Adam Smith on Tax-Driven Paper Money

September 29th, 2015
in Op Ed

by Dirk Ehnts, Econoblog101

I am teaching Origins of Political Economy this fall which allows me to (re)read some classical books starting with Adam Smith. Having read Ricardo, students were wondering whether the metalist view still holds today and if not, what replaced it.

Follow up:

I found this paper by Stephanie Bell very enlightening, which contains a quote from Adam Smith. Here is the full paragraph (source) from 'Chapter II (continuation): On Money considered as a particular Branch of the general Stock of the Society, or of the Expense of maintaining the National Capital':

A prince who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind might thereby give a certain value to this paper money, even though the term of its final discharge and redemption should depend altogether upon the will of the prince. If the bank which issued this paper was careful to keep the quantity of it always somewhat below what could easily be employed in this manner, the demand for it might be such as to make it even bear a premium, or sell for somewhat more in the market than the quantity of gold or silver currency for which it was issued. Some people account in this manner for what is called the Agio of the bank of Amsterdam, or for the superiority of bank money over current money; though this bank money, as they pretend, cannot be taken out of the bank at the will of the owner. The greater part of foreign bills of exchange must be paid in bank money, that is, by a transfer in the books of the bank; and the directors of the bank, they allege, are careful to keep the whole quantity of bank money always below what this use occasions a demand for. It is upon this account, they say, that bank money sells for a premium, or bears an agio of four or five per cent above the same nominal sum of the gold and silver currency of the country. This account of the bank of Amsterdam, however, it will appear hereafter, is in a great measure chimerical.

So, Adam Smith already knew that the prince could chose a money of his liking that is required to pay taxes, thus presenting us with an early Chartalist exposition.









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