It is this last event, that, I conceive, generally takes place.In this, as in other instances of real improvements, the effect is contrary to what might have been anticipated, the greater facility in performing the operation bringing so much greater a compass of materials within its reach, that the occupation given to the art, instead of diminishing, increases, and by the subdivision of employments, and abandonment of barter, money comes to be so much more used as an instrument of exchange, that, on the whole, the quantity of it employed is augmented, in the same way, as when a road is much improved, though one horse may be sufficient to transport what three did before, yet the commodities transported so increase, that there are, notwithstanding, thrice the number of horses employed.This is especially the case in new countries, where, from causes specified in the text, money before the existence of banks is excessively scarce.
If the reader have still any doubts on the subject, he may, I conceive, satisfy himself of the accuracy of this view, by reference to the pages of the "Wealth of Nations" itself.Adam Smith, by no means, limits the advantages of banking as practised in Scotland, to the substitution of paper for specie, and the direct fictitious capital thus created.On the contrary, he thinks that every person dealing with the banker, that is, every person engaged in business, derives individually very great advantages from the system.These advantages are resolvable into the circumstance, that every such person is free from the necessity of keeping any money by him.Whatever demands are made on him he answers by means of his cash credit, or by discounting a bill, or bills.In this way "partly by the conveniency of discounting bills, and partly by that of cash accounts, the creditable traders of the country are dispensed from the necessity of keeping any part of their stock by them unemployed, and in ready money, for answering occasional demands." (200) Now it is certainly very remarkable, that it did not strike Adam Smith, that if all the creditable dealers in the community, that is, the great majority of those who before the establishment of banks would have kept money by them, will by the facilities given by the art, be dispensed with the necessity of doing so, and can still carry on equally extensive transactions, the money requisite to transact the general business of the country must be diminished by that amount.If, for example, according to the estimate he makes, the specie in circulation in Scotland before the introduction of banking, was about one million sterling, after the establishment of that art, had the exchanges effected remained the same, a much less sum than one million would have been sufficient to perform them, for all that money would have been useless which it had before been necessary to keep in the coffers of the different dealers, and which formed the great mass of the then circulating medium, or rather of the medium through the intervention of which exchanges were transacted.If, then, a million had been still employed, -- if a million of the bankers paper had superseded a million of coin, -- it would have indicated, as I have stated in the text, a great increase in the transfers effected, and would have shown, either "that a larger compass of materials had been brought within reach of the accumulative principle, or that employments had been more subdivided, or that both circumstances had occurred." (201)According to Adam Smith, the bank saves each dealer from keeping by him in ready money, all that amount which it advances him by means of the cash account it opens with him, or by discounting the bills he presents, What in this way, then, all the banks advance to all the dealers, deducting from it the amount of paper circulated, must be so much which they save them from being obliged to keep by them.But this is the employment to which, where banking is properly conducted~ bankers devote their whole funds, and by this mode of reckoning the saving effected by them in Scotland might be made to appear equal to thirty millions of specie.Were banking, however, as a distinct business, totally abolished in that country, the event certainly would not bring into it thirty millions of specie.The effects produced by such an event would consist in a diminution of the number of exchanges, and, consequently, of the division and subdivison of employments, and of the capacity given to materials, the transaction of many exchanges by barter, and the generalization of a large amount of them by transfers from hand to hand.Specie would only come in, in sufficient abundance to make up the balance.
