Two Branches of Circulation: Wholesale and Retailby Adam Smith
88 The circulation of every country is divided into 2 branches:
- The circulation of the dealers with one another
- The circulation between the dealers and the consumers
Each circulation requires a certain stock of money.
Paper or metal money may be employed in either circulation.
The value of the goods circulated between the dealers and dealers can never exceed the value of those circulated between dealers and consumers.
- Whatever is bought by the dealers is ultimately destined to be sold to consumers.
The circulation between the dealers is carried on by wholesale.
- It requires a large sum for every transaction.
The circulation between dealers and consumers, on the contrary, is carried on by retail.
- It frequently requires very small sums.
- A shilling or a halfpenny is often sufficient.
But small sums circulate much faster than large ones.
- A shilling changes masters more frequently than a guinea.
- A halfpenny changes masters more frequently than a shilling.
The annual purchases of all the consumers are at least equal in value to the purchases of all the dealers.
- However, consumer purchases can be transacted with fewer money pieces which circulate faster through more frequent retail purchases, than wholesale purchases.
89 Paper money may be regulated to confine itself to the circulation between dealers and dealers. They may be regulated to extend between dealers and consumers.
Where the smallest circulating bank notes are £10, as in London, paper money confines itself very much to the circulation between the dealers.
When a consumer receives a £10 bank note worth 200 shillings, he changes it at the first shop where he will buy 5 shillings’ worth of goods.
- The £10 note often returns into the dealer’s hands before the consumer has spent 1/40th of the money. [5 shillings/200 shillings]
Where bank notes are issued for so small sums as 20 shillings, paper money extends more to the circulation between dealers and consumers.
- This happened in Scotland.
- 10 and 5 shilling notes filled most of that circulation before the Act of Parliament stopped their circulation.
In North American currencies, paper was issued for small sums as a shilling.
- Paper shillings filled almost all of that circulation.
- In some paper currencies of Yorkshire, it was issued even for a sixpence.
90 Where small bank notes are commonly issued, many mean people are enabled and encouraged to become bankers.
A promissory note for a sixpence will be better received by everybody without scruple than a £5 or 20 shilling note. But the frequent bankruptcies of such beggarly bankers would be a very big inconvenience. It would even be a very great calamity to many poor people who received those notes in payment.
91 Perhaps it were better that no bank notes were issued smaller than £5.
Paper money would probably then confine itself to the circulation between the different dealers, as what is happening in London. In London, no bank notes under £10 are issued. In most parts of the United Kingdom, £5 will seldom be spent all at once, just as £10 will seldom be spent all at once in London.
92 Gold and silver remains if paper money is confined to the circulation between dealers and dealers, as in London.
But if paper money is extended to the circulation between dealers and consumers=
- gold and silver are banished almost entirely, and
- almost all the ordinary transactions of its interior commerce are done with paper.
This happened in Scotland and more in North America.
- The suppression of 10 and 5 shilling bank notes somewhat relieved the scarcity of gold and silver in Scotland.
- The suppression of 20 shilling notes would probably relieve it more.
Those metals became more abundant in America since the suppression of some of their paper currencies. Gold and silver were more abundant before the institution of those currencies.
93 Banks can still give the same assistance to its country’s industry and commerce if paper money were confined to the circulation between dealers and dealers, as when paper money filled almost the whole circulation.
The dealer’s ready money for answering occasional demands is destined to circulate between himself and the other dealers which he buys goods from.
- He does not need to keep ready money to circulate between himself and the consumers.
- This is because the consumers bring ready money to him.
Banks can still relieve those dealers from needing to keep ready money unemployed for answering occasional demands by:
- discounting real bills of exchange, and
- lending on cash accounts even if the circulation would be confined between dealers and dealers.
94 The following are violations of natural liberty which the law should support and not infringe:
- restraining private people from receiving a banker’s promissory notes which they are willing to receive, and
- restraining a banker from issuing such notes which everyone is willing to accept.
But the exertions of the natural liberty of a few individuals which might endanger the security of the whole society, should be restrained by the laws of all governments, of the most free as well as of the most despotical.
The obligation of building firewalls is a violation of natural liberty of the same kind with the banking regulations here proposed.