Money, Banks and Finance in Economic Thought

The two theories of money of the Wealth of Nations

Diatkine Daniel Diatkine, Université Paris Saclay/Evry

Readers of the Wealth of Nations (Won) know that money is studied in two passages. The first one is the chapter iv of Book I, the second one occupies the most part of chapters i and ii of the Book II. The treatment in Book I is a standard since Aristotle: money is a commodity chosen to diminish transaction costs. The treatment in Book II is very different for money is not a commodity and is supplied by the banks. My contribution gives answers to two issues: First, why does the Won offers this dual conception of money? In Book I, the standard conception of gold as money is introduced into the framework of a simple market economy, without capital (and without land property). In this model commodities are exchanged by means of commodities. Consequently money is a commodity. As we know, Smith theory of the real wealth attributes to any commodity the properties of money: its purchasing power. The result is remarkable for it is commodities (and consequently labor) which buy commodities. The theory of the real Wealth (Wealth is purchasing power) exposed in the chapter v of Book I, is the consequence of this position. In Book II, Smith attempts to study money in relation to capital. Gold as money commodity is a very strange part of capital: it is costly and however it doesn’t yield any income. When banks substitute paper to gold, this argument seems to fall down: paper is substituted to gold which is exported. The conclusion is obvious: money is neither a commodity, neither a part of capital and the economy is a “real exchange economy” (Keynes). Secondly why bank money generates instability? However this substitution is costly for it gives way to financial instability. This point, which is central in Book II, is studied since longtime (Perlman, Hicks). The contribution points (it is its novelty) that the cause of this instability is a very particular informational asymmetry between lenders and borrowers. Lenders lend money when borrowers may borrow capital. This confusion between money and capital is inevitable for it is only ex post than banks may learn that some borrowers borrow capital and not money. So Smith concludes logically that prudential regulation and legal rate of interest are essential.

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Keywords: Smith, capita,l money

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