The situation of the person who took out the money, and that of them who return it, is altered.One holds a greater stock of instruments, and the debtor side of his bank account is proportionally greater, the others hold a less stock, and the credit side of their bank accounts are proportionably greater.The former has transferred a part of his claim on the general stock of instruments, and has in lieu of it the possession of some particular instrument or instruments, and the latter have done the reverse.The bank money, therefore, has merely served the place of counters, by aid of which the customers of the bank settle their transactions, and finally determine their relations to its stock.During the time these transactions were in progress, there was a proportional diminution in the amount of interest which the bank had to pay its customers, and, if the counters it gave them were merely pieces of paper costing it little or nothing, this would be so much clear gain to it; if they were gold, the expense of procuring them would exactly balance the gain.
If there be a plurality of banks, as the bankers in this ease, exchange their notes with one another, the series of transactions produced are substantially the same, unless in so far as the business of one bank may be extending, that of another contracting, a circumstance which is generally of little moment to the community.
It is, only when the banker's money passes out of the range of those having transactions with him, that it comes to hold the place of other money.While it is in their hands, it performs the office that other money would, and in this respect, if it be paper money, he gains an advantage not directly springing from the exchanges managed by his funds.Individuals, however, who do not deal with any bank, where banking is properly managed, are persons whose affairs do not require them to keep money by them, and by the agency of beth classes, it is, therefore, preserved in continual motion and employment.
I have entered into a longer detail on this subject than I had intended, from my desire to make apparent the distinction stated in the text, in regard to the superior efficiency of the money which the banker puts into circulation, whether paper or gold, as compared with that which exists where the art of banking is unknown, and where there is either no generalization, or an imperfect generalization of transactions performed through the medium of credit.
It will be seen, that the view I have attempted to give of the whole subject of exchange, is quite opposed to that exhibited in the Wealth of Nations.Adam Smith sets out from exchange, and makes it, and the division of labor consequent on it, the source of stock, whereas I have endeavored to show that exchange is the result of the increase of stock, and subsequent division of employments, that the necessity for its existence is a circumstance retarding the increase of stock, and that the benefits of the art of banking spring from the facility which that art gives to the process.
As exchange may be said to be the commencement of Adam Smith's system, and as money is the instrument of exchange, he assumes it as a first principle, that while the exchanges remain t, he same, the same amount of money is necessary to transact them, Bank paper, he, therefore, concludes, will exactly equal in nominal value the specie circulated before its issue.
If it exceed this amount, it will return upon the bank, if it fall short of it, the vacancy will be filled by specie.This principle, which Adam Smith, as is observed by Mr.Say, has introduced into speculations on this subject, is thus epitomized by the latter author:
"Taking it for granted, then, that the specie, remaining in circulation within the community, is limited by the national demand for circulating medium; if any expedient can be devised, for substituting bank notes in place of half the specie, or the commodity, money, there will evidently be a superabundance of metal money, and that superabundance must be followed by a diminution of its relative value.But as such diminution in one place by no means implies a cotemporaneous diminution in other places, where the expedient of bank notes is not resorted to, and where, consequently, no such superabundance of the commodity, money, exists, money naturally resorts thither, and is attracted to the spot where it bears the highest relative value, or is exchangeable for the largest quantity of other goods;in other words, it flows to the markets where commodities are cheapest, and is replaced by goods, of value equal te the money exported." Say, B.
I.c.xxii.Am.edit.vol.I.p.246.
He goes on to prove that the national capital must be augmented by the specie exported, and fixes the utmost quantity by which it can so be increased, at one tenth of the annual product or revenue of the nation.
Now I maintain, that to effect the same transactions, it requires far less bankers money, whether that money be paper or specie, than was required of the money in existence before the establishment of banks, the celerity of motion making up for the deficiencies of quantity, and that what Adam Smith asserts concerning the comparative efficiency of the two kinds of money circulated by consumers and dealers, holds true of that money of which the bank forms the centre of circulation, as compared with that, which, where there are no banks, circulates slowly and after intervals of inactivity between dealer and dealer, and that the one by "a more rapid circulation, serves as the instrument of many more purchases than the other,"and, consequently, that if the same number of transactions only takes place after the establishment of banks, as before their introduction, then much less money will be necessary, and if the same money be circulated, the fact indicates, that a great addition has been made to the business transacted, and still more if the money circulated exceeds that formerly circulated.
