Adam Smith's Support for Money and Banking Regulation: A Case of Inconsistency

By West, Edwin G. | Journal of Money, Credit & Banking, February 1997 | Go to article overview

Adam Smith's Support for Money and Banking Regulation: A Case of Inconsistency


West, Edwin G., Journal of Money, Credit & Banking


The Bank of England originated in a deal between monopoly-seeking

financiers and a revenue-hungry government with war-seeking propensities.

The ultimate payee of the loans that the government secured from the new

bank was, of course. the taxpayer, and it is surprising that Smith did not

focus more on this fact. Indeed, the actual regulation

of private banks of which Smith approved. appears to have aided and abetted

the further development of the government alliance with the monopolizing

bank. The suppression of small notes had the effect of reducing entry into

banking while the legal obligation of the option clauses, which Smith also

wanted, made private banks more vulnerable to runs on their liquidity.

The wealth of nations is commonly regarded as the primary locus of the classic attack on monopolies. It is remarkable, nevertheless, that its author Adam Smith appears deferential rather than hostile to the most effective banking monopoly of his time: the Bank of England. Describing it as "the greatest bank of circulation in Europe" (Smith, Wealth of Nations 1976, p. 318, hereafter W.N.), he also observes that "The stability of the Bank of England is equal to that of the British government" (W.N., p. 320). Smith seems to be particularly impressed with the special services of the bank in providing advances to the government for expected revenues from land and malt taxes and receiving and paying annuities that are due to the government's creditors. For such reasons, Smith continues, "It acts not only as an ordinary bank, but as a great engine of state" (W.N., p. 320).

THE ORIGIN OF THE BANK OF ENGLAND

When William III needed funds to pay for a war against France, and was faced with exceptionally high interest rates (due to the Government's low credit), he was keen for his government to accept a huge loan from a group of financiers in return for allowing them to establish a bank to print banknotes (as well as to issue loans). The Company of the Bank of England was accordingly set up in 1694. It loaned the government 1.2 million [pounds sterling] in return for the right to issue notes to the same amount. This amount was increased in 1697, and it was on that occasion that the financiers obtained the supreme political privilege: a monopoly of chartered banking in England together with the substantial advantage of limited liability for the shareholders. The monopoly power was extended in 1709 when further legislation limited competition in England to companies with less than six partners with unlimited liability.(1)

The account of the development of the Bank of England in W.N. is delivered in flat terms and with little indication of the extent of the monopolization that had occurred. This phenomenon is even more surprising considering that Smith was as vehement against public debts as he was against monopoly in general. The very last section in W.N. (viii) contends that "were the expense of war to be defrayed always by a revenue raised within the year . . . wars would in general be more speedily concluded and less wantonly undertaken" (pp. 925-26). Consistency required, therefore, that Smith should have been doubly offended by the late seventeenth-century legislation setting up the Bank of England because it enabled government both to escape the obligation to pay for its new war by taxes, and to do so by erecting a powerful statutory monopoly to boot.

While Smith acknowledges that "No other banking company in England can be established by act of parliament, or can consist of more than six members" (W.N., p. 320), he appears to have failed to grasp the full implications of this restriction on entry into banking. Freedom of entry, of course, is the most important condition for competition, and Smith himself insists that banking should be a fully competitive undertaking (W.N., par. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Adam Smith's Support for Money and Banking Regulation: A Case of Inconsistency
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.