"Though paper money should be pretty much confined to the circulation between dealers and dealers, yet Banks and Bankers might still be able to give nearly the same assistance to the industry and commerce of the country, as they had done when paper money filled almost the whole circulation. The ready money which a dealer is obliged to keep by him, for answering occasional demands, is destined altogether for the circulation between himself and other dealers, of whom he buys goods. He has no occasion to keep any by him for the circulation between himself and the consumers, who are his customers, and who bring ready money to him, instead of taking any from him. Though no paper money, therefore, was allowed to be issued, but for such sums as would confine it pretty much to the circulation between dealers and dealers; yet, partly by discounting real bills of exchange, and partly by lending upon cash accounts, Banks and Bankers might still be able to relieve the greater part of those dealers from the necessity of keeping any considerable part of their stock by them unemployed and in ready money for answering occasional demands. They might still be able to give the utmost assistance which Banks and Bankers can, with propriety, give to traders of every kind.

"To restrain private people, it may be said, from receiving in payment the promissory notes of a Banker for any sum whether great or small, when they themselves are willing to receive them, - or to restrain a Banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are and ought to be restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party-walls, in order to prevent the communication of fire is a violation of natural liberty, exactly of the same kind with the regulations of the Banking trade which are here proposed.

"A paper money consisting in bank-notes, issued by people of undoubted credit, payable upon demand without any condition, and in fact always readily paid as soon as presented, is, in every respect, equal in value to gold and silver money, since gold and silver money can at any time be had for it. Whatever is either bought or sold for such paper must necessarily be bought or sold as cheap as it could have been for gold and silver.

"The increase of paper money, it has been said, by augmenting the quantity and consequently diminishing the value of the whole currency, necessarily augments the money price of commodities. But as the quantity of gold and silver, which is taken from the currency, is always equal to the quantity of paper which is added to it, paper money does not necessarily increase the quantity of the whole currency. From the beginning of the last century to the present time, provisions never were cheaper in Scotland than in 1759; though, from the circulation of ten and five-shilling bank-notes, there was then more paper money in the country than at present. The proportion between the price of provisions in Scotland, and that in England, is the same now as before the great multiplication of Banking companies in Scotland. Corn is, upon most occasions, fully as cheap in England as in France; though there is a great deal of paper money in England, and scarce any in France. In 1751 and in 1752, when Mr. Hume published his 'Political Discourses,' and soon after the great multiplication of paper money in Scotland, there was a very sensible rise in the price of provisions; owing, probably, to the badness of the seasons, and not to the multiplication of paper money.

"It would be otherwise, indeed, with a paper money consisting in promissory notes, of which the immediate payment depended, in any respect, either upon the good will of those who issued them, or upon a condition which the holder of the notes might not always have it in his power to fulfil; or of which the payment was not exigible till after a certain number of years, and which in the mean time bore no interest. Such a paper money would, no doubt, fall more or less below the value of gold and silver, according as the difficulty or uncertainty of obtaining immediate payment was supposed to be greater or less, or according to the greater or less distance of time at which payment was exigible."

Such is Adam Smith's theory of Banking; inculcating a simple and safe system, sufficient for all practical purposes, and complete in itself. I deliver this as my own opinion, not arrogantly, or overbearingly, but as the deliberate result of the consideration I have been able to give the matter at issue, and the judgment I possess; and also with a full persuasion that nine out of ten of our modern authorities and lawgivers upon the subject will, after the admission I have just made, consider all I may have afterwards to offer not worth three straws. Nevertheless, such is my opinion, - valeat, etc.

One of Smith's leading maxims is, that if Bankers are subjected to the obligation of an immediate and unconditional payment of their notes in coin on demand as soon as presented, then the trade may, with safety to the public, be rendered in all other respects perfectly free; because the whole paper money of every kind which can easily circulate in any country never can exceed the value of the gold and silver of which it supplies the place, or which (the commerce being supposed the same) would circulate there if there was no paper money.

In making these assertions, Adam Smith well knew that, as a Banker's readiest means of making a profit in his business is by putting out his notes, a sense of self-interest will constantly urge him to increase his issues. For that temptation, however, he saw there was a steady check in the obligation to pay gold or silver on demand. He expresses this general rule as follows: "Should the circulation of paper at any time exceed the value of the gold and silver of which it supplies the place, many people would immediately perceive that they had more of this paper than was necessary for transacting their business at home; and as they could not send it abroad, - Bank paper only passing current where it is issued, - they would immediately demand payment for it from the Banks. When this superfluous paper was converted into gold and silver they would easily find a use for it by sending it abroad; but they could find none when it remained in the shape of paper. There would therefore be a run upon the Banks to the extent of this superfluous paper."

Smith's main doctrines then may be thus summed up: is an amount equal to the sum of gold and silver which would have circulated had there been no bank-notes.

1. His circulating medium was bank-notes, payable on demand in gold and silver coin.

2. In wholesale dealings, paper money, and in retail dealings, coin, is to be preferred.

3. Banking may be left perfectly free if all Bankers are obliged to pay their notes in gold or silver whenever payment of them is demanded.

4. The proper supply of bank-notes in a country.

5. If more notes than this amount are put out they will be quickly returned to the Banker, and thus no derangement of prices from over-issues will take place, the evil of the over-issue being visited back upon the issuer by a run for gold.

6. No excess of issue can take place so long as Banks do not exceed the bounds of legitimate Banking business, which consists in advancing their notes upon real transactions, - that is, upon bills of exchange given for bona fide business done.

Having thus sketched Adam Smith's principles, I have next to advert to the exceptions that have been taken to them. First, however, it is to be specially observed, that we are not now, and have not for a long time had, any thing to do with the currency of which this eminent writer treated. When Adam Smith applied his mind to the question gold and silver were a legal tender; the Bank of England issued no notes under 101.; no Banker could issue notes for less than 51.; and Bank of England notes not being a legal tender, all Banks were obliged to pay their obligations in specie when required to do so.

According to this summary, three conditions of Adam Smith's currency system, each of no light consequence, were in full play at the time he expounded it, but have long ceased to exist conjointly. May it not be worth our while to fix these points in the memory before we proceed? Gold and silver, when Adam Smith wrote, were both a legal tender: a debtor might pay any sum he owed in gold or silver, as he pleased; now silver is not a legal tender above twenty shillings. Again: the Bank of England circulated no one-pound notes at that time, but it has circulated them since then; - the paper of that establishment was not then a legal tender, but it is now. Changes of this material kind challenge attention at all times; but they are most remarkable when, as happens to be the case before us, we have departed from a system, the merits and reasonableness of which have raised its author to the rank of master of the science upon which he wrote; while the more we have swerved from the doctrines he wisely taught, the more have we deepened and prolonged our sufferings.