original cause of this excessive circulation of
paper money.
What a bank can with propriety advance to
a merchant or undertaker of any kind, is not
either the whole capital with which he trades,
or even any considerable part of that capital;
but that part of it only which he would otherwise
be obliged to keep by him unemployed
and in ready money, for answering occasional
demands. If the paper money which the bank
advances never exceeds this value, it can never
exceed the value of the gold and silver which
would necessarily circulate in the country if
there was no paper money; it can never exceed
the quantity which the circulation of the
country can easily absorb and employ.
When a bank discounts to a merchant a
real bill of exchange, drawn by a real creditor
upon a real debtor, and which, as soon as
it becomes due, is really paid by that debtor;
it only advances to him a part of the value
which he would otherwise be obliged to keep
by him unemployed and in ready money, for
answering occasional demands. The payment
of the bill, when it becomes due, replaces to
the bank the value of what it had advanced,
together with the interest. The coffers of the
bank, so far as its dealings are confined to
such customers, resemble a water-pond, from
which, though a stream is continually running
out, yet another is continually running in,
fully equal to that which runs out; so that,
without any further care or attention, the
pond keeps always equally, or very near equally
full. Little or no expense can ever be necessary
for replenishing the coffers of such a
bank.
A merchant, without over-trading, may frequently
have occasion for a sum of ready money,
even when he has no bills to discount.
When a bank, besides discounting his bills,
advances him likewise, upon such occasions,
such sums upon his cash account, and accepts
of a piece-meal repayment, as the money comes
in from the occasional sale of his goods, upon
the easy terms of the banking companies
of Scotland; it dispenses him entirely from
the necessity of keeping any part of his stock
by him unemployed and in ready money for
answering occasional demands. When such
demands actually come upon him, he can answer
them sufficiently from his cash account.
The bank, however, in dealing with such customers,
ought to observe with great attention,
whether, in the course of some short period
(of four, five, six, or eight months, for example),
the sum of the repayments which it
commonly receives from them, is, or is not,
fully equal to that of the advances which it
commonly makes to them. If, within the
course of such short periods, the sum of the
repayments from certain customers is, upon
most occasions, fully equal to that of the advances,
it may safely continue to deal with
such customers. Though the stream which
is in this case continually running out from
its coffers may be very large, that which is
continually running into them must be at least
equally large: so that, without any further
care or attention, those coffers are likely to be
always equally or very near equally full, and
scarce ever to require any extraordinary expense
to replenish them. If, on the contrary,
the sum of the repayments from certain other
customers, falls commonly very much short of
the advances which it makes to them, it cannot
with any safety continue to deal with such
customers, at least if they continue to deal
with it in this manner. The stream which is in
this case continually running out from its coffers,
is necessarily much larger than that which
is continually running in; so that, unless they
are replenished by some great and continual
effort of expense, those coffers must soon be
exhausted altogether.
The banking companies of Scotland, accordingly,
were for a long time very careful
to require frequent and regular repayments
from all their customers, and did not care to
deal with any person, whatever might be his
fortune or credit, who did not make, what
they called, frequent and regular operations
with them. By this attention, besides saving
almost entirely the extraordinary expense of
replenishing their coffers, they gained two other
very considerable advantages.
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 he assured that the paper money