The other circumstance to which I allude, is the exchange of the precious metals between different countries.Banks, as the great dealers in these metals, are necessarily exposed to the inconvenience of having to provide a supply that the demands occasioned by fluctuations in the business of different countries.Although, however, this circumstance is always more or less intimately connected with the business of banking, it is not necessary for our purpose to examine the effects resulting from it.
We may confine our attention, therefore, altogether to the consideration of the art, as a means of facilitating exchanges within any society.Abrief statement of its condition in Scotland, a country in which, to judge from the circumstances attending its introduction, and the practical benefits arising from its operation, it has probably arrived as near perfection as any where, may sufficiently serve the purpose of showing the manner in which the mode of its operation may be explained by the principles Ihave endeavored to develop, and how it seems to attain the power of communicating the advantages it is capable of bestowing, and of avoiding the evils to which it is sometimes liable.The Scotch banking system is also better fitted for an example, both as it was the one directly presented to the observation of Adam Smith, and from which, accordingly, his ideas on the subject seem to be chiefly taken, and because it is not directly connected with the issue of government paper, or with the passage of coin or bullion from country to country.
Banks in Scotland are both what are termed banks of deposit, and of circulation.They are the receivers and transferrers of the money, or what is equivalent of the capital of others, and they are issuers of paper money of their own.Their business is confined to what is the proper occupation of bankers, transactions springing from the exchanges effected through the medium of credit.They avoid, therefore, to grant loans, unless for the purpose of facilitating exchanges.Previously, however, to examining the operation of the system, it may be well to direct our attention to the circumstances of the parties with whom bankers have to deal.
When, in consequence of the business of banking being established on a sure basis, in any community, the system of credit comes extensively to prevail, the owners of the whole stock of the society are divided into two classes, the one consisting of those having in their possession a greater stock of instruments than what actually belongs to them, the other having a less stock than what belongs to them.The larger proportion of the owners of stock, belong sometimes to the one, sometimes to the other class, but the circumstances of many place them permanently in the one or the other.
Individuals engaged in the forming, transporting, and exchanging of instruments, the.farmers, manufacturers, and merchants of the community, have occasion to employ in their different businesses, sometimes a larger sometimes a smaller stock of instruments or capital.At one time, for example, the state of the land the farmer cultivates, requires a great outlay for seed-corn, for tilling, and manturing it, and for wages paid to laborers.
At another time the returns from it in the shape of grain, fat cattle, and other instruments and commodities are proportionally great.At the former period the farmer may not have a sufficient stock of his own, and may wish to borrow certain instruments, at the latter tie is in a condition to lend.In a similar manner, the fluctuations of business render a merchant sometimes a borrower, sometimes a lender.For example, two merchants in Great Britain are engaged in the timber trade, the one in that carried on with Prussia, the other in that with Canada.A change takes place in the business, from the duty on Prussian timber being lessened.The Canadian timber trade being rims no longer profitable, the merchant whose capital was embarked in it, withdraws it from it.He employs a portion of it in an experimental adventure to Prussia, but the larger part he has no immediate use for, and is, therefore, in a condition to lend to others.On the other hand, the merchant who had been accustomed to trade to Prussia, knowing the details of that business, and having a correspondence established there, is able to employ with advantage a much larger capital than he possesses.
He wishes to borrow instruments, that is, commodities to export to Prussia, and to have the use of ships for the double transport.Fluctuations, such as these, and innumerable others, occasion continual variations in the stock which every merchant, or other individual engaged in any sort of business, is capable of employing with advantage.Sometimes, therefore, the business of every one is expanded much farther than his own stock would permit, at other times it is contracted into so narrow limits, as not to give employment to the whole of it.
Again, in every society there are many individuals who cannot themselves employ the instruments they own.A merchant, for example, dies, leaving a large stock of instruments of one sort or other to his widow, and young children.These they cannot employ.They must either convert them into cash, which, placing in security, they may gradually expend as their occasions require, or they must lend them to others who will pay for their use.On the other hand, young men of ability, who have been bred to any business, although, perhaps, they may have very little or no capital, may yet be able to put instruments with which they may be entrusted, to so active use, that they may yield more than the ordinary returns, and so, after paying for the usual profits, may leave a considerable surplus as the reward of their exertions.
