ADAM SMITH AND THE BANKERS: RETROSPECT AND PROSPECT

Alfred Duncan and Charles Nolan

National Institute Economic Review, 2023, vol. 265, 70-104

Abstract: Adam Smith promoted free banking—private, competitive, convertible banknotes. He also supported restrictions on banks. We study Smith’s views and the era in which they developed, suggesting his ‘regulations’ were a backstop against banks’ risks to depositors but primarily monetary stability. In modern parlance, Smith supported macroprudential regulations to underpin monetary stability, as did Friedman and Schwartz the US FDIC. We discuss why Smith’s vision for banking went unrealised. Bank regulation became microprudential and ran aground in 2008/2009. The prominence of macroprudential regulation now provides a chance to reorientate regulation to support monetary stability. Early signs are not promising.

Date: 2023
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Working Paper: Adam Smith and the Bankers: Retrospect and Prospect (2023)
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