When paper is substituted in the room of gold and silver money, the quantity of the materials, tools, and maintenance, which the whole circulating capital can supply, may be increased by the whole value of gold and silver which used to be employed in purchasing them.The whole value of the great wheel of circulation and distribution is added to the goods which are circulated and distributed by means of it.The operation, in some measure, resembles that of the undertaker of some great work, who, in consequence of some improvement in mechanics, takes down his old machinery, and adds the difference between its price and that of the new to his circulating capital, to the fund from which he furnishes materials and wages to his workmen.
What is the proportion which the circulating money of any country bears to the whole value of the annual produce circulated by means of it, it is, perhaps, impossible to determine.It has been computed by different authors at a fifth, at a tenth, at a twentieth, and at a thirtieth part of that value.But how small soever the proportion which the circulating money may bear to the whole value of the annual produce, as but a part, and frequently but a small part, of that produce, is ever destined for the maintenance of industry, it must always bear a very considerable proportion to that part.When, therefore, by the substitution of paper, the gold and silver necessary for circulation is reduced to, perhaps, a fifth part of the former quantity, if the value of only the greater part of the other four-fifths be added to the funds which are destined for the maintenance of industry, it must make a very considerable addition to the quantity of that industry, and, consequently, to the value of the annual produce of land and labour.
An operation of this kind has, within these five-and-twenty or thirty years, been performed in Scotland, by the erection of new banking companies in almost every considerable town, and even in some country villages.The effects of it have been precisely those above described.The business of the country is almost entirely carried on by means of the paper of those different banking companies, with which purchases and payments of kinds are commonly made.Silver very seldom appears except in the change of a twenty shillings bank note, and gold still seldomer.But though the conduct of all those different companies has not been unexceptionable, and has accordingly required an act of Parliament to regulate it, the country, notwithstanding, has evidently derived great benefit from their trade.I have heard it asserted, that the trade of the city of Glasgow doubled in about fifteen years after the first erection of the banks there; and that the trade of Scotland has more than quadrupled since the first erection of the two public banks at Edinburgh, of which the one, called the Bank of Scotland, was established by act of Parliament in 1695; the other, called the Royal Bank, by royal charter in 1727.Whether the trade, either of Scotland in general, or the city of Glasgow in particular, has really increased in so great a proportion, during so short a period, Ido not pretend to know.If either of them has increased in this proportion, it seems to be an effect too great to be accounted for by the sole operation of this cause.That the trade and industry of Scotland, however, have increased very considerably during this period, and that the banks have contributed a good deal to this increase, cannot be doubted.
The value of the silver money which circulated in Scotland before the union, in 1707, and which, immediately after it, was brought into the Bank of Scotland in order to be recoined, amounted to L411,117 10s.9d.sterling.No account has been got of the gold coin; but it appears from the ancient accounts of the mint of Scotland, that the value of the gold annually coined somewhat exceeded that of the silver.There were a good many people, too, upon this occasion, who, from a diffidence of repayment, did not bring their silver into the Bank of Scotland:
and there was, besides, some English coin which was not called in.The whole value of the gold and silver, therefore, which circulated in Scotland before the union, cannot be estimated at less than a million sterling.It seems to have constituted almost the whole circulation of that country; for though the circulation of the Bank of Scotland, which had then no rival, was considerable, it seems to have made but a very small part of the whole.In the present times the whole circulation of Scotland cannot be estimated at less than two millions, of which that part which consists in gold and silver most probably does not amount to half a million.But though the circulating gold and silver of Scotland have suffered so great a diminution during this period, its real riches and prosperity do not appear to have suffered any.Its agriculture, manufactures, and trade, on the contrary, the annual produce of its land and labour, have evidently been augmented.
It is chiefly by discounting bills of exchange, that is, by advancing money upon them before they are due, that the greater part of banks and bankers issue their promissory notes.They deduct always, upon whatever sum they advance, the legal interest till the bill shall become due.The payment of the bill, when it becomes due, replaces to the bank the value of what had been advanced, together with a clear profit of the interest.The banker who advances to the merchant whose bill he discounts, not gold and silver, but his own promissory notes, has the advantage of being able to discount to a greater amount, by the whole value of his promissory notes, which he finds by experience are commonly in circulation.He is thereby enabled to make his clear gain of interest on so much a larger sum.