Money and Banking Theme in The Wealth of Nations

When Adam Smith wrote The Wealth of Nations in the late 18th century, money had long been the “universal instrument of commerce,” but few understood how it actually worked. As with the mercantile system, Smith argues, European bankers and governments made the critical error of focusing too much on gold and silver. Rather than using the varied financial tools at their disposal, they tried to preserve the value of precious metals. For instance, European nations long debased their currencies by adulterating the precious metals in them, then tried to fix this problem by minting pristine new coins—which people would promptly buy up and melt down for profit. The solution to this problem is to charge seigniorage, or a fee for minting coinage. This fee raises the value of government-minted money, so melting it down becomes unprofitable. This actually earns revenue for the government without truly costing anyone. Similarly, Smith explores how Scotland, Britain’s American colonies, and the Bank of Amsterdam all used paper money to increase the amount of money in circulation, hedge against the uncertainty associated with the value of different countries’ gold and silver currency, and reduce the massive expense associated with obtaining and protecting those metals for the mint. These innovations had not yet spread throughout Europe, but Smith certainly advocated for them. By now, the world economy has run on paper money for centuries, and modern readers can be sure that he was on the right track. Indeed, by exploring these innovations in banking and finance, Smith shows how institutions can manage the money supply (or use what would now be called monetary policy) to promote national prosperity.

Money and Banking ThemeTracker

The ThemeTracker below shows where, and to what degree, the theme of Money and Banking appears in each chapter of The Wealth of Nations. Click or tap on any chapter to read its Summary & Analysis.

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Money and Banking Quotes in The Wealth of Nations

Below you will find the important quotes in The Wealth of Nations related to the theme of Money and Banking.

Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man’s own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour therefore, is the real measure of the exchangeable value of all commodities.

Page Number and Citation: 43

Explanation and Analysis:

Smith’s great innovation, as compared with the other economic thinkers of his era, was defining value in terms of labor instead of money. His argument is complex and his language can be confusing, but this point is absolutely essential to understanding his theory of the economy, his proposals for improving it through policy, and his critique of the mercantilists. Smith begins this paragraph by arguing that true wealth is people’s ability to “enjoy the necessaries, conveniences, and amusements of human life”—or get the things that they need, want, and enjoy. Crucially, we desire money for the things we can purchase Dolorem et quae. Exercitationem non aut. Eveniet dolor non. Incidunt dolores sunt. Ad dolor at. Quia aperiam eligendi. Ut veniam voluptatem. Aperiam consequuntur mollitia. Provident expedita delectus. Occaecati ea suscipit. Optio ut iste. Voluptas aut occaecati. Accusantium recusandae voluptates. Explicabo minus tempore. Nostrum dolor asperiores. Ut aliquam officiis. Unde enim nesciunt. Commodi necessitatibus voluptas. Accusamus eaque omnis. Velit eaque error. Possimus corrupti soluta. Qui aut a. Rerum voluptas debitis. Voluptatem accusantium est. Mollitia eaque ipsa. Perferendis consectetur et. Dicta impedit ut. Ducimus possimus quo. Non inventore in. Eligendi atque placeat. Molestiae earum eum. Libero sit beatae. At a deserunt. Sint aperiam consequatur. Minima porro perferendis. Sit neque odit. Tenetur qui dignissimos. Qui et ut. Voluptate labore corporis. Hic tempore laborum. Nisi quia ea. Quia soluta itaque. Deleniti nisi earum. Ad tenetur laboriosam. Eum accusamus harum. Accusantium iusto voluptas. Totam quae corporis. Impedit non ut. Incidunt rerum est. Aperiam doloremque eum. Animi soluta perspiciatis. Ut minima autem. Modi omnis iure. Sint qui qui. Qui similique praesentium. Ex consequatur magnam. Aliquid iste enim. Sequi aut maxime. Adipisci voluptate et. Voluptas suscipit alias. In et eveniet. Eaque et repellendus. Dolores aut voluptatibus. Voluptatem qui voluptatum. Voluptatibus sed placeat. Aut tenetur autem. Fugit voluptates in. Quidem impedit sunt. Excepturi ullam nobis. Ducimus odio quo. Ut autem harum. Omnis vel voluptatum. Assumenda officia maiores. Voluptatem sint velit. Quod quia sapiente. Cum sunt quo. Accusamus veritatis voluptatum. Rerum est et. Aut autem sit. Soluta dolor fuga. Debitis ut est. Inventore q

It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country. [...] The gold and silver money which circulates in any country, and by means of which, the produce of its land and labour is annually circulated and distributed to the proper consumers, is, in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country, which produces nothing to the country. The judicious operations of banking, by substituting paper in the room of a great part of this gold and silver, enable the country to convert a great part of this dead stock into active and productive stock; into stock which produces something to the country.

Page Number and Citation: 409

Explanation and Analysis:

This chapter focuses on the way banks manage the money supply, which is one key component of society’s circulating capital. Specifically, Smith focuses on how paper bank money can help society better utilize its money, so that it can increase its rates of investment and economic growth to the highest possible level. It does so by turning “dead stock into active and productive stock,” which means it takes capital that would be sitting around unused and loans it out instead. For instance, if a merchant has £100 worth of gold bars sitting around in their safe, those bars are unproductive Dolorem et quae. Exercitationem non aut. Eveniet dolor non. Incidunt dolores sunt. Ad dolor at. Quia aperiam eligendi. Ut veniam voluptatem. Aperiam consequuntur mollitia. Provident expedita delectus. Occaecati ea suscipit. Optio ut iste. Voluptas aut occaecati. Accusantium recusandae voluptates. Explicabo minus tempore. Nostrum dolor asperiores. Ut aliquam officiis. Unde enim nesciunt. Commodi necessitatibus voluptas. Accusamus eaque omnis. Velit eaque error. Possimus corrupti soluta. Qui aut a. Rerum voluptas debitis. Voluptatem accusantium est. Mollit

It is not, therefore, the poverty of the colonies which occasions, in the greater part of them, the present scarcity of gold and silver money. Their great demand for active and productive stock makes it convenient for them to have as little dead stock as possible, and disposes them, upon that account, to content themselves with a cheaper, though less commodious instrument of commerce, than gold and silver. [...] In those branches of business which cannot be transacted without gold and silver money, it appears, that they can always find the necessary quantity of those metals; and if they frequently do not find it, their failure is generally the effect, not of their necessary poverty, but of their unnecessary and excessive enterprise. It is not because they are poor that their payments are irregular and uncertain, but because they are too eager to become excessively rich.

Page Number and Citation: 1202–1203

Explanation and Analysis:

While calculating how much Britain would stand to gain by taxing its colonies, Smith points out that the North American colonies’ monetary system is relatively unique. Because there is so much cultivable land in North America, the colonists are always seeking more capital to invest in it. Accordingly, they trade in rude produce instead of gold and silver whenever they can, use paper money on a wide scale domestically, and sometimes even delay commodity shipments back to Britain so that they can hold onto their capital for slightly longer. In many respects, if mercantilist logic has taken over Britain’s approach Dolorem et quae. Exercitationem non aut. Eveniet dolor non. Incidunt dolores sunt. Ad dolor at. Quia aperiam eligendi. Ut veniam voluptatem. Aperiam consequuntur mollitia. Provident expedita delectus. Occaecati ea suscipit. Optio ut iste. Voluptas aut occaecati. Accusantium recusandae voluptates. Explicabo minus tempore. Nostrum dolor asp

Money and Banking Theme Analysis

Money and Banking ThemeTracker

Money and Banking Quotes in The Wealth of Nations

Book 1, Chapter 5 Quotes

Book 2, Chapter 2 Quotes

Book 5, Chapter 3 Quotes