chasing or consuming, and not in the pieces which convey it. . . . His revenue, therefore, cannot consist of these metal pieces, of which the amount is so much inferior to its value; but in the power of purchasing, in the goods which can successively be bought with them as they circulate from hand to hand.

"Money, therefore, the great wheel of circulation, the great instrument of commerce, like all other instruments of trade, though it makes a part and a very valuable part of the capital, makes no part of the revenue of the society to which it belongs; and though the metal pieces of which it is composed, in the course of their annual circulation, distribute to every man the revenue which properly belongs to him, they make themselves no part of that revenue.' 99 1

"It is not the guinea, but the guinea's worth," says Smith, "that constitutes a person's income." Why not the guinea? It is this that is paid him as his income; it is the value of this which enables him to become possessed of articles necessary for his comfort or support. Its value is the measure of his ability to purchase such articles. What is gained by going beyond the guinea, and making that which the guinea will purchase the measure of a person's income? He may not expend his guineas; but may accumulate them for a lifetime, leaving them for his heirs. Would he be all that time without any income? Would his income be measured by what he might purchase? If he hoarded his guineas, would not he have the same income as if he expended them as fast as earned? Or he might loan his guineas at interest, and in this way be receiving a large income, never expending a penny of the principal. "If gold could be exchanged for nothing," says Smith, "it would be of no value." It is not a great stroke of genius to tell us this. He might, without much danger, have affirmed the same of every other kind of property. "But," says Smith, "a person's income cannot be said to be equal both to the money that is paid him, and the goods which such money can purchase. It can equal only the one or the other of these, and the latter more properly than the former." If it be a discovery to find out that one does not equal two, then Smith should certainly have the honor of making it.

From the consideration of metallic, Smith proceeds to that of paper, money:

1 Wealth of Nations, Book ii., Chap. ii.

"The machines and instruments of trade, which compose the fixed capital, have this further resemblance to that part of the circulating capital which consists in money: that as every saving in the expense of erecting and supporting those machines, which does not diminish the productive powers of labor, is an improvement of the neat revenue of the society, so every saving in the expense of collecting and supporting that part of the circulating capital which consists in money is an improvement of exactly the same kind.

"It is sufficiently obvious, and it has partly, too, been explained already, in what manner every saving in the expense of supporting the fixed capital is an improvement in the neat revenue of society. The whole capital of the undertaker of every work is necessarily divided between his fixed and his circulating capital. While his whole capital remains the same, the smaller the one part the greater must necessarily be the other. It is the circulating capital which furnishes the materials and wages of labor, and puts industry in motion. Every saving, therefore, in the expense of maintaining the fixed capital, which does not diminish the productive powers of labor, must increase the fund which puts industry in motion, and consequently the annual produce of the land and labor, the real revenue of society. The substitution of paper in the room of gold and silver money, replaces a very expensive instrument of commerce with one much less costly, and sometimes equally convenient. Circulation comes to be carried on by a new wheel, which it costs less both to erect and maintain than the old one. But in what manner this operation is performed, and in what manner it tends to increase either the gross or the neat revenue of the society, is not altogether so obvious; and may, therefore, require some further explication.

"There are several different sorts of paper money; but the circulating notes of Banks and bankers are the species which is best known, and which seems best adapted for this purpose. When the people of any particular country have such confidence in the fortune, probity, and prudence of a particular banker as to believe that he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him, these notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them.

"A particular banker lends among his customers his own promissory notes, to the extent, we shall suppose, of a hundred thousand pounds. As those notes serve all the purposes of money, his debtors pay the same interest as if he had lent them so much money. This interest is the source of his gain. Though some of these notes are continually coming back upon him for payment, part of them circulate for months and years together; though he has generally in circulation, therefore, notes to the extent of a hundred thousand pounds, twenty thousand pounds in gold and silver may frequently be sufficient provision for answering occasional demands. By this operation, therefore, twenty thousand pounds in gold and silver perform all the operations which a hun

dred thousand pounds would otherwise have performed. The same exchanges may be made; the same quantity of consumable goods may be circulated and distributed to their proper consumers, by the means of his promissory notes to the value of a hundred thousand pounds, as by an equal value of gold and silver money. Eighty thousand pounds of gold and silver, therefore, can in this manner be spared from the circulation of the country; and, if different operations of the same kind should at the same time be carried on by many different Banks and bankers, the whole circulation may thus be conducted with a fifth part only of the gold and silver which would otherwise have been requisite." 1

"There are several kinds of paper money," says Smith; "but bank-notes seem to be the best to serve as money," and he therefore makes them the subject of his discussion. This paragraph describes exactly the nature of Smith's mind, and the method pursued by him. Bank-notes seem to him to be the best. Why did he not tell us which was the best? Seem has no place in scientific analysis. It belongs purely to the deductive method. Had Smith devoted himself to finding out what bank-notes were, instead of what they seemed to be, he might have rendered the world some service in the place of pouring forth such a mass of unmeaning verbiage in support of vain and frivolous distinctions, which had no existence but in his own imagination.

Smith's theory of the issue of paper money was this: a banker in good credit, and who has punctually met his payments, issues his notes for, say, £100,000. These he pays out, no matter for what objects. If the amount be not excessive, — that is, if it do not exceed the wants of the community for currency,the notes will remain indefinitely in circulation. A few of them will be occasionally presented for payment, as their holders may happen to want coin. For such occasional calls, it will be prudent for the banker to keep on hand, say, £20,000 in coin. The measure of his profit will be the excess of interest on his notes over and above that on his reserves. By this substitution, £80,000 of coin are discharged from circulation, while the exchanges of the community will be effected equally well as with the corresponding amount of coin. In all this, he assumed that the operations referred to were all based upon credit, except the provision of £20,000 in coin; that the notes issued

1 Wealth of Nations, Book ii., Chap. ii.

would serve as instruments of exchange, without any reference to that which they represented. He overlooked the fact, that all the notes issued in the discount of bills return to the party issuing them, for redemption or conversion, within periods of, say, four months from their issue; that, as they were issued in the discount of bills, they must be returned on their payment. That they were not demanded in coin, or, rather, that reserves of £20,000 in coin were all that were found necessary for the banker to hold, was due to the fact that he issued his notes in the discount of business paper, and that the payment of such paper returned to him his notes in the manner already described. If he discounted only such notes as were certain to be paid, £10,000, or even £5,000, of coin reserves might be adequate. The notes would return for redemption with the same certainty and regularity, if they represented capital to their full amount, as if they did not represent a penny. Redemption within certain periods is the law of all convertible currencies. There was in the case supposed no substitution of credit for capital; only that instruments other than coin were used for the exchange or distribution of a corresponding amount of capital. It by no means follows that there is any less coin in a community for the use of symbols. There may be a far greater amount from its increased wealth due to their use, in all cases in which they can be used instead of coin.

To quote again :

"Let us suppose, for example, that the whole circulating money of some particular country amounted at a particular time to £1,000,000, that sum then being sufficient for circulating the whole annual produce of their land and labor. Let us suppose, too, that sometime thereafter different Banks and bankers issued promissory notes payable to the bearer, to the extent of £1,000,000, reserving in their different coffers £200,000 for answering occasional demands. There would remain, therefore, in circulation, £800,000 in gold and silver, and £1,000,000 of bank-notes, or £1,800,000 of paper and money together. But the annual produce of the land and labor of the country had before required only £1,000,000 to circulate and distribute it to its proper consumers, and that annual produce cannot be immediately augmented by the operations of banking. £1,000,000, therefore, will be sufficient to circulate it after them. The goods to be bought and sold being precisely the same as before, the same quantity of money will be sufficient for buying and selling them. The channel of circulation, if I may be allowed such an expression, will remain precisely the same as before. £1,000,000

we have supposed sufficient to fill that channel. Whatever, therefore, is poured into it beyond that sum, cannot run in it, but must overflow: £1,800,000 are poured into it; £800,000, therefore, must overflow, that sum being over and above what can be employed in the circulation of the country. But though this sum cannot be employed at home, it is too valuable to be allowed to lie idle. It will, therefore, be sent abroad, in order to seek that profitable employment which it cannot find at home. But the paper cannot go abroad, because at a distance from the Banks which issue it, and from the country in which payment of it can be exacted by law, it will not be received in common payments. Gold and silver, therefore, to the amount of £800,000 will be sent abroad, and the channel of home circulation will remain filled with £1,000,000 of paper instead of the £1,000,000 of those metals which filled it before.

"When paper is substituted in the room of gold and silver money, the quantity of the materials, tools, and maintenance which the whole circulating capital can supply, may be increased by the whole value of gold and silver which used to be employed in circulating them. The whole value of the great wheel of circulation and distribution is added to the goods which are circulated and distributed by means of it."1

The effect of the issue of £800,000 (whatever its character) of currency upon a community accustomed to use £1,000,000 in coin would depend entirely upon that which the paper money represented. It is to be remarked, however, that no such certain or methodical issue or substitution of one kind or currency for another as that supposed by Smith is possible. The use of a symbolic currency is evidence of a high intellectual and moral condition. Such currency, valueless in itself, is taken, like a bill of exchange, upon the faith that it is what it is represented to be, the evidence of capital, — and that it will secure to its holder such capital. We should no more expect to find in Spain or Turkey the currency of New England as it was, or Scotland, than we should expect to find in them the skill of the latter in the mechanic arts. A good currency, like elaborate mechanical contrivances, is a growth, not an improvisation. No people ever said to themselves, "We have put up with an expensive currency of coin long enough, we will now try the cheaper one of paper;" any more than they said to themselves, "We have put up with poor mechanical contrivances long enough, we will henceforth use only such

1 Wealth of Nations, Book ii., Chap. ii.