dred thousand pounds would otherwise have performed. The same exchanges may be made; the same quantity of consumable goods may be circulated and distributed to their proper consumers, by the means of his promissory notes to the value of a hundred thousand pounds, as by an equal value of gold and silver money. Eighty thousand pounds of gold and silver, therefore, can in this manner be spared from the circulation of the country; and, if different operations of the same kind should at the same time be carried on by many different Banks and bankers, the whole circulation may thus be conducted with a fifth part only of the gold and silver which would otherwise have been requisite." i

1

"There are several kinds of paper money," says Smith; "but bank-notes seem to be the best to serve as money," and he therefore makes them the subject of his discussion. This paragraph describes exactly the nature of Smith's mind, and the method pursued by him. Bank-notes seem to him to be the best. Why did he not tell us which was the best? Seem has no place in scientific analysis. It belongs purely to the deductive method. Had Smith devoted himself to finding out what bank-notes were, instead of what they seemed to be, he might have rendered the world some service in the place of pouring forth such a mass of unmeaning verbiage in support of vain and frivolous distinctions, which had no existence but in his own imagination.

Smith's theory of the issue of paper money was this: a banker in good credit, and who has punctually met his payments, issues his notes for, say, £100,000. These he pays out, no matter for what objects. If the amount be not excessive, — that is, if it do not exceed the wants of the community for currency,the notes will remain indefinitely in circulation. A few of them will be occasionally presented for payment, as their holders may happen to want coin. For such occasional calls, it will be prudent for the banker to keep on hand, say, £20,000 in coin. The measure of his profit will be the excess of interest on his notes over and above that on his reserves. By this substitution, £80,000 of coin are discharged from circulation, while the exchanges of the community will be effected equally well as with the corresponding amount of coin. In all this, he assumed that the operations referred to were all based upon credit, except the provision of £20,000 in coin; that the notes issued

1 Wealth of Nations, Book ii., Chap. ii.

would serve as instruments of exchange, without any reference to that which they represented. He overlooked the fact, that all the notes issued in the discount of bills return to the party issuing them, for redemption or conversion, within periods of, say, four months from their issue; that, as they were issued in the discount of bills, they must be returned on their payment. That they were not demanded in coin, or, rather, that reserves of £20,000 in coin were all that were found necessary for the banker to hold, was due to the fact that he issued his notes in the discount of business paper, and that the payment of such paper returned to him his notes in the manner already described. If he discounted only such notes as were certain to be paid, £10,000, or even £5,000, of coin reserves might be adequate. The notes would return for redemption with the same certainty and regularity, if they represented capital to their full amount, as if they did not represent a penny. Redemption within certain periods is the law of all convertible currencies. There was in the case supposed no substitution of credit for capital; only that instruments other than coin were used for the exchange or distribution of a corresponding amount of capital. It by no means follows that there is any less coin in a community for the use of symbols. There may be a far greater amount from its increased wealth due to their use, in all cases in which they can be used instead of coin.

"Let us suppose, for example, that the whole circulating money of some particular country amounted at a particular time to £1,000,000, that sum then being sufficient for circulating the whole annual produce of their land and labor. Let us suppose, too, that sometime thereafter different Banks and bankers issued promissory notes payable to the bearer, to the extent of £1,000,000, reserving in their different coffers £200,000 for answering occasional demands. There would remain, therefore, in circulation, £800,000 in gold and silver, and £1,000,000 of bank-notes, or £1,800,000 of paper and money together. But the annual produce of the land and labor of the country had before required only £1,000,000 to circulate and distribute it to its proper consumers, and that annual produce cannot be immediately augmented by the operations of banking. £1,000,000, therefore, will be sufficient to circulate it after them. The goods to be bought and sold being precisely the same as before, the same quantity of money will be sufficient for buying and selling them. The channel of circulation, if I may be allowed such an expression, will remain precisely the same as before. £1,000,000

we have supposed sufficient to fill that channel. Whatever, therefore, is poured into it beyond that sum, cannot run in it, but must overflow: £1,800,000 are poured into it; £800,000, therefore, must overflow, that sum being over and above what can be employed in the circulation of the country. But though this sum cannot be employed at home, it is too valuable to be allowed to lie idle. It will, therefore, be sent abroad, in order to seek that profitable employment which it cannot find at home. But the paper cannot go abroad, because at a distance from the Banks which issue it, and from the country in which payment of it can be exacted by law, it will not be received in common payments. Gold and silver, therefore, to the amount of £800,000 will be sent abroad, and the channel of home circulation will remain filled with £1,000,000 of paper instead of the £1,000,000 of those metals which filled it before.

"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 circulating 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."1

The effect of the issue of £800,000 (whatever its character) of currency upon a community accustomed to use £1,000,000 in coin would depend entirely upon that which the paper money represented. It is to be remarked, however, that no such certain or methodical issue or substitution of one kind or currency for another as that supposed by Smith is possible. The use of a symbolic currency is evidence of a high intellectual and moral condition. Such currency, valueless in itself, is taken, like a bill of exchange, upon the faith that it is what it is represented to be, the evidence of capital, — and that it will secure to its holder such capital. We should no more expect to find in Spain or Turkey the currency of New England as it was, or Scotland, than we should expect to find in them the skill of the latter in the mechanic arts. A good currency, like elaborate mechanical contrivances, is a growth, not an improvisation. No people ever said to themselves," We have put up with an expensive currency of coin long enough, we will now try the cheaper one of paper;" any more than they said to themselves, "We have put up with poor mechanical contrivances long enough, we will henceforth use only such

1 Wealth of Nations, Book ii., Chap. ii.

as are most perfectly adapted to their ends." Progress in distribution, so that it may be cheaply and expeditiously effected, is much more gradual than in production whereby quantity is increased and quality improved. Intellectual training will suffice for the latter; but for the former moral qualities must always be superadded. Symbolic currencies have come into use very gradually. They were never resorted to for the purpose of discharging from use a corresponding amount of coin; neither did their use necessarily discharge from employment a corresponding amount of coin; neither would they (provided they represented capital) increase the relative amount of money, as capital would necessarily exist in the same ratio. In such case, the channel of circulation (if the figure may be used) would never overflow, no matter the magnitude of the current. The banks would recede and contract with the current. Smith, however, assumed in his illustration the increase in paper money to be without a corresponding increase in capital; and that an equal amount of coin, discharged from employment as currency, would be immediately sent abroad as merchandise. But even if the £800,000 of paper money had been purely fictitious,—that is, if it had represented nothing but the promises of the issuers, still the channel of circulation would no more have overflowed than if the new issue had represented a corresponding amount of capital. As the instruments of expenditure, in excess of capital, were increased, prices would rise in like ratio, so that relative to prices, the amount of money might not have increased a dollar. Till prices reached their maximum, there would be an active demand for all kinds of merchandise, foreign as well as domestic: and under the increased demand importations would be increased; to be paid for not by exports of merchandise, but of the coin reserves of the country. It would never occur to the holders of this coin that they must send it out of the country to find employment for it, or to get its worth. Such as they had to spend would be expended on objects lying immediately about them; and, if any portion went out of the country, it would be in payment of merchandise for which the ordinary exports of the country no longer sufficed. The expenditure would be made long before any one dreamed of exporting gold. In all these operations, there would be no plan or method, nor would it be supposed

that any shipments of coin would be necessary. When an adverse movement of specie begins, people are always surprised, and wonder what can be the cause. As they are always sure to apply the proper remedy so soon as the movement appears to be a strong one, they would never, had they foreseen the consequences, have placed themselves in a position from which they immediately seek to escape. Coin, too, can be much better spared when it is the sole currency, than when a symbolic one is used in connection with it. In the latter case, a reduction of one dollar in coin may be equivalent to the reduction of five or ten dollars in the volume of symbols. Hence the extreme sensitiveness of such countries as England to the slightest foreign demand for specie. The illustration, therefore, that the moment a paper currency is used people methodically send abroad a corresponding amount of coin, is preposterous. The moment a symbolic currency is issued to the extent supposed by Smith, coin is carefully collected by the issuers of currency, as they can increase their issues in fivefold or greater ratio to the amount they hold. As soon as a symbolic currency begins to be issued, the motive to retain specie in the country becomes all the stronger in ratio to the amount of issue of such currency.

"When we compute," says Smith, "the quantity of industry which the circulating capital of any society can employ, we must always have regard to those parts of it only which consist in provisions, materials, and finished work; the other, which consists in money, and which serves only to circulate these three, must always be deducted. In order to put industry in motion, three things are requisite materials to work upon, tools to work with, and the wages or recompense for the sake of which the work is done. Money is neither a material to work upon, nor a tool to work with; and, though the wages of the workmen are commonly paid to them in money, their real income consists, not in the money, but in the money's worth,—not in the metal pieces, but in what can be got for them.

"The quantity of industry which any capital can employ must evidently be equal to the number of workmen whom it can supply with materials, tools, and maintenance suitable to the workmen; but the quantity of industry which the whole capital can employ is certainly not equal both to the money which purchases, and to the materials, tools, and maintenance which are purchased with it but only to one or other of these two values; and to the latter more properly than to the former."1 Money," he continues in

1 Wealth of Nations, Book ii., Chap. ii.