We’re joining our friends at Liberty Matters in their celebration of the 250th anniversary of the publication of An Inquiry into the Nature and Causes of the Wealth of Nations through a series of six weekly essays.
In the second essay, Maria Pia Paganelli explores Book II of Wealth of Nationswhich is, she says, about how countries maintain the capital required to support the division of labor. From the article:
Perpere (2024) explains that Smith adopts the medieval distinction that money can be both money (medium of exchange) or capital (capital). Gold and silver can be used as mediums of exchange (money), but they can also be used as investment capital (capital). If gold and silver are used as money, they cannot be used as capital. Smith compares the introduction of bank money to a highway in the sky. If a road is on the ground, that ground cannot be used to produce anything. But if that road is suspended in the sky, the ground below is now freed and can be used for agricultural purposes. Using a different medium of exchange, like paper, frees gold and silver from that function and allows them to be used for investment purposes.
