The second half of #WealthOfNations Book 2, Chapter 2 is all about banks. Once you invent money, you have to have somewhere to put it, I suppose. #WealthOfTweets#SmithTweets
Banks. You give 'em paper money for the very first time and crazy things can happen! Like what, you ask? Oh, we're so glad you asked. (II.ii.29) #WealthOfTweets#SmithTweets
Or maybe...not so crazy? A lot of what Smith’s explaining here seems super obvious to us now—you can charge interest on paper money! Fractional reserve banking is a thing! Just like paper money, huge mental adjustments for the 18thC. (II.ii.29–30) #WealthOfTweets#SmithTweets
And fractional reserve banking, btw, means that you can keep increasing the nation’s wealth and also have money to use for foreign investment and importing foreign goods. (II.ii.31–33) #WealthOfTweets#SmithTweets
Be careful though! If you import fancy French stuff you’ll just promote prodigality and laziness. Instead you should import better machines and materials to improve national industry. (We get it, but we <3 wine and silk, darnit.) (II.ii.33–35) #WealthOfTweets#SmithTweets
One more time for the people in the balcony. Money is just purchasing power. It’s not wealth. Paper money is good because it frees up purchasing power. (II.ii.37–39) #WealthOfTweets#SmithTweets
Scotland gets this. "Ye're pure braw, Scotland!" - Adam Smith, probably. (II.ii.41–44) #WealthOfTweets#SmithTweets
More of Smith explaining stuff that’s new in the 18thC but totally obvious by the 21st: Credit is a thing! (II.ii.44–47) #WealthOfTweets#SmithTweets
An excess of paper money can cause a run on banks. We, the SmithTweeters, are pleased to report that we know all about runs on banks because we have watched Mary Poppins, like, a lot. (II.ii.48) #WealthOfTweets#SmithTweets
Banks have some particular expenses. 1) The interest lost because they have to keep some money as a fractional reserve 2) Refilling that reserve when people withdraw cash. (II.ii.49) #WealthOfTweets#SmithTweets
A bank that finds itself constantly needing to put out cash and refill the reserve should stop issuing so much paper and keep a larger reserve. They're wasting resources by constantly maintaining the reserve. (II.ii.50–53) #WealthOfTweets#SmithTweets
If all the banks would just get this, Smith wouldn’t even have to write chapter two! But they don’t get it, and so here we all are. (II.ii.53) #WealthOfTweets#SmithTweets
And just to really hammer it home, Smith is going to tell you all exactly how much it costs when banks get this wrong.
Pause for Fun With 18thC Vocabulary! When Smith talks about “undertakers”, he’s not discussing the funeral industry or the WWE. He’s talking about entrepreneurs and investors who undertake projects. (II.ii.64) #WealthOfTweets#SmithTweets
There’s also this practice of “drawing and redrawing” that merchants use when they’re on the brink of bankruptcy. Guess what? It’s bad!! (II.ii.66–72) #WealthOfTweets#SmithTweets
What you do is lend someone 💰. He gives you an IOU. Then you circulate that IOU as if it's money, and everyone who passes it on signs their names to it. Smith’s worried that this process fools people and that debts won’t get paid. (II.ii.66–72) #WealthOfTweets#SmithTweets
#TLDR Smith probably should have just called this chapter “Banks Behaving Badly” and left it at that. (II.ii.73–85) #WealthOfTweets#SmithTweets
For banks to be useful, they have to be judicious and skillful or the whole thing comes crashing down. (II.ii.86) #WealthOfTweets#SmithTweets
Since Smith's been branded as an advocate for complete freedom from government restraint, II.ii.94 is pretty noteworthy! Yes, he says, restraining the ways that people can receive IOUs is a restriction of natural liberty. But also do it anyway. #WealthOfTweets#SmithTweets
Setting stuff up so that people who aren’t wealthy can’t use paper money, thinks Smith, protects all of society from the ill effects of their unrestrained action. It’s like saying you've gotta build a fire wall! (II.ii.94) #WealthOfTweets#SmithTweets
(We bet that his support for banning low-value banknotes is one of the bits of Smith that modern economists aren’t all that excited about.) (II.ii.94) #WealthOfTweets#SmithTweets
It’s interesting how the details of loans and repayment varied from city to city in Smith’s time. That’s all lost now. (II.ii.98–104) #WealthOfTweets#SmithTweets
The proportional value between coins and goods does not depend on the value of paper money. It depends on the supply of gold and silver and the labor necessary to bring it to market. (II.i.105) #WealthOfTweets#SmithTweets
You can give banks perfect liberty other than subjecting them to two constraints:
1) They shouldn’t be allowed to issue small bills. 2) They should provide immediate, unconditional payment of bank notes as soon as they are presented.
SmithTweeters over and out. See you tomorrow for productive and unproductive labor. SPOILER ALERT: They don’t mean what everyone thinks they do. #WealthOfTweets#SmithTweets
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An observation: Despite the common claim that economics is about money, it’s not until Book 2, Chapter 2 of Wealth of Nations that we get a chapter dedicated to money. Maybe there’s other stuff that matters too? (II.ii) #WealthOfTweets#SmithTweets
#AdamSmith kicks it off by comparing individual estates to nations. Individual estates have “gross rent” which is what is paid to the landlord & “neat (net) rent” which is what remains once expenses and circulating capital are deducted. (II.ii.1–4) #WealthOfTweets#SmithTweets
First! A quick review: without division of labor, every person must provide everything they need. No one accumulates or stores up stock. You do what you can with what you have when you have it. (II.intro.1) #WealthOfTweets#SmithTweets
But once the division of labor develops (remember, it’s the secret sauce!) we have so many wants that we can’t provide for them all ourselves. Most of them are provided for by others, and we purchase their labor with our own. (II.intro.2) #WealthOfTweets#SmithTweets
Improvements make things cheaper, but they also raise the rent of land, which makes landlords richer, and lets them purchase more labor. Neglect and decay, though, make everyone poorer. (1.xi.p.2–6) #WealthOfTweets#SmithTweets
Smith says landowners won't mislead the public about what’s in the public interest, because their interest aligns with the public interest. Also they're lazy and kind of dumb, because they don't have to do anything to make their money. (I.xi.p.8) #WealthOfTweets#SmithTweets
Improvements make things cheaper—better machinery, higher skilled labor, better division of labor all drive prices down. (1.xi.o.1) #WealthOfTweets#SmithTweets
OMG, it’s the Conclusion of the Digression concerning the Variations in the Value of Silver!! (with bonus digression about 🐄🐄💩 that digressed from the digression on silver.) (I.xi.n) #WealthOfTweets#SmithTweets
We have to stop thinking about national wealth in terms of the amount of gold and silver we have. Precious metals are just one kind of commodity. (I.xi.n.1) #WealthOfTweets#SmithTweets
(And if the past 65 pages didn't convince you, says Smith, you just wait til Book IV.) (I.xi.n.1) #WealthOfTweets#SmithTweets
The third sort of rude produce is the kind where human attempts to cultivate and improve it produce unpredictable results. Examples include wool and animal hides. (I.xi.m.1) #WealthOfTweets#SmithTweets
It seems like the price of these should rise right along with the price of meat, but Smith says “Not so fast!” (I.xi.m.3) #WealthOfTweets#SmithTweets