#WealthofTweets: Book 2.2

coinage is bitcoin money #wealthoftweets #smithtweets history of money purchasing power cryptocurrency teach economics paper money banking role of banks fractional reserve banking bank runs credit entrepreneurs bankruptcy

28 Jan • 28 tweets • adamsmithworks/status/1354788973844062208

Good morning Smithketeers! Today's section of #WealthOfNations is full of material on the history of money. If you're a #bitcoin and #cryptocurrencies fan, or if you're following @DocumentingBTC @Bitcoin @BTCTNor @BitcoinMagazine, this section of #AdamSmith's work is for you!

An observation: Despite the common claim that economics is about money, it’s not until Book 2, Chapter 2 of Wealth of Nations that we get a chapter dedicated to money. Maybe there’s other stuff that matters too? (II.ii) #WealthOfTweets #SmithTweets

#AdamSmith kicks it off by comparing individual estates to nations. Individual estates have “gross rent” which is what is paid to the landlord & “neat (net) rent” which is what remains once expenses and circulating capital are deducted. (II.ii.1–4) #WealthOfTweets #SmithTweets

Real wealth is in proportion to the "neat" (net), not the gross.(II.ii.4) #WealthOfTweets #SmithTweets

The gross revenue of a nation is ALL our grosses combined. The neat (net) is all our expenses and circulating capital deducted from the gross. The real wealth of nations (That has a ring to it!) is in proportion to the neat, not the gross. (II.ii.5) #WealthOfTweets #SmithTweets

You don’t get to count the stuff you use to maintain your fixed capital (machines, etc.) as part of the net either. But that’s okay because properly maintained machinery → more production. (Is anyone else having flashbacks to shop class?) (II.ii.6) #WealthOfTweets #SmithTweets

This is why innovation is so important, though! Better, simpler, cheaper machinery enables more productivity with less loss to net revenue. (SmithTweets were a lot more expensive when we had to hand set the type, you know.) (II.ii.7) #WealthOfTweets #SmithTweets

You don’t have to deduct all the expenses of maintaining circulating capital, though, because you can move it into the stock that supports society if you’re not circulating it to make a profit at the moment. (II.ii.9) #WealthOfTweets #SmithTweets

Money (💰finally!💰) is the only part of circulating capital whose maintenance expenses have to be deducted from the net revenue of the nation. (II.ii.11) #WealthOfTweets #SmithTweets

Why? Remember: in this section, money isn’t #bitcoin or #EFT or even paper. It’s coin. And so money is sort of like a machine. You have to “collect and support it.” (II.ii.13) #WealthOfTweets #SmithTweets

Smith does understand and know about paper money. He’s not a moron. But he’s clearly talking about coins here. (II.ii.13) #WealthOfTweets #SmithTweets

He's living in a time where money still means coin. You have to specify if you mean paper money. Later, you can just say "money" and mean bills. Our grandkids will say "money" & mean #bitcoin and #EFT. It's like phone/wall phone/cell phone. (II.ii.13) #WealthOfTweets #SmithTweets

Anyway. The point is that our wealth is about the goods that circulate, not about the money that helps them circulate. Money is just the wheel that makes them easier to move. (II.ii.14) #WealthOfTweets #SmithTweets

Sometimes we conflate those, though, “when we talk of any particular sum of money, sometimes we mean nothing but the metal pieces of which it is composed and sometimes we include in our meaning…the power of purchasing.”(II.ii.16) #WealthOfTweets #SmithTweets

So what your pay is worth can mean both “The physical money” or “What you can buy with it.” The ambiguity irritates Smith because he is the sort of person who spends fifty pages trying to clarify it. (II.ii.15–17) #WealthOfTweets #SmithTweets

Smith prefers to think of money as purchasing power. (II.ii.16–17) #WealthOfTweets # SmithTweets NOW we get to paper money!

So, we don't know if you know this, but if you’re paid in paper instead of coin, the value of your pay is NOT the trivial value of the paper. It’s the value of what you can BUY with it. (II.ii.19) #WealthOfTweets #SmithTweets

OBVIOUSLY, right? This is such a hard concept for modern people to talk about because, for us, of COURSE the value of paper money isn’t the value of the paper and ink! But it was a major mental shift in the 18th century. (II.ii.19–21) #WealthOfTweets #SmithTweets

Imagine being the first person who was expected to take a piece of paper instead of literal gold and silver! (II.ii.19–21) #WealthOfTweets #SmithTweets

(Okay, clearly we, the SmithTweeters, <3 the intellectual history of money. Georg Simmel and @GeorgeSelgin can tell you more.) https://www.amazon.com/Philosophy-Money-Routledge-Classics-14/dp/0415610117
https://www.amazon.com/Good-Money-Birmingham-Beginnings- C oinage/dp/1598130439/

This all cashes out (ha!) to mean that the wealth of a nation is NOT about the amount of money circulating. That's only important to the amount of economic activity it can support. Wealth is a much bigger issue. (II.ii.22) #WealthOfTweets #SmithTweets

Coins pass from person to person, and the same coins are used to purchase goods over and over and over. National wealth does not equal national money supply. (II.ii.22) #WealthOfTweets #SmithTweets

Smith would have LOVED Wheel of Fortune. (II.ii.23) #WealthOfTweets # SmithTweets

Every time you decrease the costs of producing and maintaining money or machinery (because money’s like a machine) you increase purchasing power and we get wealthier. (II.ii.25) #WealthOfTweets #SmithTweets

Paper money is great because it’s a cheaper way to store purchasing power. It’s a less expensive machine than coins. (II.ii.26) #WealthOfTweets #SmithTweets

But you do have to be able to trust your banks and your bankers for paper money to function properly. (II.ii.28) #WealthOfTweets #SmithTweets

And...actually, Smith is about to talk about banks a lot. So, having established the role of money in the stock of a commercial society, let's leave it here for today. Tomorrow...banks with paper money: how do they work? (II.ii.29–fin) #WealthOfTweets #SmithTweets

Want more about #AdamSmith and #cryptocurrencies? Our friend @burrow_JohnR has you covered over at AdamSmithWorks.org!
https://www.adamsmithworks.org/documents/cryptocurrency-money-and-adam- smith

• • •

The second half of #WealthOfNations Book 2, Chapter 2 is all about banks. Once you invent money, you have to have somewhere to put it, I suppose. #WealthOfTweets #SmithTweets

Banks. You give 'em paper money for the very first time and crazy things can happen! Like what, you ask? Oh, we're so glad you asked. (II.ii.29) #WealthOfTweets #SmithTweets

Or maybe...not so crazy? A lot of what Smith’s explaining here seems super obvious to us now—you can charge interest on paper money! Fractional reserve banking is a thing! Just like paper money, huge mental adjustments for the 18thC. (II.ii.29–30) #WealthOfTweets #SmithTweets

And fractional reserve banking, btw, means that you can keep increasing the nation’s wealth and also have money to use for foreign investment and importing foreign goods. (II.ii.31–33) #WealthOfTweets #SmithTweets

Be careful though! If you import fancy French stuff you’ll just promote prodigality and laziness. Instead you should import better machines and materials to improve national industry. (We get it, but we <3 wine and silk, darnit.) (II.ii.33–35) #WealthOfTweets #SmithTweets

One more time for the people in the balcony. Money is just purchasing power. It’s not wealth. Paper money is good because it frees up purchasing power. (II.ii.37–39)#WealthOfTweets #SmithTweets

Scotland gets this. "Ye're pure braw, Scotland!" - Adam Smith, probably. (II.ii.41–44) #WealthOfTweets #SmithTweets

More of Smith explaining stuff that’s new in the 18thC but totally obvious by the 21st: Credit is a thing! (II.ii.44–47) #WealthOfTweets #SmithTweets

An excess of paper money can cause a run on banks. We, the SmithTweeters, are pleased to report that we know all about runs on banks because we have watched Mary Poppins, like, a lot. (II.ii.48)
https://www.youtube.com/embed/xE5klz0yUT0 #WealthOfTweets #SmithTweets

(They’re bad.) (II.ii.48) #RunsOnBanks #DeepWisdom #WealthOfTweets # SmithTweets

Banks have some particular expenses. 1) The interest lost because they have to keep some money as a fractional reserve 2) Refilling that reserve when people withdraw cash. (II.ii.49) #WealthOfTweets #SmithTweets

A bank that finds itself constantly needing to put out cash and refill the reserve should stop issuing so much paper and keep a larger reserve. They're wasting resources by constantly maintaining the reserve. (II.ii.50–53) #WealthOfTweets # SmithTweets

If all the banks would just get this, Smith wouldn’t even have to write chapter two! But they don’t get it, and so here we all are. (II.ii.53) #WealthOfTweets # SmithTweets

And just to really hammer it home, Smith is going to tell you all exactly how much it costs when banks get this wrong. It's a lot. (II.ii.54–56) #WealthOfTweets #SmithTweets

Banks sometimes extend too much credit to too many people with too little assurance of regular repayment. That's bad. (II.ii.57–64) # WealthOfTweets #SmithTweets

Pause for Fun With 18thC Vocabulary! When Smith talks about “undertakers”, he’s not discussing the funeral industry or the WWE. He’s talking about entrepreneurs and investors who undertake projects. (II.ii.64) #WealthOfTweets #SmithTweets

There’s also this practice of “drawing and redrawing” that merchants use when they’re on the brink of bankruptcy. Guess what? It’s bad!! (II.ii.66–72) #WealthOfTweets #SmithTweets

What you do is lend someone 💰. He gives you an IOU. Then you circulate that IOU as if it's money, and everyone who passes it on signs their names to it. Smith’s worried that this process fools people and that debts won’t get paid. (II.ii.66–72) #WealthOfTweets #SmithTweets

We’re just excited because this is the plot of every Victorian novel ever. #Middlemarch #VanityFair #BleakHouse (II.ii.66–72) #WealthOfTweets #SmithTweets

#TLDR Smith probably should have just called this chapter “Banks Behaving Badly” and left it at that. (II.ii.73–85) #WealthOfTweets #SmithTweets

For banks to be useful, they have to be judicious and skillful or the whole thing comes crashing down. (II.ii.86) #WealthOfTweets #SmithTweets

Since Smith's been branded as an advocate for complete freedom from government restraint, II.ii.94 is pretty noteworthy! Yes, he says, restraining the ways that people can receive IOUs is a restriction of natural liberty. But also do it anyway. #WealthOfTweets #SmithTweets

Setting stuff up so that people who aren’t wealthy can’t use paper money, thinks Smith, protects all of society from the ill effects of their unrestrained action. It’s like saying you've gotta build a fire wall! (II.ii.94) #WealthOfTweets #SmithTweets

(We bet that his support for banning low-value banknotes is one of the bits of Smith that modern economists aren’t all that excited about.) (II.ii.94) #WealthOfTweets #SmithTweets

It’s interesting how the details of loans and repayment varied from city to city in Smith’s time. That’s all lost now. (II.ii.98–104) #WealthOfTweets #SmithTweets

The proportional value between coins and goods does not depend on the value of paper money. It depends on the supply of gold and silver and the labor necessary to bring it to market. (II.i.105) # WealthOfTweets #SmithTweets

You can give banks perfect liberty other than subjecting them to two constraints:
1. They shouldn’t be allowed to issue small bills.
2. They should provide immediate, unconditional payment of bank notes as soon as they are presented. (II.ii.106)
#WealthOfTweets #SmithTweets

That should give you more banks, too. And more banks are better (if the rules are good) because competition is good! Right, @lawrencehwhite1? (II.ii.106) # WealthOfTweets #SmithTweets

https://iea.org.uk/publications/research/free-banking-in-britain-theory-experience-and-debate-1800-1845

Man, Smith, talk about burying the lede...#WealthOfTweets #SmithTweets

SmithTweeters over and out. See you tomorrow for productive and unproductive labor. SPOILER ALERT: They don’t mean what everyone thinks they do. #WealthOfTweets #SmithTweets



See Also: The AdamSmithWorks Reading Guide for this chapter.