To conclude; in my opinion the notion from which Adam Smith sets out, and which, since his time, has kept possession of all speculations on this subject, and been the foundation of many important practical measures, (202) is essentially erroneous.According to him, there is always a certain sum of money necessary to carry on the transactions of every society, the amount of which is proportioned to the transactions carried on.This is termed the circulating medium, and, whether it be bank paper, or specie circulated by the banker, or coin used for the purposes of exchange where there is no bank, it is reckoned always in quantity proportioned to the transactions carried on.On the contrary, it seems to me, that when once a bank is established in any community, the money circulated among those who are its customers, serves merely the purpose of counters for arranging their transactions, performing the same part as a multiplicity of checks, operating upon their several accounts, might accomplish.It is not a fund kept for making exchanges, but an instrument applied for, at the time exchanges are to be made, and operating upon the real fund kept for that purpose, the claim, viz., which the bank has on the general stock of the community, the specie deposited in its vaults, and the other items making up its capitol, which, like the coin in the old deposit banks of Italy and Holland, constitute that part of the general stock, really performing the function of exchange.
If this be the case, it follows that the more perfect as an art banking becomes, the less, other circumstances being equal, is the amount of the circulating medium required, and the greater the saving to the community.
It also follows, that a system of banking considered merely as a means of transacting exchanges taking place in the ordinary course of affairs, within the community, approaches nearest to the excellence of art, when it most effectually secures its funds from being squandered, and when the counters employed by it in its operations, issue from it, pass through the hands of its customers, and find their way back to it most easily and quickly.The former circumstance diminishes the risk.of loss from the mode of effecting exchange, the latter diminishes the expense of it.
It may farther be observed that the popular notion, that the advantages of banking are limited to the substitution of paper for specie, and the creation to that amount of a fictitious capital, is altogether erroneous.
The advantages derived from this source are rather contingent, than essential.
They fall chiefly to the banker, and, as he may be considered as a broker having the care of the funds of certain of the lenders of the community, for the purpose of distributing them among the borrowers, and having to be paid for the trouble, the expense, and the risk of loss attending his business, this mode of paying him may be the most convenient that can be devised.The real advantage however of the art, arises from its application of the floating loans of the society to the purposes of exchange; and, instead of the paper money issued being the cause and the measure of the good derived from it, the less the quantity of such money, in proportion to the business transacted with it, the smaller the expense of the business of exchange to the trading community, and the greater the benefits the banker bestows on it.And, again; in cases where bank paper makes the general currency, instead of the partial or total abolition of banking, only requiring the substitution of a quantity of specie, equal to the paper withdrawn from circulation, it would, in proportion as it were partial or total, compel the substitution of a much larger quantity of specie, or a proportional diminution of the exchanges before transacted, and, in either case, would place the instruments belonging to the society in more slowly returning orders, lessen the amount of materials within reach of the accumulative principle, and eventually occasion a proportional diminution of the national stock.
NOTE H.
Since the passage in the text was written, the art of the application of steam, as an agent in transport by water, has made a farther step.It consists in a passage of the engine used in land carriage, to that used in water carriage.Besides this, however, the germ of some other principles has appeared, which, it seems probable, will ultimately produce a great and important revolution in the art.It is remarkable, that the site of this event is also the Hudson.
NOTE I.
