23 December 2013

Paul Krugman Does Some Injustice to the Thoughts of Adam Smith On Money, Gold, and Silver

Paul Krugman, in making his argument about gold, bitcoins, and paper money,  'quotes' Adam Smith, although somewhat circuitously, as seemingly to deride gold and silver in favor of paper money.

I discuss that column of his here.    And here is Mr. Krugman's quote from Adam Smith.
"I suspect, however, that Adam Smith would have been dismayed.  Smith is often treated as a conservative patron saint, and he did indeed make the original case for free markets. It’s less often mentioned, however, that he also argued strongly for bank regulation — and that he offered a classic paean to the virtues of paper currency.

Money, he understood, was a way to facilitate commerce, not a source of national prosperity — and paper money, he argued, allowed commerce to proceed without tying up much of a nation’s wealth in a “dead stock” of silver and gold."
I looked up quite a few of the references to 'dead stock' in Adam Smith's Wealth of Nations since Paul K does not provide an actual quote, and found plenty of references to 'money' as 'dead stock,' but nothing in particular to gold and silver per se.  

I doubt that Adam Smith thought of them as barbarous relics as Paul seems to imply.  I could be wrong and would be interested in seeing a quote that says what Mr. Krugman implies that Adam Smith says.  Perhaps he can consult his notes and provide an actual quote in context.

Smith goes to great pains to show that 'money' is a medium of exchange, and the wealth of a nation is properly increased by the employment of money in productive ways. Duh.  I wish the Federal Reserve understood that in their trickle down approach to economic recovery and regulation and the support of the financialisation of the economy that produces no wealth, but instead transfers it from the many to the few.

Smith recognizes that gold and silver are a store of wealth that could be needed moreso at certain times, and should be increased during bountiful periods, but he is adamant that 'money' is not the means of increasing wealth.   Wealth is the action of people on resources creating products.  Money is a 'highway' to help to facilitate the transactions.

But this in no way implies that he views gold and silver themselves as inherently 'dead stock' and that paper money is to be preferred in and of itself.  At least not in the areas in which I had read.

He does not specifically condemn 'paper money' either except in passing with regard to risk.

I struggled with the supposed quote given by Mr. Krugman, given that Smith would have been so familiar in the sad case of John Law and his paper money experiment, for example.

I believe that Smith is talking about those domestic instruments that energize a monetary system in transactions. In other words, commercial paper and so forth.  Smith argues that money is best used as it is being gainfully employed in the actual production of things, and not hoarded.   Again, who can argue with that?

Here is what I would daresay is the 'money quote' from Adam Smith on paper, gold and silver:
"The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either.

The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air, enable the country to convert, as it were, a great part of its highways into good pastures, and corn fields, and thereby to increase, very considerably, the annual produce of its land and labour.

The commerce and industry of the country, however, it must be acknowledged,though they may be somewhat augmented, cannot be altogether so secure, when they are thus, as it were, suspended upon the Daedalian wings of paper money, as when they travel about upon the solid ground of gold and silver.

Over and above the accidents to which they are exposed from the unskilfulness of the conductors of this paper money, they are liable to several others, from which no prudence or skill of those conductors can guard them."

Adam Smith, Wealth of Nations, p. 262
As you may recall Daedalus was the father of Icarus. He fashioned the wings of wax and feathers on which Icarus soared, but in his hubris flew too high, and close to the sun on his artificial devices, alas, and plummeted quite dramatically back to earth.

I thought Adam Smith's statement on 'paper money' is particularly well formed and well advised in this regard.  And extrapolating what he said and what he thought to somehow craft an endorsement of the current monetary system in all its malformed and highly unproductive serial fraud is a bit of a stretch to say the very least. 

Rather than be dismayed, if a moral philosopher like Adam Smith were to come back and look at what passes for a financial system and the regulation and encouragement of commerce in our world today, I doubt he would be able to stop throwing up.