In consequence of all those contrivances, the cir culation of London is carried on with the smallest possible quantity of currency which is consistent with the regularity of its payments; and any sudden reduction, therefore, in the amount of its circulating cash, would ultimately lead to a state of general in solvency and suspension of confidence. Bills and drafts from all quarters of the country being also made payable in London, and accepted By the differ .
ant bankers, and a failure in any one of those meats being deemed an act of insolvency, it is dent that any general derangement of credit in don must spread far and wide tbrou out the dom. The punctuality of the Lou' payments is necessary to sustain and regulate the whole paper credit of the country.; and these payments being made exclusively in Bank of England notes, the culation of those notes cannot, in any case, be - rially reduced with safety to the community. Prior to the restriction act, there was no risk of any un due increase in the circulation of bank-notes, as the excess would have been immediately returned in ex change for specie. But the Bank, being now released from its obligation to pay in specie, and being thus closed against any return of its superfluous notes, its circulation may be increased at the discretion of its directors ; and, in these very peculiar circumstances, it is the opinion of Mr Thornton, t that the true policy of the Bank is generally to allow its circu lation to vibrate within certain limits.; to resort, when the temptation to borrow in the way of dis counts is too strong, to some effectual principle of restriction, but in no case materially to reduce the sum in circulation ; to afford a slow and cautious ex tension of it, as the general trade of the kingdom is enlarged ; and to allow of a temporary increase, even beyond its usual limits, in a season of extraordinary difficulty or alarm.
It is justly observed by Dr Smith, after he has ex plainectall the advantages of banking, that the com merce and industry of a country cannot be so secure when managed with paper money, as when managed with a currency of gold and silver. " The gold and silver money which circulates in any country," he observes, " may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, pro duces itself not a single pile of either. The judi cious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air, enable the country to convert, as it were, a great part of its high ways into good pastures and corn-fields, and there by to increase very considerably the annual pro duce of its land and labour. The commerce and in dustry of the country, however, it must be acknow ledged, though they may be somewhat augmented, cannot he altogether so secure, when they are thus, as it were, suspended on the Thedalian wings of paper money, aswhen they travel about upon the solid ground of sold and silver. Over and above the accidents to which they are exposed from the unskilfulness of the conductors of this paper money, they are liable to several others, from which no prudence or skill of these conductors can *ward them." (Wealth of Na tions. Buchanan's edit. Vol. L p. 508.) The necessary effect of every system of paper cur rency is, to encourage the principle of commercial credit. This is, indeed, the foundation on which it is raised, and the more widely the circulation of pa per is extended, the more closely will the mercantile community be knit together by the artificial ties of confidence and credit. Wherever there is trade, there must no doubt be credit. But where banks are generally established for the purpose of circulat ing paper money, credit must be augmented tenfold, seeing that, in such circumstances, no one can re ceive a payment without becoming a creditor. It is an evil, therefore, inseparable from any system under which a currency of the precious metals is au petsed ed by one purely conventional, that while a useless expence, is thereby saved to the community, and while its capital also acquires an increased degree of activity, the trading part of society are brought into such a state of general dependence, that every man may be said, in some degree, to rest upon his neigh bour, and the whole to rest upon the principle of confi dence in each other. The banker'snotesobtain a gene
ral circulatioe; no demand is made upon him for their payment in cash, because the public believe that he has property to pay them. The banker, in like manner, discounts the merchant's bills, from an opinion of his solvency, and the merchant, in giving credit, is guid ed by the same rule. Confidence, in short, is the ()harm which holds together, and while this principle prevails, no evil will result from this com plicated system of credit. Bank-noses will circulate freely..-.there will be no great demand for specie— and the merchant will always be enabled to convert his bills into cash. In these circumstances, every expedient will be adopted to spare the use both of notes and of specie. The merchant will naturally be anxious to reduce as low as possible the stock of cash which he reserves for occasional demands ; in many cases he will trust to accident for providing funds, such as to the sale of his goods, or to his cre dit with his banker ; while the banker, who provides a cheap instrument of exchange in place of a more expensive one, and whose profit consists in lending it on the same terms, has, in like manner, a strong inducement to increase the circulation of his paper, and, trusting to his credit, to diminish the specie re served for its payment. While the system is in this manner strained to its utmost pitch, the merchants ma naging the commerce.of the country with the smallest passible quantity of paper, and the bankers circulating the paper with the smallest possible quantity of specie, let us suppose, that from whatever cause, either from the alarms of war, or from a succession of bank ruptcies, the principle of mercantile confidence be gins to fail. In this case, the former ties by which merchants were connected with each other are now broken ; the usual channels of circulation, by which a small quantity of cash rapidly passing from one hand to another, served for transacting the payments of the community, are interrupted, and the money in circulation is, in consequence, found insufficient for the punctuality of mercantile payments. The supply of currency, however, in place of being increased, is still further diminished ; the bankers, from the fears natural to their situation, limiting the circulation of their notes, and refusing to accommodate the mer., chant, as before, by discounting his bills ; and the public, in their turn, discrediting the paper of the banks. This general failure of confidence immediate ly produces alarming bankruptcies, many merchants stopping payments, not from a want of property, but from a want of cash; a run commences on the banks for specie, many of whom are, in consequence, obliged to suseend their cash payments. The Bank of England being the great repository in this country, the demands of the country for spe cie gradually centre in the metropolis, the bankers generally disposing of the property which they hold in ' the public funds and other Government securities, and demanding from the Bank of England specie for whatever quantity of its notes they can collect. The Directors of the Bank, astonished by this alarming drain of their cash, naturally contract the circulation . of their paper. But the transactions of the metro polis having been hitherto managed with the most exact frugality, both of notes and specie, this sudden diminutions& its circulating cash must leave the money dealers unprovided with funds necessary for their im mense payments, and must thus derange the wholeeco nomy of that complicatedsysteni which hasbeen raised upon the frail foundations of confidence and credit. The disorder arising in the metropolis, from a want of cash, will soon extend itself to the remotest extre mities of the kingdom. In the mutual dependence created by credit and confidence, the failure of one merchant involves others in the same fate, bankrupt cies multiply in every quarter, and the alarm in creases with such rapidity, as to threaten a general subversion of credit and confidence throughout the country.