It becomes gradually more and more difficult to find within the

country a profitable method of employing any new capital. There arises, in

consequence, a competition between different capitals, the owner of one

endeavouring to get possession of that employment which is occupied by

another; but, upon most occasions, he can hope to justle that other out of

this employment by no other means but by dealing upon more reasonable

terms. He must not only sell what he deals in somewhat cheaper, but, in

order to get it to sell, he must sometimes, too, buy it dearer. The demand

for productive labour, by the increase of the funds which are destined for

maintaining it, grows every day greater and greater. Labourers easily find

employment; but the owners of capitals find it difficult to get labourers

to employ. Their competition raises the wages of labour, and sinks the

profits of stock. But when the profits which can be made by the use of a

capital are in this manner diminished, as it were, at both ends, the price

which can be paid for the use of it, that is, the rate of interest, must

necessarily be diminished with them.

Mr Locke, Mr Lawe, and Mr Montesquieu, as well as many other writers, seem

to have imagined that the increase of the quantity of gold and silver, in

consequence of the discovery of the Spanish West Indies, was the real

cause of the lowering of the rate of interest through the greater part of

Europe. Those metals, they say, having become of less value themselves,

the use of any particular portion of them necessarily became of less value

too, and, consequently, the price which could be paid for it. This notion,

which at first sight seems so plausible, has been so fully exposed by Mr

Hume, that it is, perhaps, unnecessary to say any thing more about it. The

following very short and plain argument, however, may serve to explain

more distinctly the fallacy which seems to have misled those gentlemen.