40 BANKING THEORIES IN UNITED STATES
reserving in their different coffers two hundred thousand pounds for answering
occasional demands. There would remain, therefore, in circulation,
eight hundred thousand pounds in gold and silver, and a million of bank
notes, or eighteen hundred thousand pounds of paper and money together.
But the annual produce of the land and labor of the country had before required
only one million to circulate and distribute it to its proper consumers,
and that annual produce cannot be immediately augmented by those operations
of banking. One million, 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. One million we have supposed
sufficient to fill that channel. Whatever, therefore, is poured into it beyond
this sum, cannot run in it, but must overflow. One million eight hundred
thousand pounds are poured into it. Eight hundred thousand pounds, therefore,
must overflow, that sum being over and above what can be employed
in the circulation of the country!
Though this sum cannot all be employed at home, the excess will
not lie idle, but will be sent abroad to seek employment. As paper
currency is useless abroad, it is part of the gold and silver that
must go. And goods will be returned in exchange; goods that are,
for the most part, materials, tools, and the things necessary for
the maintenance of labor.2 To but a minor extent are articles received
of the sort that promote prodigality and consumption,
rather than production.?
The principle set forth by Smith, in the pages that we have
thought important enough to quote at length, exercised a very
great influence upon the literature of banking theory in America.
Benjamin Franklin had, in 1774, made the elementary observation
that among the advantages of paper money is that it
costs less for “coining or making,” besides being subject to less
wear and tear. But Smith’s thesis, that the issue of bank notes in
excess of the metallic money withdrawn from circulation into
reserves displaces a like amount of specie from circulation, caus-1
Wealth of Nations, book II, chap. 2 (vol. i, pp. 275-277)-2
This must qualify the statement made by Smith on the preceding page, that
banking operations do not result in the need of a larger volume of circulating
medium.
3 Ibid., pp- 277, 278.
¢ Franklin, Works, ii, 417. Similar statements are found in several colonial
pamphlets.
