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The history of paper money wasn’t at first so much an easy-going process. The adoption of the paper money was considered to be beneficial for both the wealth of the country and the individual businessmen. Nevertheless, the banks couldn’t think through everything right away, and the bank’s funds were often misused by the merchants and traders and other sorts of business people. These cases of illegal activities were possible mainly because of the errors and disadvantages of the banks’ policies. But to eventually find an optimum way of crediting money, the banks needed to overcome a lot of challenges.
The Role of Paper Money
In the midst of the 18th century, the paper money was quite new and just appeared in the circulation. The lack of strict regulations in the bank caused numerous cases of over-trading. People were allowed to borrow credits almost without any restrictions and on the loosened terms. Thus, the fund-raising with the fictitious bills of exchange by “drawing and re-drawing” banks’ funds was popular among the businessmen (Smith 328). Unfortunately, the banks couldn’t expose these cases of fraud at once, and usually, when the bankers found out about the reality of the situation, it was too late. The fund-raisings harmed the banks’ capital a lot. But either way, they couldn’t expose the businessmen in time without harming themselves.
The abuse of the capitals had a negative impact on the economic state of Scotland. For improving the situation, there was a new bank established with a “purpose of relieving the distress of the country” (Smith 332). However, the attempt to advance the economy didn’t come to a big success. The new bank operated both bills of exchange and the cash accounts, people were lent money equally, and therefore, there was even a bigger lack of security.
Banks are closely interconnected with the government and have a great influence on the state’s economy. A lamentable situation in the bank induces great losses for the government’s finances. The government attempted to improve the state’s economy by increasing the rates of interest from the credits. In an attempt to increase the government’s capitals, the Bank of England started to offer the conversion of the dead stocks that consisted of silver and gold into an active stock of paper money. The conversion of gold and silver into cash has several good impacts not only on the economy but on the industrial development of the country as well. Since the gold was a dead and immovable stock, it didn’t produce anything for the country. The dead stock’s conversion allowed to refine industrial development.
Due to the unproductiveness of deadstock, the entrance of the paper money into circulation was a necessity. The circulation of the paper money was more profitable for the banks yet it was less secure because the paper money is more liquid and “irretrievable” (Smith 342). The lack of legal regulation of crediting money enabled banks to multiply the amount of paper money in the county’s circulation and jeopardized the economic stability.
Gold and silver were scarce in Scotland yet the money circulation greatly depended on them. The excessive multiplication of paper money was a threat to the treasury, and it was clear that the bank regulations were necessary. The suppression of the large banknotes helped to relieve the scarcity of gold and silver. At the same time, paper money became a common means in the trade relations between dealers.
The challenges that the government and the banks faced at those times demonstrate that there was a poor legal foundation for the distribution of money in public. The bankers encountered a lot of private people who tried to misuse the bank’s money; therefore they needed to be more careful in lending. When the banks began to restrict the private people crediting it was considered as “a violation of natural liberty” (Smith 344). Nevertheless, these regulations were the only way to support the security and to provide the economic stability f the country.
Throughout time, money has evolved. It became more liquid and mobile. But these changes invoked the threads to the economic safety and required the strengthening of the regulations and rules of crediting. The regulations needed to be completely legal and to meet the basic human rights, to be beneficial not only for the government but the individuals as well. Without the crediting controls, the money often was given to the untrustworthy people who abused it and therefore induced great losses for the banks. The misuse of the banks’ funds is proved to be harmful to the country’s economy as a whole, and moreover, the banks’ inability of controlling such cases only encouraged the illegal activities, and it negatively affected the society in general. Thus, it is right to assume that the further reforms in the bank policies and the increased regulatory and legal controls could help to solve the numerous issues at the variety of levels: political, financial, and social.
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations, New York, NY: Cosimo Classics, 2011. Print.