Source: EconLog
by Maria Pia Paganelli
“Smith attributes the remarkable economic growth that Scotland experienced in the 18th century to the development of a vigorous banking system, made prudent through competition. In the 18th century, banks are a bit controversial. Some believe that banks, by introducing paper money, increase the quantity of money in a country, thus making it richer. Others claim that banks make a country poorer instead, because paper money substitutes for gold and silver as a means of domestic payment, thus decreasing the quantity of gold and silver, thereby decreasing the country’s wealth. Smith differs. For Smith, banks do help an economy to grow richer (not poorer) by decreasing (not increasing) the quantity of gold and silver in the country! Smith’s logic relies on economic forces and government regulations to generate the prudent financial conduct needed for stable growth.” (03/18/26)