The smithian bankers : between prudence and imprudence
It has already been noted that Smith did not defended a free banking system (Munn 1981; Gherety 1994; Kosmetatos 2014) for two reasons. First, he defended usury laws at a rate just above “the lowest market price” (Smith, 1776). If the laws are cancelled, there is a high risk that bankers behave recklessly. Imprudence was already present in Smith's time - see the example of the Ayr Bank - but it remained marginal. Secondly, the defence of usury laws echoed that of the 1765 Act, which consisted in abolishing the option clause and prohibited the emission of small denomination notes. Here again, the aim was to impose regulations on the activity of bankers in order to force them to behave prudently. In this article, we try to answer the question: why Smith uses regulations to make bankers remain prudent ? Indeed, according to Smith in the Wealth of Nations, Scottish bankers are, for the most part, prudent. This prudence is both an economic quality, in the sense that it implies frugal behaviour that guarantees the accumulation of capital, but also a virtue - the prudent man is applauded by the impartial spectator. Nevertheless, as Bréban and Lapidus (2020) explain, Smithian prudence is similar to Kimball's one: far from being averse to wealth, the prudent man seeks to become rich, but he wants to avoid losses. He is therefore not risk-averse. Moreover, this 'economic' prudence is inferior, according to Smith. This detail is important: this form of prudence is not a perfect virtue, like the superior prudence. Inferior prudence is not stable because it is based on fear. It is therefore easy to understand why Smith wants to keep laws which regulate the banking system: in the face of inferior prudence, only laws which impose constrains can channel the behaviour of an economic actor. To understand bankers behaviour, it is necessary to study the moral philosophy of Theory of Moral Sentiments, where Smith explains the foundations of prudence. We will see how it is similar to Kimball's definition and not to risk aversion (part 1). Then, we will study bankers behaviour in the context of a banking system regulated by usury laws and the Act of 1765 (part 2); we will see how fragile this equilibrium is. Finally, we try to imagine what would happen if the regulations were cancelled (part 3). Recklessness would give way to prudence, leading to serious financial crises
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Keywords: Smith banker prudent regulations
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