BOOK II. The practice of drawing and re-drawing is fo well known to all men of business, that it may perhaps be thought unneceffary to give an account of it. But as this book may come into the hands of many people who are not men of bufinefs, and as the effects of this practice upon the banking trade are not perhaps generally understood even by men of bufinefs themfelves, I fhall endeavour to explain it as diftinctly as I can. The cuftoms of merchants, which were esta blished when the barbarous laws of Europe did not enforce the performance of their contracts, and which during the courfe of the two laft centuries have been adopted into the laws of all European nations, have given fuch extraordinary privileges to bills of exchange, that money is more readily advanced upon them, than upon any other species of obligation; especially when they are made payable within fo fhort a period as two or three months after their date. If, when the bill becomes due, the acceptor does not pay it as foon as it is prefented, he becomes from that moment a bankrupt. The bill is protested, and returns upon the drawer, who, if he does not immediately pay it, becomes likewife a bankrupt. If, before it came to the person who prefents it to the acceptor for payment, it had paffed through the hands of feveral other persons, who had fucceffively advanced to one another the contents of it, either in money or goods, and who to exprefs that each of them had in his turn received 2 II. received thofe contents, had all of them in their CHA P. order endorsed, that is, written their names upon the back of the bill; each endorfer becomes in his turn liable to the owner of the bill for thofe contents, and, if he fails to pay, he becomes too from that moment a bankrupt. Though the drawer, acceptor, and endorfers of the bill should, all of them, be perfons of doubtful credit; yet still the fhortnefs of the date gives fome fecurity to the owner of the bill. Though all of them may be very likely to become bankrupts; it is a chance if they all become fo in fo fhort a time. The houfe is crazy, fays a weary traveller to himself, and will not ftand very long; but it is a chance if it falls to-night, and I will venture, therefore, to fleep in it to-night. The trader A in Edinburgh, we fhall fuppofe, draws a bill upon B in London, payable two months after date. In reality B in London owes nothing to A in Edinburgh; but he agrees to accept of A's bill, upon condition that before the term of payment he fhall redraw upon A in Edinburgh for the fame fum, together with the intereft and a commiffion, another bill, payable likewife two months after date. B accordingly, before the expiration of the first two months, re-draws this bill upon A in Edinburgh; who again, before the expiration of the fecond two months, draws a fecond bill upon B in London, payable likewife two months after date; and before the expiration of the third VOL. II. H H II. BOOK third two months, B in London re-draws upon A in Edinburgh another bill, payable also two months after date. This practice has fometimes gone on, not only for feveral months, but for feveral years together, the bill always returning upon A in Edinburgh, with the accumulated intereft and commiffion of all the former bills. The intereft was five per cent. in the year, and the commiffion was never lefs than one half per cent. on each draught. This commiffion being repeated more than fix times in the year, whatever money A might raise by this expedient muft neceffarily have coft him fomething more than eight per cent. in the year, and fometimes a great deal more; when either the price of the commiffion happened to rife, or when he was obliged to pay compound intereft upon the intereft and commiffion of former bills. This practice was called raifing money by circulation. In a country where the ordinary profits of flock in the greater part of mercantile projects are fuppofed to run between fix and ten per cent., it must have been a very fortunate fpeculation of which the returns could not only repay the enormous expence at which the money was thus borrowed for carrying it on; but afford, befides, a good furplus profit to the projector. Many vaft and extenfive projects, however, were undertaken, and for feveral years carried on without any other fund to fupport them befides what was raised at this enormous expence. The pro II. projectors, no doubt, had in their golden dreams c HA P. the moft diftinct vifion of this great profit. Upon their awaking, however, either at the end of their projects, or when they were no longer able to carry them on, they very feldom, I believe, had the good fortune to find it *. * The method defcribed in the text was by no means either the most common or the moft expenfive one in which thofe adventurers fometimes raised money by circulation. It frequently happened that A in Edinburgh would enable B in London to pay the first bill of Exchange by drawing, a few days before it became due, a fecond bill at three months date upon the fame B in London. This bill, being payable to his own order, A fold in Edinburgh at par; and with its contents purchased bills upon London payable at fight to the order of B, to whom he fent them by the post. Towards the end of the late war, the exchange between Edinburgh and London was frequently three per cent. against Edinburgh, and those bills at fight muft frequently have coft A that premium. This tranfaction therefore being repeated at least four times in the year, and being loaded with commiffion of at least one half per cent. upon each repetition, muft at that period have coft A at least fourteen per cent. in the year. At other times A would enable B to discharge the firft bill of exchange by drawing, a few days before it became due, a fecond bill at two months date; not upon B, but upon some third person, C, for example, in London. This other bill was made payable to the order of B, who, upon its being accepted by C, discounted it with fome banker in London; and A enabled C to difcharge it by drawing, a few days before it became due, a third bill, likewife at two months date, fometimes upon his firft correfpondent B, and fometimes upon fome fourth or fifth perfon, D or E, for example. This third bill was made payable to the order of C; who, as foon as it was accepted, discounted it in the fame manner with fome banker in London. Such operations being repeated at leaft fix times in the year, and being loaded with a commiffion of at least one-half per cent. upon each repetition, together with the legal interest of five per cent., this method of raising money, in the fame manner as that defcribed in the text, muft have coft A fomething more than eight per cent. By faving, however, the exchange between Edinburgh and London, it was lefs expenfive than that mentioned in the foregoing part of this note; but then it required an established credit with more houses than one in London, an advantage which many of thefe adventurers could not always find it eafy to procure. BOOK II. The bills which A in Edinburgh drew upon B in London, he regularly discounted two months before they were due with fome bank or banker in Edinburgh; and the bills which B in London re-drew upon A in Edinburgh, he as regularly discounted either with the bank of England, or with fome other bankers in London. Whatever was advanced upon fuch circulating bills, was, in Edinburgh, advanced in the paper of the Scotch banks, and in London, when they were dif counted at the bank of England, in the paper of that bank. Though the bills upon which this paper had been advanced, were all of them repaid in their turn as foon as they became due; yet the value which had been really advanced upon the first bill, was never really returned to the banks which advanced it; because, before each bill became due, another bill was always drawn to fomewhat a greater amount than the bill which was foon to be paid; and the dif counting of this other bill was effentially neceffary towards the payment of that which was foon to be due. This payment, therefore, was altogether fictitious. The ftream, which, by means of thofe circulating bills of exchange, had once been made to run out from the coffers of the banks, was never replaced by any ftream which really run into them. The paper which was iffued upon thofe circulating bills of exchange, amounted, upon many occafions, to the whole fund deftined for carrying on fome vaft and extenfive project of agri culture, |