Paul Krugman Quotes Adam Smith

Paul Krugman, a distinguished US professor of economics, writes a regular column in the New York Times.  His topic yesterday was the latest ephemeral, if geekish, interest in “Bitcoin”, on “Adam Smith Hates Bit Coin” HERE   See also a similar piece in the Washington Times  by Neil Irwin:  “Bitcoin is ludicrous, but it tells us something important about the nature of money” HERE 

“Adam Smith Hates Bitcoin”

“One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned.

Smith actually wrote eloquently about the fundamental foolishness of relying on gold and silver currency, which — as he pointed out — serve only a symbolic function, yet absorbed real resources in their production, and why it would be smart to replace them with paper currency:

“The gold and silver money which circulates in any country, and by means of which, the produce of its land and labour is annually circulated and distributed to the proper consumers, is, in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country, which produces nothing to the country. The judicious operations of banking, by substituting paper in the room of a great part of this gold and silver, enable the country to convert a great part of this dead stock into active and productive stock; into stock which produces something to the country. 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” (Wealth Of Nations, II.ii.86: 321)

 And now here we are in a world of high information technology — and people think it’s smart, nay cutting-edge, to create a sort of virtual currency whose creation requires wasting real resources in a way Adam Smith considered foolish and outmoded in 1776.”

Comment

Paul Krugman writes a newspaper column and is employed regularly by the New York Times to speak authoritatively on general economics to a sophisticated readership in one of the leading newspapers in the USA.  He is no longer running seminars on money for students with more leisure time than the majority of his readers to read the history of economic thought.

This is a pity because leaving readers with the passage he quotes while making an accurate statement of Smith’s views, Krugman leaves a limited impression of the totality of Smith’s views on paper money.

When Smith wrote this chapter, he stated that paper money had been in circulation in Scotland at the time by Scottish banks issuing their own currencies for the previous 25 years.  He notes the many positive qualities of widely accepted paper money; he also notes the potential dangers to the economy of “insecure” paper compared to the relative solidity of gold and silver, which is required to back the paper currency.

Of course some of these problems were also evident at the time in the failure of the relatively new “Ayr Bank”, mainly from over-issuing paper money against its stock of metal reserves.  So no matter the virtues of paper currency managed by the “judicious operations of banking” in increasing “the industry of a country”, it depends entirely on the nature of that “judicious” management. 

Now because it is relatively easier to print paper currency than to locate and mine gold and silver, the quality of a bank’s “judicious” management is a hostage to fortune (or the lack of it) for the security of that “highway through the air” (correctly said by Smith to be “a very violent metaphor”).

In the same paragraph, not quoted by Krugman, Smith writes:

“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” (WN II.ii.86; 321).

Adam Smith’s use of the metaphor of the ”Daedalian wings of paper money”, from the classical mythology of Daedalus and Icarus escaping from the Minotaur using wings set with wax, which melted from his flying too close the Sun.  This fate is contrasted by using another metaphor of ”the solid ground of gold and silver”.  This shows once again Smith's brilliant use of metaphoric figures of speech in his writing, as befits a lecturer in classical Rhetoric.

I take no view on “Bit Coin” as such – I am willing to accede to Krugman’s greater familiarity with the proposed technologies involved in creating an electronic currency and their risks.  I do, however, once again plead with those who quote from Smith’s works that they read the whole context for the passages that they select.