Adam Smith's Simplified Wealth of Nations, Book 2, Chapter 2c: Bank operations

Chapter 2c: Bank Operations

49 Other than the common business expenses, such as the expence of house-rent, wages of servants, clerks, accountants, etc., a bank's expenses consist chiefly in:

  1. The expence of keeping a large sum at all times in its coffers for answering the occasional demands of the holders of its notes.
  2. The expence of replenishing those coffers as fast as they are emptied when answering those occasional demands.

50 A bank which issues more paper than can be employed in the country, should increase the quantity of gold and silver kept at all times in their coffers.

51 The coffers of such a bank should be filled much fuller because they will empty themselves much faster than if their business were confined within more reasonable bounds.

52 Let us say that all the paper of a bank which the national circulation can easily employ was exactly £40,000. 53 Had every bank always understood its own interest, the circulation could never have been overstocked with paper money.   54 By issuing too much paper, the excess continually returned to the bank to be exchanged for gold and silver. 55 All the Scotch banks were also obliged to constantly employ agents in London to collect money at a cost seldom below 1.5-2%.   56 The gold coin paid out by the Bank of England or the Scotch banks for their paper which was in excess of the circulation needed by the country, was also itself in excess of the national circulation.
Next: Chapter 2d: Overtrading