Banks and Trust in Adam Smith
Contribution to Book
One can see banking as a mediating institution based on trust. In a small pre-commercial society, trust is personal and credit markets quite limited and based on personal knowledge. In larger commercial societies, credit markets tend to expand, but this is not possible if they are based only on personal trust. This is because of the difficulties of getting to know every customer in a large and impersonal society. Institutional trust needs to supplement personal trust. One trusts a bank and/ or the banking system more than the individual teller in the bank, and the bank trusts credit scoring and the legal system in the face of a lack of personal knowledge of individual clients. Yet personal and impersonal trust act generally as complements for one another rather than substitutes.
Adam Smith's vision of banking may be interpreted as an example of an analysis of this mix of institutional and personal trust. Bankers in Smith's time tended to be prominent public figures, with known reputation and known assets (personal trust), but bankers were also legally bound by unlimited liability (institutional trust). They gave credit to "men of credit" (personal trust), but when it became difficult to verify this credit, Smith argued, regulation was needed (institutional trust).
Robert F. Garnett, Jr., Paul Lewis, and Lenore T. Ealy
Paganelli, M.P. (2015). Banks and trust in Adam Smith. In R.F. Garnett Jr., P. Lewis, & L.T. Ealy (Eds.), Commerce and community: Ecologies of social cooperation (pp. 322-335). Routledge.
Commerce and Community: Ecologies of Social Cooperation