Adam Smith's Theory of Money and Banking

Nicholas Adam Curott
2012 Social Science Research Network  
This paper addresses a long-running debate in the economics literature -the debate over Adam Smith's theory of money and banking -and argues that recent reinterpretations of Smith's monetary theory have erroneously diverted historians of monetary thought from the correct, but briefly articulated, initial interpretations of Thornton (1802) and Viner (1937) . Smith did not present either the real-bills theory or a price-specie-flow theory of banknote regulation, as is now generally presumed, but
more » ... ally presumed, but rather a reflux theory based upon the premise that the demand for money is fixed at a particular nominal quantity. Smith's theory denies that an excess supply of money can ordinarily make it into the domestic nominal income stream or influence prices or employment. Keywords: Adam Smith, price-specie-flow mechanism, real bills doctrine, free banking, law of reflux, monetary approach to the balance of payments JEL Classifications: B12, B31 Adam Smith's Theory of Money and Banking
doi:10.2139/ssrn.2136133 fatcat:fcf7haqkk5ccdkwdfnr6am7sea