Chap. 2a: The Net Revenue of Society

Book 2, Chap. 2a: Money as Part of the General Stock of Society (the Cost of Maintaining the National Capital)

1 Book 1 showed that the price of most commodities is made up of wages, profits, and rent.

  • There are some commodities which has a price made up of wages and profits only.
  • There are very few in which it consists in wages only.
  • The price of every commodity resolves itself into some one, or other, or all of these three parts.
    • If it goes neither to rent nor wages, then it goes to somebody’s profit.

2 This is the case for every commodity taken both separately and complexly.

  • The whole price or exchangeable value of that annual produce must resolve itself into the same three parts.
  • It must be parceled out among the people either as wages, profits, or rent.

3 The total annual produce of a country is divided as a revenue to its inhabitants.

  • The total revenue of all its inhabitants can be be divided into a gross revenue and net revenue, just as the gross rent and the net rent makes up the total rent of a private estate.

4 The gross rent of a private estate is paid by the farmer.

  • The net rent is what remains free to the landlord, after deducting the expences in management, repairs, etc.
    • The net rent is what the landlord can spend or use as his stock for immediate consumption.
  • His real wealth is in proportion to his net rent, not his gross rent.

[Net Rent + Expences (management, repairs, etc) = Gross Rent] (paid by the farmer to the landlord)

The Net Revenue of Society

5 The gross revenue of everyone in a country makes up their total national annual produce.

  • The net revenue is what remains free to them after deducting the expence of maintaining their:
    1. fixed capital
    2. circulating capital
  • The net revenue is their stock which they can reserve for their immediate consumption or spend on their subsistence, conveniencies, and amusements, without encroaching on their capital.
  • Their real wealth is in proportion to their net revenue, not to their gross revenue.


Screenshot from 2017-08-24 19-53-32



6 The whole expence of maintaining the fixed capital must be excluded from the net revenue of society.

  • The following cannot be part of the society’s net revenue:
    • the materials for supporting society’s:
      • useful machines
      • instruments of trade
      • profitable buildings
    • the products and services needed to make those materials which support fixed capital.
      • The wages paid to create those materials may make a part of the society’s net revenue if the workers spend all their wages on consumption.
  • But in other kinds of labour, the wages and the produce both go to consumption.
    • The wages go to the workers’ consumption.
    • The produce go to the consumption of other people, whose subsistence, conveniences, and amusements, are increased.

7 The intention of the fixed capital is to increase productivity.

  • The same number of labourers and labouring cattle will raise more produce in an improved farm with the necessary buildings, fences, drains, communications, etc. than in an unimproved farm.
    • In manufactures, the same number of workers assisted with the best machinery, will work up more goods than those with imperfect ones.
  • The cost of any fixed capital is always repaid with great profit.
    • This cost increases the annual produce to more than what is needed to support such improvements.
      • However, this support still requires a certain portion of that produce.
  • The increase in productivity diverts a certain amount of labour and materials to another advantageous employment.
    • This is why all such improvements in mechanics are always regarded as advantageous to society.
  • A certain amount of materials and labour previously used to support complex and expensive machinery, can now be used to increase the amount of work which that machine is useful for.
  • Let us say that an undertaker of a big factory employs 1,000 workers a year to maintain his machinery.
    • If he can reduce this expence to 500, he will naturally employ the other 500 in buying more materials to be processed by more workers.
    • The amount of that work will naturally increase, providing more advantage and convenience for society.

8 The expence of maintaining the fixed capital in a country may be compared to the repairs in a private estate.

  • The expence of repairs may be needed to support the estate’s produce and the gross and net rent of the landlord.
  • When the expenses can be reduced without reducing the produce, the gross rent remains same and the net rent is increased.

9 The cost of maintaining the fixed capital is excluded from the society’s net revenue.

  • The cost of maintaining the circulating capital is included in the society’s net revenue.
  • The last three parts of circulating capital are provisions, materials, and finished work.
    • These are regularly withdrawn and placed:
      • in the fixed capital, or
      • in the stock reserved for society’s immediate consumption.
  • The circulating capital employed in maintaining fixed capital, all goes to the stock for immediate consumption.
    • It makes a part of the society’s net revenue.
  • The maintenance of provisions, materials, and finished work does not withdraw the annual produce from the society’s net revenue, besides what is necessary for maintaining the fixed capital.

10  The society’s circulating capital in this respect is different from an individual’s circulating capital.

  • An individual’s circulating capital is totally excluded from his net revenue.
    • His net revenue must all consist in his profits.
  • Every individual’s circulating capital makes a part of his society’s total circulating capital.
    • But it is not totally excluded from making a part of his society’s net revenue.
  • A merchant must not consume all of the goods that he himself sells.
    • But they may be consumed by other people who pay for them, with profits, without reducing their capital or that of the merchant.

11 Therefore, money is the only part of the society’s circulating capital, of which the maintenance can reduce their net revenue.

12 The fixed capital, and that circulating capital called money, are very similar to one another in affecting the society’s revenue.

  1. 13 Those machines and tools of trade, etc. require expences to build and support them.
    • Those expenses are deductions from the society’s net revenue.
    • The stock of money which circulates in any country must require a certain expence:
      • to collect it, and
      • to support it.
    • Both expenses make a part of the society’s gross revenue and are deductions from its net revenue.
    • Some gold and silver and labour is employed to support that great but expensive instrument of commerce, instead of increasing the stock reserved for immediate consumption.
    • Money allows everyone to have their subsistence, conveniencies, and amusements regularly distributed to them.
  1. 14 The machines, instruments of a trade, etc., which make up the fixed capital of an individual or a society make no part either of their gross or net revenue.
    • The money which circulates the society’s whole revenue among its members makes no part of that revenue.
    • The great wheel of circulation is different from the goods which are circulated through it.
    • The society’s revenue is in those goods, not in the wheel that circulates them.
    • In computing any society’s gross or net revenue, we must always deduct the whole value of money from the whole annual circulation of money and goods.
      • The value of money can never make a part of the society’s gross or net revenue.


15 Only the ambiguity of language makes this proposition doubtful or paradoxical.

  • It is self-evident when properly understood.

16 When we talk of a sum of money, we sometimes only mean the metal pieces it is made of.

  • Sometimes we include in our meaning some obscure reference to the purchasing power it conveys.
    • This power is the goods which can be bought with it.
  • When we say that England’s circulating money is £18 million, we only mean the amount of metal pieces which circulate in England.
  • But when we say that a man is worth £50-100 a year, we mean:
    • the amount of the metal pieces annually paid to him, and
    • the value of the goods he can annually buy.
  • We mean to estimate his way of living.
    • His way of living is the quantity and quality of the necessaries and conveniencies he can have.

17 When we combine the two meanings ambiguously into the word ‘money’, or when we mean the amount of the metal pieces and some obscure reference to the goods which can be bought by that money, the wealth or revenue is equal only to one of the two amounts.

  • It is equal to the amount of goods which can be bought, not to the amount of those metal pieces.
  • It is equal to the money’s worth, not the money.

[Translator’s Note: The amount is money is objective, the money’s worth is subjective]

18 Thus, if a guinea be one’s weekly pension, he can buy a certain amount of goods and services worth a guinea with his pension.

  • His real weekly revenue is determined by the things he can buy with a guinea.
  • His weekly revenue is certainly not equal both to the guinea and to what can be bought with the guinea.
  • His weekly revenue is equal to the guinea’s worth, not to the actual guinea.

19 If his pension were paid in a weekly paper bill for a guinea, his revenue would depend on what he could get for the paper and surely not the paper itself.

  • The bill will then be considered by all the tradesmen as worth the necessaries and conveniencies worth a guinea.
  • The person’s revenue would not consist in paper guinea or gold guinea, but in what he can get for it.
  • If it could be exchanged for nothing, the paper bill would be like a bill upon a bankrupt and be worthless.

20 Though the weekly or yearly revenue of all a country’s inhabitants is paid in money, their real riches must always be in proportion to the amount of consumable goods which they can buy with this money.

  • The whole revenue of all of them taken together is not equal to both the money and the consumable goods.
  • It is only only equal to the consumable goods and not the money.

21 We frequently express a person’s revenue by the metal pieces paid to him because the amount of those pieces regulates his purchasing power, or the value of the goods which he can afford to consume.

  • We still consider his revenue as consisting in this power of purchasing or consuming, and not in the pieces which convey it.

22 An individual’s purchasing power is similar to the society’s purchasing power.

  • The amount of the metal pieces annually paid to an individual, is often precisely equal to his revenue.
    • It is thus the shortest and best expression of its value.
  • “But the amount of the metal pieces which circulate in a society can never be equal to the revenue of all its members.”
    • The same physical guinea may pay the weekly pension of one man today, another man tomorrow, and a third the day after.
  • The amount of the metal pieces which circulate in any country must always be of much less value than the worth of that money.
    • But the power of purchasing or the goods which can be bought with that money, must always be the same value with that money.
    • The revenue of those who receive that money must be of the same value with the money they receive.
    • That revenue consists in the power of purchasing or the goods which can be bought.
    • It cannot consist in those metal pieces of which the amount is so much inferior to its value.

23 Physical money is the great wheel of circulation and the great instrument of commerce.

  • Like all instruments of trade, it makes no part of the revenue of the society where it belongs.
  • Physical money makes no part of the revenue, even though it distributes to every man the revenue which belongs to him.
  1. 24 Every saving in the cost of collecting and supporting money (circulating capital) is an improvement exactly of the same kind as every saving and cost-reduction in the building and supporting of machines and the tools of trade (fixed capital),  as long as the savings do not reduce labour productivity.
    • Both savings are an improvement of the society’s net revenue.

25 Reducing the expences of supporting the fixed capital improves the society’s net revenue.

  • The undertaker’s whole capital is divided between his fixed and circulating capital.
    • The smaller the one part, the greater must be the other.
  • The circulating capital furnishes the materials and wages of labour.
    • It puts industry into motion.
  • Every reduction in the cost of maintaining the fixed capital, which does not reduce productivity, must increase the fund which mobilizes industry.
    • The reduction in the cost increases the society’s real revenue.

26 The substitution of gold and silver money with paper, replaces a very expensive instrument of commerce with one much less costly.

  • It is sometimes equally convenient.
  • Circulation is carried on by a new wheel.
    • This new wheel costs less to build and maintain.
    • But it is not obvious how this new wheel increases the gross or net revenue of society.

Paper Money
27 There are many kinds of paper money.

  • The circulating notes of banks are the best known and best adapted as paper money.

28 When people have such confidence in the fortune, probity, and prudence of a banker, they believe that he is always ready to pay upon the presentation of his promissory notes.

  • Those notes become equal to gold and silver money from the confidence that money can be received for the notes at any time.

29 A banker lends his own promissory notes worth £100,000 to his debtors.

  • Since these notes are as good as money, his debtors pay him interest.
    • This interest is his gain.
    • Though some of those notes continually come back to him from the debtor’s customers for redemption, part of them continue to circulate for months and years.
  • Though he has £100,000 of notes in circulation, £20,000 in gold and silver may be sufficient for answering occasional demands.
    • £20,000 in gold and silver perform all the functions which £100,000 of gold and silver could have performed.
    • The same exchanges may be made.
      • The same amount of goods worth £100,000 may be circulated through his promissory notes, as when it was circulated by solely by gold and silver money.
    • £80,000 of gold and silver can be spared from the country’s circulation.
  • If these operations were carried on by many different banks, the whole circulation may be conducted with 1/5 of the gold and silver previously needed.

30 Let us suppose, that a country’s whole circulating money was £1 million.

  • £1 million was enough to circulate the whole national annual produce.
  • Different banks then issued promissory notes for £1 million.
  • They reserved £200,000 in gold and silver for answering occasional demands.
  • There would remain in circulation, £800,000 in gold and silver, and a million bank notes or £1.8 million of combined paper and metal money.
  • But the annual produce the country only required £1 million to circulate it to its proper consumers.
  • That annual produce cannot be immediately increased by those operations of banking.
    • £1 million will be sufficient to circulate it.
  • Since the goods bought and sold are precisely the same, the same amount of money will be enough for buying and selling them.
    • The channel of circulation will remain precisely the same as before.
    • £1 million was sufficient to fill that channel.
  • Whatever is poured in beyond this sum must overflow.
    • £1.8 million are poured into it.
    • £800,000 must overflow.
  • That sum is over and above what can be employed in the country’s circulation.
    • This sum cannot be employed at home but it is too valuable to be left idle.
    • Therefore, it will be sent abroad to seek profitable employment which it cannot find at home.
  • But the paper cannot go abroad because:
    • the issuing banks are too far away.
    • it is not legal tender in foreign countries
  • £800,000 in gold and silver will be sent abroad.
    • The channel of home circulation will remain filled with a million of paper instead of the million of metals which filled it before.

[Translator’s Note: Bretton Woods allows the US paper currency to overflow, making the entire financial system unstable]

31 The gold and silver sent abroad is not sent for for nothing.

  • It is not given as a gift to foreign nations.
  • They will be exchanged for foreign goods for the home country or for another foreign country.


32 If they use it to buy goods from one foreign country to sell to another, it is called the carrying trade.

  • The profit they make from the carrying trade will be an addition to their own country’s net revenue.
    • It is like a new fund for carrying on a new trade.
    • Since paper already circulates all domestic business, the gold and silver can be converted to a fund to circulate this new trade.




33 If they employ it in buying foreign goods for home consumption, they may either:

  1. Buy goods likely to be consumed by idle people who produce nothing, such as foreign wines, silks, etc. 34 This way:
    1. promotes prodigality
    2. increases expence and consumption without increasing production
    3. does not establish any permanent fund for supporting that expence
    4. hurtful to the society in every respect
  2. Buy more materials, tools, and provisions to maintain and employ a more industrious people, who reproduce the value of their annual consumption, with a profit. 35 This way:
    1. promotes industry
    2. increases the society’s consumption
    3. provides a permanent fund for supporting that consumption because the people who consume can reproduce the whole value of their consumption, with a profit
    4. increases the society’s gross revenue by increasing the whole value added by labour to those materials
    5. increases their net revenue by deducting the cost of supporting the tools and instruments of their trade.


36 Most of the gold and silver forced abroad by banking used to buy foreign goods for home consumption is almost unavoidably used to buy this second kind of goods.

  • Some men may increase their cost very much without increasing their revenue.
    • However, no entire class ever does so because the principles of prudence always influences the majority, though it does not always govern every individual’s conduct.
  • But the revenue of idle people cannot be increased by banking.
    • Only the expense of a few among them may be increased by banking.
  • A very small part of the money forced abroad will be employed to buy foreign goods for the consumption of idle people.
    • Because the demand of idle people will not change so much
  • Most of it will naturally be destined for the employment of industry and not for the maintenance of idleness.


37 When we compute the amount of industry which a society’s circulating capital can employ, we must always have regard only to provisions, materials, and finished work.

  • The circulating capital which consists in money, and which only circulates those three, must always be deducted.

Three things are needed to mobilize industry:

  • Materials to work on
  • Tools to work with
  • Wages or recompense for the work done

Money is neither a material to work on, nor a tool to work with.

  • Though wages are commonly in money, a worker’s real revenue is in the money’s worth.
  • The real revenue of people consist in what can be bought with money, and not in the physical money.


38 The amount of industry which any capital can employ must be equal to the number of workers whom it can supply with materials, tools, and a maintenance suitable to the nature of the work.

  • Money may be needed to buy:
    • the materials and tools of work and
    • the maintenance of the workers.
  • The amount of industry which the whole capital can employ is certainly not equal to both the money which buys, and the materials, tools, and maintenance, bought with that money.
    • It is equal only to the materials, tools and maintenance more properly than to the money.


39 When gold and silver money is replaced with paper, the amount of materials, tools, and maintenance (the circulating capital) may be increased by the value of gold and silver used to buy them in the past.

  • The increased value of this great wheel of circulation is added to the goods it circulates.
  • This operation resembles an undertaker of a great work who takes down his old machinery and replaces it with a newer and cheaper one of the same quality.
    • He adds his cost savings to the fund that provides materials and wages to his workers.


40 It is perhaps impossible to determine the proportion of a country’s circulating money to the whole value of its annual produce circulated by that money.

  • Money has been computed by different authors at 1/5, 1/10, 1/20, and 1/30 of the value of the annual produce.
  • No matter how small money is compared to the annual produce of a country, it forms a great part of the stock used to maintain industry.
  • When gold and silver money is reduced to 1/5 because of the introduction of paper money, the value of the remaining 4/5 is added to the funds for maintaining industry.
    • It makes a very big addition to the quantity of that industry and to the value of the national annual produce.

41 This operation has been done in Scotland within the past 25-30 years by the establishment of new banks in every considerable town and some country villages.

  • Its effects were precisely those above described.
  • The business of the country is almost entirely done with the paper of those banks through purchases and payments.
  • Silver very seldom appears except in the change of a 20 shilling bank note, and gold still more seldom.
  • The country has derived great benefit from the banks even though they are not exceptional and were regulated by an act of Parliament.
  • I heard that the trade of Glasgow doubled 15 years after the establishment of the banks there.
  • The trade of Scotland has more than quadrupled since the establishment of the two public banks at Edinburgh.
  1. The Bank of Scotland was established by act of Parliament in 1695
  2. The Royal Bank was established by royal charter in 1727
  • I do not know whether the trade of Scotland or Glasgow has really increased so much during so short a period.
    • It seems to be too great to be caused by banks alone.
  • However, I do not doubt that the banks contributed to the big increase in the trade and industry of Scotland during this period.


42 Before the union in 1707, the value of the silver money circulating in Scotland was £411,117.

  • It was immediately brought into the Bank of Scotland to be recoined after the union.
  • There is no account of the gold coin.
  • The ancient accounts of the mint of Scotland show that the value of the gold annually coined exceeded that of the silver.
  • There were many people who did not bring their silver into the Bank of Scotland because of the diffidence of repayment.
    • Some English coin  was also not called in.
  • The whole value of the gold and silver circulating in Scotland before the union cannot be less than £1 million.
    • £1 million seems to have been almost the whole circulation of Scotland.
  • The circulation of the Bank of Scotland was considerable and had then no rival.
    • Its circulation made a very small part of the union’s whole circulation.
  • Presently, Scotland’s whole circulation cannot be less than £2 million.
    • The part which consists in gold and silver probably does not amount to £500,000.
  • Scotland’s circulating gold and silver was greatly diminished during this period.
    • But its real riches and prosperity did not diminish at all.
    • Its agriculture, manufactures, and trade have increased.


Discounted Bills of Exchange
43 Most banks issue their promissory notes chiefly by discounting bills of exchange or by advancing money before they are due.

  • They always deduct the interest from the sum they advance, until the bill becomes due.
  • The payment of the due bill replaces to the bank the value that was advanced, with a clear profit of the interest.
  • The banker who advances a discounted bill (of reduced value) to the merchant in notes instead of gold and silver, is able to discount more, according to the total value of all of his circulating promissory notes.
    • He can make his clear gain of interest on a larger sum.

Cash Accounts
44 The commerce of Scotland is not very great at present.

  • It was smaller when the first two banks were established.
  • Those companies would have had little trade had they confined their business to discounting of bills of exchange.
  • They invented cash accounts — another method of issuing their promissory notes
  • They give credit (£2,000-3,000 for example) to anyone who could procure two persons of undoubted credit and good landed estate to become surety for him.
  • Whatever money advanced to him based on the given credit should be repaid on demand, with the legal interest.
  • This kind of credit is granted by banks around the world.
    • But Scotch banks peculiarly give them on easy terms.
    • The easy terms perhaps were the principal cause of the great trade of those banks and the benefit the country received from it.

45 People with this credit who borrow £1,000, may repay it piecemeal, by £20-30 at a time.

  • The bank discounts a part of the interest of the £1,000 from the day each of those small sums are paid, until the the whole is paid.
  • All merchants and almost all businessmen, find it convenient to keep such cash accounts.
  • They are interested in promoting the banks:
    • by readily receiving their notes in all payments
    • by encouraging others to receive their bank notes too
  • The banks advance the loans in the bank’s own promissory notes.
    • The merchants use these notes to pay the manufacturers for goods.
    • The manufacturers pay these notes to the farmers for raw materials and provisions.
    • The farmers pay these to their landlords for rent.
    • The landlords pay these to the merchants for goods.
    • The merchants return these to the banks to balance their cash accounts or to replace what they borrowed.
    • Thus, almost the whole money business of the country is transacted by promissory notes, creating the great trade of those banks.

46 Through those cash accounts, every merchant can carry on a greater trade.

  • Let us say that there is one merchant in London and another in Edinburgh, both employing equal stocks in the business.
  • The Edinburgh merchant, using cash accounts, can carry on a greater trade and employ more people than the London merchant.
  • The London merchant, with no cash accounts, must always keep a big sum of money to answer the payment demands for the goods he purchases on credit.
    • If this amount is £500, then he must keep £500 in money instead of spending it to add £500 of additional goods in his warehouse.
    • If he is able to sell all his goods in the year, he would have lost the sale of £500 worth of goods.
    • His annual profits must be less, by the profits of those £500 of goods;
    • The number of people he employs must be less, by the employment generated by those £500 of goods.
  • On the other hand, the Edinburgh merchant keeps no money unemployed for answering such occasional demands.
    • He satisfies occasional demands with his cash account with the bank.
    • He gradually repays the bank with the money or paper from the sales of his goods.
    • With the same stock, he can have more goods than the London merchant.
    • He makes a bigger profit and provides more employment.
    • Hence the great benefit which Scotland has derived from this trade.

47 Discounting bills of exchange gives the English merchants a convenience equivalent to the cash accounts of the Scotch merchants.

  • But the Scotch merchants can and have discounted their bills of exchange as easily as the English merchants, in additional to their cash accounts.

48 All kinds of paper money which can easily circulate in any country can never exceed the value of the gold and silver it substitutes.

  • If 20 shilling notes are the lowest paper money in Scotland, all paper money which can easily circulate there cannot exceed the sum of gold and silver needed for transactions worth 20 shillings or more.
  • If the circulating paper exceeds that sum, it must immediately return on the banks to be exchanged for gold and silver.
    • Because the excess could not be sent abroad nor employed in the circulation of the country.
  • Many people would immediately perceive that they had more of this paper than was needed for business transactions at home.
    • Since they could not send it abroad, they would immediately demand payment of it from the banks.
    • By converting this superfluous paper into gold and silver, they can easily find a use for it abroad.
    • But they could find no use for it while it remained in paper.
  • There would immediately be a run on the banks to the whole extent of this superfluous paper.
    • If the banks showed any backwardness in payment, a greater alarm would be created, increasing the run.

49 Other than the common business expenses, such as the expence of house-rent, wages of servants, clerks, accountants, etc., a bank’s expenses consist chiefly in:

  1. The expence of keeping a large sum at all times in its coffers for answering the occasional demands of the holders of its notes.
    • This sum pays no interest.
  2. The expence of replenishing those coffers as fast as they are emptied when answering those occasional demands.

50 A bank which issues more paper than can be employed in the country, should increase the quantity of gold and silver kept at all times in their coffers.

  • Because the excess paper is continually returning to the bank for payment.
  • It should increase its gold and silver in a much greater proportion to this excessive paper circulation.
    • Because their notes will return to it much faster than the excess of their quantity.
  • Such a bank should increase their first expence in a much greater proportion to this forced increase of their business.

51 The coffers of such a bank should be filled much fuller.

  • Because they will empty themselves much faster than if their business was confined within more reasonable bounds.
  • They must require a more violent, more constant and uninterrupted expence to replenish them.
  • The coin too is continually drawn in large quantities from their coffers, cannot be employed in the circulation of the country.
  • The coin comes in place of paper which is over and above what can be employed in that circulation
    The coin is therefore over and above what can be employed in it too.
  • But as that coin will not be allowed to lie idle, it must be sent abroad in order to find that profitable employment it cannot find at home
  • This continual exportation of gold and silver must further enhance the expence of the bank in finding new gold and silver to replenish those rapidly emptying coffers.
  • Such a bank must in proportion to this forced increase of their business, increase the second article of their expence still more than the first.

52 Let us say that all the paper of a bank which the national circulation can easily employ was exactly £40,000.

  • For answering occasional demands, it is obliged to keep £10,000 in gold and silver at all times.
  • Should this bank circulate £44,000, the £4,000 above the national circulation, will return to the bank as fast as they are issued.
  • For answering occasional demands, this bank should keep £14,000 at all times, not £11,000 only.
  • It will gain nothing by the interest of the £4,000 excessive circulation.
  • It will lose the expence of continually collecting £4,000 in gold and silver.
  • This £4,000 will be continually going out of its coffers as fast as it enters.

53 Had every bank always understood its own interest, the circulation could never have been overstocked with paper money.

  • But every bank has not always understood its own interest.
  • The circulation has frequently been overstocked with paper money.


54 By issuing too much paper, the excess continually returned to the bank to be exchanged for gold and silver.

  • For many years, the Bank of England was obliged to coin gold at an average of around £850,000 per year.
  • It was frequently obliged to buy gold bullion at the high price of 960 pence an ounce because of:
    • this great coinage, and
    • the degraded state of the gold coin a few years ago.
  • It then converted bullion into coin at 934.5 pence an ounce.
    • It lost between 2.5-3.0% on the coinage of such a large sum. [(960 – 934.5)/960]
  • The Bank of England paid no seignorage.
    • The government paid the coinage cost.
    • But this did not prevent the expence of the bank.

55 All the Scotch banks were also obliged to constantly employ agents in London to collect money at a cost seldom below 1.5-2%.

  • This money was sent by wagon and insured by the carriers at an additional cost of 0.75%.
    • Those agents were not always able to replenish the coffers of the Scotch banks as fast as they were emptied.
  • The banks had to draw bills of exchange on their London correspondents to the fill the discrepancy.
    • When those correspondents collected payment for those bills with interest and commission, some of the Scotch banks had to draw a second set of bills.
  • In this way, the bills for the same sum would  make more than 2-3 journeys.
  • The debtor Scottish bank would always pay the interest and commission on the accumulated total.
    • Even more prudent Scotch banks were sometimes obliged to employ ruinous bills of exchange.
  • This distress was caused by the excessive circulation of Scottish bank notes.


56 The gold coin paid out by the Bank of England or the Scotch banks for their paper which was in excess of the circulation needed by the country, was also itself in excess of the national circulation.

  • It was sometimes sent abroad in coin or melted down and sent abroad as bullion.
    • It was sometimes melted down and sold to the Bank of England at the high price of 960 pence an ounce.
  • It was the newest, heaviest, and best pieces only which were carefully picked out of the coin and sent abroad or melted down.
    • While those heavy pieces remained in coin at home, they were of no more value than the light pieces.
    • They were more valuable abroad or when melted down into bullion at home.
  • The Bank of England found to their astonishment that every year had the same scarcity of coin as the year before, despite their great coinage.
    • They found every year the more degraded state of the coin despite the great amount of good new coins they issued.
    • Every year, they found themselves needing to coin nearly the same amount of gold as the year before.
    • Every year, they found the cost of coinage becoming higher due to the continual rise in the price of gold bullion.
      • This rise was due to the continual wearing and clipping of the coin.
  • By supplying its own coffers with coin, the Bank of England is indirectly obliged to supply the whole kingdom.
    • Its coin is continually flowing from its coffers in many ways.
  • The Bank of England was obliged to supply:
    • whatever coin was wanted to support this excessive circulation of Scotch and English paper money and
    • whatever lack this excessive circulation created in the kingdom’s coin.
  • All the Scotch banks paid very dearly for their own imprudence and inattention.
    • But the Bank of England paid very dearly:
      • for its own imprudence and
      • for the much greater imprudence of almost all Scotch banks.

Words: 5,860

Next: Book 2, Chap. 2b: Bank Prudence


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s