and exchange it for coin before he could use it as currency. Of all Smith's fancies, this is one of the most untenable and absurd. Even if foreign merchandise were to be purchased, the notes, so long as they represented merchandise, would serve the holder precisely as well as coin. The holder of the merchandise to be purchased would receive them in payment equally with coin. He may pay for his importations, not in coin, but by bills drawn against a shipment of domestic merchandise. The drawer of such bill receives such notes in its sale equally with coin, as he can pay these out equally with coin in the payment of his debts or in the purchase of labor and material in the production of his industries. As a rule, specie is hardly more necessary in foreign than in domestic trade, imports being paid for by exports. In countries that do not produce the precious metals, the two must, in the long run, nearly balance, the one the other. The amount of coin required in a healthy condition of trade, only equals that necessary for the discharge of balances, which may not equal one per cent of the merchandise moving between nations or between communities widely separated. Smith's assumption, therefore, that all excess of currency over and above that necessary to effect the exchanges of its holders must be returned to the Banks for coin, before it can be used as money or capital, is a pure fiction, having no counterpart whatever in any transaction in real life. Again: "A banking company which issues more paper than can be employed in the circulation of the country, and of which the excess is continually returning upon them for payment, ought to increase the quantity of gold and silver which they keep at all times in their coffers, not only in proportion to this excessive increase of their circulation, but in much greater proportion; their notes returning upon them much faster than in proportion to the excess of their quantity. Such a company, therefore, ought to increase the first article of their expense, not only in proportion to this forced increase of their business, but in much greater proportion. . . . "The coffers of such a company, too, though they ought to be filled much fuller, must empty themselves much faster than if their business was confined within more reasonable bonds; and must require not only a more violent, but a more constant and uninterrupted, exertion of expense in order to replenish them. The coin, too, which is continually drawn in such large quantities from their coffers cannot be employed in the circulation of the country. It comes in place of a paper which is over and above what can be employed in that circulation, and is, therefore, over and above what can be employed in it too. But, as that coin will not be allowed to lie idle, it must in one shape or another be sent abroad, in order to find that profitable employment which it cannot find at home; and this continual exportation of gold and silver, by enhancing the difficulty, must, necessarily, enhance still further the expense of the Bank in finding new gold and silver, in order to replenish their coffers which empty themselves so very rapidly. Such a company, therefore, must, in proportion to this forced increase of their business, increase the second article of their expense still more than the first."1 No Bank can issue "more paper than can be employed in the circulation of the country," provided such issues be made in the discount of bills representing merchandise. So far a perfect equilibrium is maintained between money and merchandise. But all the issues of paper money, not the excess alone, return regularly and within very short periods to the Bank for redemption, in the manner already described. As they were issued in the discount of bills, they must be returned in their payment. The whole process is automatic, so long as provision for their conversion is provided previous to their issue. If such be not made before their issue, it must be made subsequent to it, and ordinarily out of the reserves of the Bank. It is not a question of quantity, but of quality or kind. There can never be too much of a symbolic currency; there can never be too little of such as is not properly symbolic. For the one, a Bank need keep on hand only a small percentage of coin in ratio to its issues, no matter how great these may be for the other, it must keep on hand an amount equal to its issues, no matter how small these may be. With Smith, quantity was the only criterion of quality. He wholly overlooked the fact, that a currency not issued in excess has to be redeemed just as speedily, and to the same extent, as a currency issued in excess, or a currency that has nothing behind it. It is not the extent but the character of issues of paper money that calls for large reserves of coin. So long as they represent capital, so long as they will secure to their holders the same value of other articles as coin, there will be no object to exchange them for coin. But if the notes of a Bank be drawn in gold and silver, why may not the latter be as profitably employed at home as abroad? 1 Wealth of Nations, Book ii. Chap. ii. Suppose the countries to which they were sent to be in the precise condition of that from which they were sent, they would then have to be sent off to some other. If all had their proper proportion of currency to property, such gold and silver as currency would find a resting-place nowhere; they would be waifs which no one would touch. If, on the other hand, they were capital, they could as well be employed in one country as another for no country can have too much capital, if it can have too much currency. But no country can have too much of that either, if it be capital, or its representative. In the illustration of his argument, Smith finds himself with too much money on hand—a larger quantity than that necessary to effect the exchanges, and he packs it off without ceremony, as capital, to some other country. He should certainly have asked himself whether it might not be possible that such money might not be as unwelcome and out of place abroad as at home; and whether it might not be immediately returned without breaking the wax. In such an event, which might be more than probable, his treatise could certainly not be considered complete till he had in some manner disposed of this refractory element in business affairs. Smith is constantly talking of the expense of maintaining a currency which is in excess of the wants of a community, as if it cost nothing to maintain one that did not exceed its wants. It costs just as much, in ratio to its amount, to maintain a currency which equals only the wants of the people, as it does one that exceeds their wants. All currencies not legal tender have to be taken in within a comparatively short time from their issue. For this purpose, an adequate amount of capital must always be provided. If provided in merchandise previous to their issue, they convert themselves, in being returned to the Bank in payment of the bills in the discount of which they were issued. If such provision for their conversion be not made previous to their issue, they must be taken in by paying out therefor a corresponding amount of coin. A Bank, when it commences operations, must have its capital paid in either in coin, or the notes or cheques payable in coin of other Banks, or in good bills given for merchandise, and having a value in coin equal to their nominal amount. The substance must always equal the symbol. Such substance may be, and usually is, in the hands of the public. It does not, necessarily, ever come into the possession of the Bank. It must, however, be provided just as much in the one case as the other. Again: "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 portion 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 were no paper money; it can never exceed the quantity which the circulation of the country can easily absorb and employ." 1 A Bank, as a rule, should advance nothing to merchants. If they conduct their business properly, they have no need of banking accommodations. They have abundant capital in the merchandise intrusted to them. They are purchasers on time for distribution. It is their bills given to manufacturers, or producers, that are discounted. Such discounts are made to supply the cost of such merchandise to manufacturers or producers, for the purpose of enabling them to prosecute their industries during the periods for which the credits are given, and until the merchants return to them the proceeds of their sales. It is only when merchants have made purchases of merchandise which they cannot sell within the time within which their bills are to mature, that they call upon the Banks to supplement the credits first given to the manufacturers. No well-conducted Bank will take paper manufactured by merchants, for the reason that by doing so it is making loans upon merchandise which is shown to be unsalable. No loans should ever be made to an undertaker or contractor. Undertakers and contractors cannot make business paper. It is their object to get the possession of merchandise for their own use, not to sell it. As Smith would not allow Banks to issue a greater amount of currency than that necessary to be held by merchants to meet occasional demands, it is plain that he had no idea of the nature or value of a symbolic currency. It has already been shown that such currency, 1 Wealth of Nations, Book ii. Chap. ii. to be fully adequate to its objects, should equal in amount the total value of the merchandise entering presently into consumption. Paper money does not supersede metallic money: it only supplements it. To say, therefore, that it should never exceed in amount the coin previously in circulation, is to say that a railroad constructed along an old highway should never transport a greater amount of merchandise than had been transported over it. The railroad may still leave the old highway well employed, while reducing the cost of transportation five or ten fold. It does not supersede, it supplements, the old highway; and, by supplementing it, adds almost infinitely to production and wealth. "Whatever currency a Bank issues over and above what a community can absorb, is," says Smith, "constantly returning to it for redemption." A country will absorb all the currency it can get. If the present amount of United States notes should be quintupled, the country would absorb them, just as it has absorbed those at present in circulation, which, as far as the exchanges were concerned, were wholly superfluous. Prices rose in ratio to the amount issued, so that, so soon as the effect of the inflation had expended itself, money was in no greater relative abundance than before. So with the issues of a Bank. If they represented consumable merchandise, the country would absorb all that could be issued; money, in the mean time, remaining in the same relative abundance. As whatever was issued by Banks would be speedily returned to them for redemption, and would have to be retired by the payment of coin, provided they did not represent merchandise, the country could not "absorb" such notes a second time, for the very good reason that they could not be reissued. When a currency is irredeemable, the country will absorb all it can get, so long as any credit whatever is attached to it. It can absorb whatever represents capital, for the reason that an equilibrium is in such case maintained between prices and the amount of currency issued. "When it was observed that, within moderate periods of time, the repayments of a particular customer were upon most occasions fully equal to the advances which a Bank had made him, it might be assumed that the paper money which had been advanced to him had not at any time exceeded the quantity of gold and silver |