Good morning #AdamSmith fans! Today we're talkin' stock lent at interest. It's always considered a form of capital. (I.iv.1) #WealthOfTweets #SmithTweets
Stock lent at interest can be used for consumption or the borrower may use it as capital. If it's used as capital, the borrower can use the profits on their stock to repay the loan and pay back interest—this, says Smith, is more common. (II.iv.1–2) #WealthOfTweets #SmithTweets
Unless the borrower is a country gentleman. No one expects much of those guys. #Ouch (II.iv.3)
#WealthOfTweets #SmithTweets
Remember: money is kind of beside the point. What borrowers aren't looking for is money qua money. They're looking for "the money's worth". The purchasing power they can get by borrowing. (II.iv.4) #WealthOfTweets #SmithTweets
And so what we're talking about when we're talking about the quantity of stock isn't the quantity of money, but the purchasing power it can command. When they're lent out and paid back in money, they're monied interest. (II.iv.5) #WealthOfTweets #SmithTweets
Think of money as a "deed of assignment". It just conveys who's got the purchasing power. (II.iv.5) #WealthOfTweets #SmithTweets
The cool thing about money lent at interest is that you can use it many times without causing trouble, so long as it's borrowed for use as capital. You're just transferring (and multiplying!) purchasing power. (II.iv.5) #WealthOfTweets #SmithTweets
The more stock there is to be lent at interest, the less interest you can charge for the use of the stock. Just like other things: supply goes up, price goes down. (II.iv.8) #WealthOfTweets #SmithTweets
And, as Smith noted way back in I.ix., the rate of interest is related to the profits of stock. They fall, too, as the quantity of available stock increases. (II.iv.8) #WealthOfTweets #SmithTweets
In case you weren't sure, Smith is STILL annoyed that people are wrong about silver. He calls out Locke, Law, and Montesquieu for claiming the discovery of silver and gold in America is responsible for falling interest rates. (II.iv.9) #WealthOfTweets #SmithTweets
(Smith says his BFF Hume cleared this up. #HumeSays interest rates are a result of the demand for borrowing, the capital available to borrow, and the economic health of a nation. Not the supply of silver and gold.) (II.iv.9) #WealthOfTweets #SmithTweets
We spit out our tea a little at the comparison of using more money to command the same amount of capital having the same effect as a verbose lawyer using more words to write a deed of assignment. #Guffaw (II.iv.11) #WealthOfTweets #SmithTweets
#TLDR Smith says stop thinking that increasing the money supply is going to create more capital. All it does on its own is change nominal prices. (II.iv.11) #WealthOfTweets #SmithTweets
An increase in the quantity of commodities in the economy is a completely different story. (II.iv.12) #WealthOfTweets #SmithTweets
If the number of commodities increases, the purchasing power of money (its real value) goes up, and so the quantity of capital increases. (II.iv.12) #WealthOfTweets #SmithTweets
Because the quantity of capital increases, profits will fall. Because the purchasing power of money will be higher, nominal wages might fall (even though laborers will be able to purchase more with what they earn). (II.iv.12) #WealthOfTweets #SmithTweets
Now we get to usury. Governments try to stop it, but they really can't. Banning lending at interest tends mostly to punish borrowers, who now have to pay to borrow and to cover the risk of the lender getting caught. (II.iv.13) #WealthOfTweets #SmithTweets
Smith has thoughts about where the legislated legal ceiling for interest rates ought to be: above the lowest market rate so honest borrowers who need to pay a higher interest rate to secure credit aren't forced into the arms of usurers... (II.iv.14) #WealthOfTweets #SmithTweets
...but not so far above the lowet market rate that lenders are tempted to loan money only to "prodigals and projectors" willing to pay very high rates to access capital they couldn't otherwise get, leaving nothing for honest borrowers. (II.iv.15) #WealthOfTweets #SmithTweets
We pause now to point out a time the French got it wrong. #AsSmithDoes (II.iv.16) #WealthOfTweets #SmithTweets
And one more thing: the price of land is related to the interest rate, because anyone trying to decide how to use extra stock can choose to lend it out or buy land. Land offers low, secure returns. (II.iv.17) #WealthOfTweets #SmithTweets
If interest rates are high enough, it'll tempt people into giving up the security of collecting rent, lowering the demand (and therefore the price) of land. (II.iv.17) #WealthOfTweets #SmithTweets
(Look. We know. This isn't really the quotable Smith you're all here for. Even we, the SmithTweeters, agree. Wait'll we get to the herring....) #WealthOfTweets #SmithTweets

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More from @adamsmithworks

1 Feb
Is there a better way to start the day than with a good ol' Smithian subdivision? OBVIOUSLY NOT. Capital can be employed in four ways:
1) procuring rude produce (raw materials)
2) manufacturing
3) wholesale
4) retail
(II.v.2) #WealthOfTweets #SmithTweets
All four employments depend on each other. You can't have retail without raw materials, manufacturing, wholesaling. You won't procure raw materials with no one to sell them to. &c. (II.v.3–7) #WealthOfTweets #SmithTweets
Retail needs to be defended more than the other three categories. Smith is arguing against political writers who think that the number of retailers needs to be controlled to protect consumers and the public interest. (II.v.7) #WealthOfTweets #SmithTweets
Read 34 tweets
30 Jan
Why...what's that? A soapbox? Right here? I mean, if you insist, we'll just climb right up on top of it and DISCUSS #AdamSmith and productive and unproductive labor. #WealthOfTweets #SmithTweets
Here’s the thing. We love Smith, and we think he can be a remarkably good writer. But we wish he’d chosen almost any terms but productive and unproductive for the ideas he’s talking about here. (II.iii) #WealthOfTweets #SmithTweets
This passage is almost always completely misunderstood, and it’s entirely because of the value judgements people load onto the words productive and unproductive and the assumptions people make about Smith and economics. (II.iii) #WealthOfTweets #SmithTweets
Read 28 tweets
29 Jan
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
Read 30 tweets
28 Jan
Good morning Smithketeers! Today's section of #WealthOfNations is full of material on the history of money. If you're a #bitcoin and #cryptocurrencies fan, or if you're following @DocumentingBTC @Bitcoin @BTCTN or @BitcoinMagazine, this section of #AdamSmith's work is for you!
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
Read 28 tweets
27 Jan
Book II of #WealthOfNations! It's all about stock! Not the kind you fill with chicken and noodles, but the kind that (according to #AdamSmith) makes commercial society go 'round. (II.intro)…
#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
Read 27 tweets
26 Jan
Smith Fans! It’s the conclusion of chapter 11 of #WealthOfNations!! We made it! (1.xi.p.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
Read 16 tweets

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