When a bill was drawn, payable after a certain time, the merchant to whom it was sent, if he bada debt to pay, or purchase to make, without having money ready for the purpose, paid with thebill, instead of money. One of these bills would often pass through several bands, and be themedium of payment in a number of transactions, before it was finally discharged by the personon whom it was drawn. To this extent, it performed the precise functions of paper money, andled the way to the further use of that important substitute.
(3.x.6) As soon as it was discovered, that the obligation of a merchant of credit, to pay a sumof money, was, from the assurance that it would be paid as soon as demanded, considered of equalvalue with the money itself, and was without difficulty received in exchanges, as the moneyitself would have been received, there was motive sufficient to extend the use of the substitute.
Those persons who had been accustomed to perform the functions of bankers in keeping themoney of individuals, and exchanging against one another the coins of different countries, werethe first who issued promises to pay certain sums of money, in the expectation that they wouldoperate, as substitutes for money, in the business of purchase and sale. As soon as the use ofsuch a substitute for money has begun, nothing is wanting but freedom, and the confidence ofthe public in the written promises, to enable the paper to supersede the use of the metal, andoperate, almost exclusively, as the medium of exchange.
(3.x.7) It remains to inquire what are the advantages derived from the use of this substitute;and what are the inconveniences to which it is liable.
Section XI. Advantages Derived from the Use of PaperMoney (3.xi.1) The precious metals, which are necessary to perform the functions of a medium ofexchange, are bought with the commodities of the country. Manufactures, and the produce of theland, are exported and instead of other commodities, to be turned to use, gold and silver, to beemployed as the medium of exchange, are imported for them. The value of the gold and silver,when they alone perform the business of exchange, always bears a considerable proportion,-incountries but little advanced in the arts of exchange, a large proportion, to the whole of theannual produce of the country. If each piece performs a hundred purchases in once exchangingthe goods which fall to be exchanged in a year, the value of the money required is equal to ahundredth part of the whole of such goods, which, though not exactly corresponding with theannual produce, correspond with it so nearly, that we need not scruple to speak of them underthat name. In countries in which money does not pass rapidly from hand to hand, it may be equalto a tenth of the whole of the annual produce.
(3.xi.2) It is evident that whatsoever part of the national property goes to provide themedium of exchange, is wholly inoperative with regard to production. Nothing produces, but the immediateinstruments of production; the food of the labourer, the tools or machinery with which helabours, and the raw material, which he fabricates. If the whole, therefore, of the nationalproperty, which goes in this manner to provide a medium of exchange, equal to one-tenth, orone-hundredth part of the annual produce, could be taken from that employment, and convertedinto food, tools, and the materials of production, the productive powers of the country wouldreceive a corresponding increase.
(3.xi.3) If it be considered, that the annual produce is equal, not only to the whole of the netrevenue of the country, but, along with this, to the whole of the capital, excepting the part whichis fixed in durable machinery, it may be easily understood how vast an accession is made to themeans of production, by providing a substitute for the precious metals, as a medium ofexchange.
(3.xi.4) Paper is also far more convenient, as a medium of exchange. A large sum in theshape of gold or silver is a cumbrous commodity. In performing exchanges of considerable value, thevery counting of gold and silver is a tedious operation. By means of a bank note, the largest sumis paid as quickly as the smallest.
Section XII. Inconveniences to which the Use of Paper Moneyis Liable (3.xii.1) The inconveniences to which paper money is liable, seem all to be comprehendedunder three heads.
(3.xii.2) First, - The failure of the parties, by whom the notes are issued, to fulfil theirengagements.
(3.xii.3) Secondly, - Forgery.
(3.xii.4) Thirdly, - The alteration of the value of the currency.
(3.xii.5) 1. The failure of the parties, by whom notes are issued, is an evil against which,under good institutions, the most powerful securities are spontaneously provided.
(3.xii.6) If competition were allowed to operate freely, and if no restriction were imposed onthe number of the partners, who might be engaged in a bank, the business of banking, and of issuingnotes, would naturally place itself on a footing, which would render paper currency very secure.
(3.xii.7) The number of banks would of course be multiplied; and no one bank would beable to fill with its circulation more than a certain district.
(3.xii.8) As little risk, where the partners were numerous, would be incurred by each ofthem, as the profits would be very sure, and the importance of having a good currency would be sensiblyfelt; there would be motive sufficient, to all the principal noblemen and gentlemen of the county,or other district, to hold shares in the local bank, and add to the security of the public.
