We have said in the second book, that the current money of a country is always in proportion to the trade, industry, consumption, and alienation, which regularly takes place in it; and when it happens that the money already in the country is not sufficient for carrying on these purposes, a part of the solid property, equal to the deficiency, may be melted down (as we have called it) and made to circulate in paper. That so soon again as this paper augments beyond that proportion, a part of what was before in circulation, must return upon the debtor in the paper, and be realized anew.
Now let us consider what is understood by realized. By this term is meant, that the regorging paper, or that quantity of currency which a nation possesses over and above what is necessary for its circulation, must be turned into some shape whereby it may produce an income; for it is now a maxim, that no money is to be suffered to remain useless to the proprietor of it.
When this regorging paper then comes upon the debtor in it, if he should pay the value of it in hard specie, how would the condition of the creditor be improved?
We suppose the credit of the paper equal to the credit of the coin within the country. We also suppose that the paper has so stagnated in the hands of the bearer, that he can neither lend it, or purchase with it any species of solid property, within the country, capable to produce an income: for if any way of disposing it usefully can be found, this circumstance proves that circulation is not, at that time, fully stocked; consequently, the money does not regorge. But let us suppose that it does regorge; then he must either oblige the debtor in the paper to pay in coin, and lock that up in his coffers, as was the case of old; or he must send his coin to other countries, where circulation is not fully stocked, and where an income may be bought with it. This constantly happens when circulation is either overstocked, or when the quantity of it begins to diminish in a country.
Let me next suppose, that in a country reasonably stocked with money, a sudden demand for it, far beyond the ordinary rate of circulation, should occur: suppose a war to break out, which absorbs, in a short time, more money than, perhaps, all the coin in a nation can realize. The state imposes a tax, which, let me suppose, may produce a sum equal to the interest of the money required. Is it not very certain, that such persons who found a difficulty in placing their regorging capitals, will be better pleased to purchase a part of this annual interest, than to lend it to any person who might pay it back in a short time; by which repayment the lender would again be thrown into the same inconvenience as before, of finding a proper out-let for it? This is a way of realizing superfluous money, more effectual than turning it into gold or silver.
When I speak, therefore, of realizing paper money, I understand either the converting it into gold and silver, which is the money of the world; or the placing of it in such a way as to produce a perpetual fund of annual interest.
Were public borrowing, therefore, to work the effect of bringing the money in circulation below the proportion required for carrying on alienation, then an obligation to repay the capital would be necessary, and complaints would be heard against the state for not paying off their debts; because thereby the progress of industry would be prevented. But when the operations of credit are allowed to introduce a method of creating money anew, in proportion to the demand of industry, then the state has no occasion to pay back capitals; and the public creditors enjoy far better conditions in their annual income, than if the capitals were refunded.
Let me illustrate this by an example.
We must take it for granted, that in every nation in Europe, there is a sum in circulation equal to the alienation which goes on actually at the time. We must also take it for granted, that the amount of all debts whatsoever, public and private, paying interest to the class of creditors, is a very great sum: now let us suppose, that the class of debtors should be enabled (no matter by what means) to pay off what they owe, in coin; would not, by the supposition, a sum nearly equal to that coin immediately fall into stagnation, and would it not be impossible to draw any income from it? This was exactly the case of old. The coin far exceeded the uses of circulation, and stagnated in treasures. Wars brought it out; because then circulation augmented; peace again cutting off these extraordinary demands, the coin stagnated again, and returned to the treasures.
What is the case at present?