original cause of this excessive circulation of 
paper money
What a bank can with propriety advance to 
a merchant or undertaker of any kind, is not 
either the whole capital with which he trades
or even any considerable part of that capital
but that part of it only which he would otherwise 
be obliged to keep by him unemployed 
and in ready money, for answering occasional 
demands. If the paper money which the bank 
advances never exceeds this value, it can never 
exceed the value of the gold and silver which 
would necessarily circulate in the country if 
there was no paper money; it can never exceed 
the quantity which the circulation of the 
country can easily absorb and employ
When a bank discounts to a merchant a 
real bill of exchange, drawn by a real creditor 
upon a real debtor, and which, as soon as 
it becomes due, is really paid by that debtor
it only advances to him a part of the value 
which he would otherwise be obliged to keep 
by him unemployed and in ready money, for 
answering occasional demands. The payment 
of the bill, when it becomes due, replaces to 
the bank the value of what it had advanced
together with the interest. The coffers of the 
bank, so far as its dealings are confined to 
such customers, resemble a water-pond, from 
which, though a stream is continually running 
out, yet another is continually running in, 
fully equal to that which runs out; so that, 
without any further care or attention, the 
pond keeps always equally, or very near equally 
full. Little or no expense can ever be necessary 
for replenishing the coffers of such a 
A merchant, without over-trading, may frequently 
have occasion for a sum of ready money
even when he has no bills to discount
When a bank, besides discounting his bills, 
advances him likewise, upon such occasions
such sums upon his cash account, and accepts 
of a piece-meal repayment, as the money comes 
in from the occasional sale of his goods, upon 
the easy terms of the banking companies 
of Scotland; it dispenses him entirely from 
the necessity of keeping any part of his stock 
by him unemployed and in ready money for 
answering occasional demands. When such 
demands actually come upon him, he can answer 
them sufficiently from his cash account
The bank, however, in dealing with such customers
ought to observe with great attention
whether, in the course of some short period 
(of four, five, six, or eight months, for example), 
the sum of the repayments which it 
commonly receives from them, is, or is not, 
fully equal to that of the advances which it 
commonly makes to them. If, within the 
course of such short periods, the sum of the 
repayments from certain customers is, upon 
most occasions, fully equal to that of the advances
it may safely continue to deal with 
such customers. Though the stream which 
is in this case continually running out from 
its coffers may be very large, that which is 
continually running into them must be at least 
equally large: so that, without any further 
care or attention, those coffers are likely to be 
always equally or very near equally full, and 
scarce ever to require any extraordinary expense 
to replenish them. If, on the contrary
the sum of the repayments from certain other 
customers, falls commonly very much short of 
the advances which it makes to them, it cannot 
with any safety continue to deal with such 
customers, at least if they continue to deal 
with it in this manner. The stream which is in 
this case continually running out from its coffers
is necessarily much larger than that which 
is continually running in; so that, unless they 
are replenished by some great and continual 
effort of expense, those coffers must soon be 
exhausted altogether
The banking companies of Scotland, accordingly, 
were for a long time very careful 
to require frequent and regular repayments 
from all their customers, and did not care to 
deal with any person, whatever might be his 
fortune or credit, who did not make, what 
they called, frequent and regular operations 
with them. By this attention, besides saving 
almost entirely the extraordinary expense of 
replenishing their coffers, they gained two other 
very considerable advantages
First, by this attention they were enabled 
to make some tolerable judgment concerning 
the thriving or declining circumstances of their 
debtors, without being obliged to look out for 
any other evidence besides what their own 
books afforded them; men being, for the most 
part, either regular or irregular in their repayments
according as their circumstances are 
either thriving or declining. A private man 
who lends out his money to perhaps half
dozen or a dozen of debtors, may, either by 
himself or his agents, observe and inquire both 
constantly and carefully into the conduct and 
situation of each of them. But a banking 
company, which lends money to perhaps five 
hundred different people, and of which the 
attention is continually occupied by objects of 
a very different kind, can have no regular information 
concerning the conduct and circumstances 
of the greater part of its debtors, beyond 
what its own books afford it. In requiring 
frequent and regular repayments from 
all their customers, the banking companies 
of Scotland had probably this advantage in 
Secondly, by this attention they secured 
themselves from the possibility of issuing more 
paper money than what the circulation of the 
country could easily absorb and employ. When 
they observed, that within moderate periods 
of time, the repayments of a particular customer 
were, upon most occasions, fully equal 
to the advances which they had made to him, 
they might he assured that the paper money