Thread by @adamsmithworks

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

(They’re bad.) (II.ii.48) #RunsOnBanks #DeepWisdom #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.

It's a lot. (II.ii.54–56) #WealthOfTweets #SmithTweets

Banks sometimes extend too much credit to too many people with too little assurance of regular repayment.

That's bad. (II.ii.57–64) #WealthOfTweets #SmithTweets

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

We’re just excited because this is the plot of every Victorian novel ever. #Middlemarch #VanityFair #BleakHouse (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.

(II.ii.106) #WealthOfTweets #SmithTweets

That should give you more banks, too. And more banks are better (if the rules are good) because competition is good! Right, @lawrencehwhite1? iea.org.uk/publications/r… (II.ii.106) #WealthOfTweets #SmithTweets

Man, Smith, talk about burying the lede...#WealthOfTweets #SmithTweets

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