Contribution to Book
Adam Smith promotes markets because of their efficiency and because of their ability to develop and support moral social life. His views on banking are an example of his broader view. According to Smith banks should be allowed to issue their own money and compete in a minimally regulated environment. On the one hand, competition, including the possibility of bank failures, generates discipline, and discipline generates prudent behavior. On the other hand, competition in the banking sector is generated and maintained by prudent behavior. The prudent behavior of morally responsible banks is rewarded with economic success and it supports the economic and moral development of society; and the economic success of banks allows for morals to flourish. Smith’s pictures of banking is a part of his big picture of a complex web of interrelations of markets, laws, and morals; it is an example of the complexity of the natural system of liberty which promotes prosperity and the development of moral, free, and responsible individuals. But when historians of economics look at Smith on banking, they tend to focus only on the technical aspects of Smith, often narrowing the focus and often narrowing (or losing) the picture of the bigger project Smith seems to envision, and generating contradictions.
Princeton University Press
Paganelli, M. P. (in press). Adam Smith and the History of Economic Thought: The Case of Banking. In R. Hanley (Ed.), Adam Smith: A Princeton Guide. Princeton, NJ: Princeton University Press.
Adam Smith: A Princeton Guide