Adam Smith, “Division of Stock,” and Lombard Street

Michael Munger
Additional contact information
Michael Munger: Duke University

A chapter in Adam Smith’s Wealth of Nations After 250 Years, 2026, pp 23-41 from Springer

Abstract: Abstract Walter Bagehot’s Lombard Street was an elaboration of Adam Smith’s “division of stock” framework in Wealth of Nations, not a pure doctrinal innovation. Smith’s view focused on a tension: financial rules must encourage society’s stock to take up productive uses, while preventing reckless “projectors” from dissipating scarce capital. Read in this light, Bagehot’s lender-of-last-resort prescription—lend freely, at a penalty rate, on good collateral—makes Smith’s goals actionable in a crisis. It also treats Lombard Street as an institutional mechanism that renders capital reallocation observable and rapid, linking monetary stability to the efficiency of interregional credit intermediation in practice. The paper emphasizes the conceptual and governance importance of maintaining a credible line between liquidity support and insolvency rescue, because crossing that line converts a lender of last resort into an insurer of last resort and generates moral hazard by weakening depositor and counterparty monitoring. The concluding section applies the Smith—Bagehot synthesis to modern U.S. practice, highlighting how discretionary crisis interventions, deposit insurance, and “contagion” rationales can institutionalize expectations of bailout and thereby increase leverage, risk taking, and the frequency of “Minsky Moment” instability.

Date: 2026
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:conchp:978-3-032-32299-9_2

Ordering information: This item can be ordered from
http://www.springer.com/9783032322999

DOI: 10.1007/978-3-032-32299-9_2

Access Statistics for this chapter

More chapters in Contributions to Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().