<blockquote>
<p>Does Adam Smith ... support a Central Bank/Federal Reserve?</p>
</blockquote>
<p>Adam Smith was firmly in favor of central banking (although not necessarily in the same way as understood today). In Chapter 3 Book 4 of The Wealth of Nations he writes:</p>
<blockquote>
<p>“In order to remedy the inconvenience to which this disadvantageous exchange must have subjected their merchants, such small states, when they began to attend to the interest of trade, have frequently enacted, that foreign bills of exchange of a certain value should be paid not in common [coin] currency, but by an order upon, or by a transfer in the books of a certain bank, established upon the credit, and under the protection of the state”.</p>
</blockquote>
<p>Regarding the Federal Reserve, it is impossible to say. Fed is not just central bank but also research institution and it does banking regulation and supervision. Adam Smith, contrary to widely held beliefs was not principally anti-regulation, in fact in WoN he supports all sorts of pragmatic regulations such as the act of navigation which he rigorously defended.</p>
<p>As argued by <a href="https://www.jstor.org/stable/40752070" rel="nofollow noreferrer">Reisman (1998)</a> [emphasis mine]:</p>
<blockquote>
<p>Adam Smith was not a single-minded advocate of a laissez-faire market in which
the minimal State had no more than a protective function. Rather, he was a
pragmatic social thinker who in each case selected the tool that was the best
suited to his meta-objective of rapid economic growth.  .... <strong>In
Wealth of Nations . . . laissez-faire becomes only a qualified presumption rather
than a hard-and-fast rule</strong></p>
</blockquote>
<p>Given his pragmatic stance on regulation, and that according to our best modern understanding banking regulation is essential, <a href="https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.33.1.61" rel="nofollow noreferrer">Tarullo, 2019</a>) he would likely not oppose it, although without inventing time machine we can only conjecture what he would say. In addition, central bank does not fulfill the same role in present day fiat monetary system as it did under gold standard. Again, save of having time machine we can just conjecture how he would respond to that. Smith in his writing does not directly address fiat money systems, these became commonplace only during 20th century (there are arguably few historical exceptions (see Peter Bernholz (2003). Monetary Regimes and Inflation: History, Economic and Political Relationships) but Smith does not discuss these, and he might not have been even aware of such systems.</p>
<blockquote>
<p>Does ... Capitalism support a Central Bank/Federal Reserve?</p>
</blockquote>
<ol>
<li>Capitalism is name for economic/social system. A system has no will it cannot support anything. That is like asking if solar system supports banning smoking in public places.</li>
<li>If you are interested in knowing if having central bank is consistent with capitalism that depends on your definition of capitalism. The word capitalism is typically not used in economics as it is very poorly defined and it can mean anything (there are scholars that consider <a href="https://en.wikipedia.org/wiki/State_capitalism" rel="nofollow noreferrer">USSR capitalist</a> country). For example, Mankiws principles of economics have word capitalism printed only three times (in a textbook of over 850 pages), and all of those three times, two are quotes from newspapers and one is from a quote from Churchill used in introduction to one chapter.</li>
</ol>
<p>However, if you wish to use the dictionary definition of capitalism (from <a href="https://www.merriam-webster.com/dictionary/capitalism" rel="nofollow noreferrer">Merriam-Webster</a>):</p>
<blockquote>
<p>: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market</p>
</blockquote>
<p>then central banks or Fed are fully consistent with capitalist system. The description above talks about system that is just characterized by private ownership, and where the distribution of goods is <em>mainly</em> determined by competition in free market. Thus, having central bank or even whole sectors like let's say healthcare, controlled by government is fully consistent with capitalism provided the economy <em>mainly</em> relies on free market.</p>
<p>However, under some different specific definitions of capitalism the above may not hold. Since capitalism is poorly defined and value laden term it is best to just avoid it as done throughout most of modern economic literature (or if you have to use it it is best to refer to some specific definition).</p>

CC BY-SA 4.0
2021-07-24T00:20:47.357Z
how is central bank a free market system? the supply of money and interest rate is determined by 10 people in a room,  similarly how USSR people determined the Prices and Rations of potatoes; in a real economy, interest rates are determine by millions of buyers and sellers,
mattsmith5
CC BY-SA 4.0
2021-07-24T00:21:25.310Z
additionally people are not allowed to transform or burn money, unlike other capital items, people are allowed to destroy factory equipment or tools, finally, can you address this question? Adam Smith Does mention gold and silver over 50 times in his book, I do not think he was a believer in Fiat, however, I never read his premise on Federal Reserve, thanks
mattsmith5
CC BY-SA 4.0
2021-07-24T00:22:22.960Z
anyways, is the underlying answer yes or no , or not sure from Adam Smith on central banks?  maybe we will never know, because there Was No central bank in his time? I am trying to read through documents,  maybe he does believe in a Central Bank with Money Backed by an actual substance (Gold, Silver, or whatever the market deems value) ?
mattsmith5
CC BY-SA 4.0
2021-07-24T00:27:29.770Z
I updated question little bit, for part 2, thanks for the input
mattsmith5
CC BY-SA 4.0
2021-07-24T00:35:31.683Z
notation *, "additionally people are not allowed to transform or burn money, unlike other capital items, people are allowed to destroy factory equipment or tools" , meaning people do not actually own the monetary capital
mattsmith5
CC BY-SA 4.0
2021-07-24T00:37:57.710Z
@mattsmith5 1. Per dictionary definition of capitalism, A) capitalism is not synonymous with laisse-faire B) system only needs to be **mostly** based on free market. A central bank is for sure not a free market element but  as long as **most** of the economy is organized along free-market lines it apparently does not matter using dictionary definition of capitalism. 2. As mentioned in my answer if you have different definition of capitalism it might not apply, capitalism is not precisely defined term in economics, again some scholars in full seriousness claim USSR was capitalist country
1muflon1
CC BY-SA 4.0
2021-07-24T03:23:23.887Z
cool, thanks for the help, does Adam Smith also believe in Fiat money, part 2 of question, I gave thumbs up to  answer by the way
mattsmith5
CC BY-SA 4.0
2021-07-24T06:38:35.497Z
@mattsmith5 Do not "update" your question with a part 2 after it has been answered, just post it as a new question. I rolled back the edit.
Giskard
CC BY-SA 4.0
2021-07-24T09:16:12.860Z
@mattsmith5 asking whether Adam Smith supports fiat money or not is like asking whether Edison would support iPhone or be Samsung guy. Fiat money is primarily modern post 20th century monetary arrangement. Although there are few historical occasions where fiat money system existed in the past (eg in late Iron Age China) Adam Smith was likely not aware of that since there was no fiat system during his lifetime, and history/archeology was in its infancy. Adam Smith was supporter of use of bank notes instead using gold coins, but he cited safety issues, and transportation issues as his reasons
1muflon1
CC BY-SA 4.0
2021-07-24T09:18:04.443Z
But he never talks about fiat monetary system. During his lifetime counties were on gold/silver standard (or even direct gold/silver monetary system) for centuries probably he did not even imagine fiat monetary system could exist
1muflon1
CC BY-SA 4.0
2021-07-24T16:50:31.937Z
true there is very few cases of fiat in history https://www.dinardirham.com/the-rise-and-fall-of-fiat-currencies/
mattsmith5
CC BY-SA 4.0
2021-07-24T17:02:38.663Z
@mattsmith5 there are even less than the page suggests. 1. Roman denarius was not a fiat currency, it is true that there was hyperinflation in Roman empire due to currency debasement, but fiat currency **by definition** cannot be backed by anything. Denarius was always backed by metal, just the  content of that metal was debased. 2. That Chinese example, is an actual example of fiat currency you will find in literature but Smith had no way of knowing about ancient Chinese monetary systems, in Smiths time China was on silver standard. 3. That French example, again that was an example of gold
1muflon1
CC BY-SA 4.0
2021-07-24T17:03:57.387Z
standard, with some extra shenanigans, the system in France at that time was based on notes convertible into coinage <- that is not fiat, by definition in fiat monetary system money are inconvertible, as long as there is any convertibility guaranteed by money issuer, we are not talking about fiat money
1muflon1
CC BY-SA 4.0
2021-08-02T13:19:10.243Z
@1muflon1 oh so US dollar bills aren't fiat because you can exchange them for nickels.
Criticize SE actions means ban
CC BY-SA 4.0
2021-08-02T13:36:53.920Z
@user253751 nickels are part of the fiat currency and they are not backed by anything… that’s like asking if $100 note is not fiat because it can be converted into $1 paper notes. … you can have commodity money backed backed by paper (some non fiat currencies were historically backed by hemp which is not that far away from paper) but for that the currency has to be actually redeemable in that commodity. Not only nickels are not redeemable but it is illegal to melt them or even transport them in large quantities so in no economically meaningful way are USD convertible claiming it is would be
1muflon1
CC BY-SA 4.0
2021-08-02T13:42:26.357Z
Just an equivocation fallacy of exploiting the fact redeemable or convertible has different meaning in common English or in different areas of study
1muflon1
CC BY-SA 4.0
2021-08-02T13:53:33.130Z
@1muflon1 so nickels are not coinage?
Criticize SE actions means ban
CC BY-SA 4.0
2021-08-02T13:58:01.863Z
@user253751 they are fiat coinage if you refer to the French system that was not fiat system because the coinage was directly based on gold coins which were redeemable in gold (you could convert them into gold without punishment). The French system was just forerunner of gold standard where you circulate banknotes (and also coins) which are convertible to metal, in fact even during early gold standard most of the gold was still in form of coins in the vault
1muflon1
CC BY-SA 4.0
2021-07-24T00:07:16.380Z
2021-07-29T09:12:54.817Z
2021-07-29T09:12:54.817Z
1muflon1
<p>Does Adam Smith and Capitalism support a Central Bank/Federal Reserve?</p>
<p>I am trying to read through the book &quot;Wealth of Nations&quot; to understand.  Having a central/regulatory figure dictate supply and interest rates, seems less laissez faire. However curious if Adam Smith has any documentation on this subject.</p>

CC BY-SA 4.0
2021-07-24T06:41:14.847Z
Capitalism does not support anything, it is not a specific institution or a person and makes no statements.
Giskard
CC BY-SA 4.0
2021-07-26T12:49:07.433Z
Who is Capitalism?
Criticize SE actions means ban
CC BY-SA 4.0
2021-07-27T22:53:44.080Z
I would keep the question intact or close it down, if it makes no sense,
mattsmith5
<macroeconomics><inflation><interest-rate><central-banking><federal-reserve>
Did Capitalism and Adam Smith Support a Central Bank?
mattsmith5
# Did Capitalism and Adam Smith Support a Central Bank?

(Asked by: username_0 on 2021-07-23)

Does Adam Smith and Capitalism support a Central Bank/Federal Reserve?

I am trying to read through the book "Wealth of Nations" to understand. Having a central/regulatory figure dictate supply and interest rates, seems less laissez faire. However curious if Adam Smith has any documentation on this subject.

**Tags:** macroeconomics, inflation, interest-rate, central-banking, federal-reserve

> **Comments:**
> **username_1**: Capitalism does not support anything, it is not a specific institution or a person and makes no statements.  
> **username_2**: Who is Capitalism?  
> **username_0**: I would keep the question intact or close it down, if it makes no sense,  

---

## 1 answers

### Answer by username_3 on 2021-07-24. Score: 6 | Accepted answer

> Does Adam Smith ... support a Central Bank/Federal Reserve?

Adam Smith was firmly in favor of central banking (although not necessarily in the same way as understood today). In Chapter 3 Book 4 of The Wealth of Nations he writes:

> “In order to remedy the inconvenience to which this disadvantageous exchange must have subjected their merchants, such small states, when they began to attend to the interest of trade, have frequently enacted, that foreign bills of exchange of a certain value should be paid not in common [coin] currency, but by an order upon, or by a transfer in the books of a certain bank, established upon the credit, and under the protection of the state”.

Regarding the Federal Reserve, it is impossible to say. Fed is not just central bank but also research institution and it does banking regulation and supervision. Adam Smith, contrary to widely held beliefs was not principally anti-regulation, in fact in WoN he supports all sorts of pragmatic regulations such as the act of navigation which he rigorously defended.

As argued by [Reisman (1998)](https://www.jstor.org/stable/40752070) [emphasis mine]:

> Adam Smith was not a single-minded advocate of a laissez-faire market in which
> the minimal State had no more than a protective function. Rather, he was a
> pragmatic social thinker who in each case selected the tool that was the best
> suited to his meta-objective of rapid economic growth. .... **In
> Wealth of Nations . . . laissez-faire becomes only a qualified presumption rather
> than a hard-and-fast rule**

Given his pragmatic stance on regulation, and that according to our best modern understanding banking regulation is essential, [Tarullo, 2019](https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.33.1.61)) he would likely not oppose it, although without inventing time machine we can only conjecture what he would say. In addition, central bank does not fulfill the same role in present day fiat monetary system as it did under gold standard. Again, save of having time machine we can just conjecture how he would respond to that. Smith in his writing does not directly address fiat money systems, these became commonplace only during 20th century (there are arguably few historical exceptions (see Peter Bernholz (2003). Monetary Regimes and Inflation: History, Economic and Political Relationships) but Smith does not discuss these, and he might not have been even aware of such systems.

> Does ... Capitalism support a Central Bank/Federal Reserve?

1. Capitalism is name for economic/social system. A system has no will it cannot support anything. That is like asking if solar system supports banning smoking in public places.
2. If you are interested in knowing if having central bank is consistent with capitalism that depends on your definition of capitalism. The word capitalism is typically not used in economics as it is very poorly defined and it can mean anything (there are scholars that consider [USSR capitalist](https://en.wikipedia.org/wiki/State_capitalism) country). For example, Mankiws principles of economics have word capitalism printed only three times (in a textbook of over 850 pages), and all of those three times, two are quotes from newspapers and one is from a quote from Churchill used in introduction to one chapter.

However, if you wish to use the dictionary definition of capitalism (from [Merriam-Webster](https://www.merriam-webster.com/dictionary/capitalism)):

> : an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market

then central banks or Fed are fully consistent with capitalist system. The description above talks about system that is just characterized by private ownership, and where the distribution of goods is *mainly* determined by competition in free market. Thus, having central bank or even whole sectors like let's say healthcare, controlled by government is fully consistent with capitalism provided the economy *mainly* relies on free market.

However, under some different specific definitions of capitalism the above may not hold. Since capitalism is poorly defined and value laden term it is best to just avoid it as done throughout most of modern economic literature (or if you have to use it it is best to refer to some specific definition).

> **Comments:**
> **username_0**: how is central bank a free market system? the supply of money and interest rate is determined by 10 people in a room,  similarly how USSR people determined the Prices and Rations of potatoes; in a real economy, interest rates are determine by millions of buyers and sellers,  
> **username_0**: additionally people are not allowed to transform or burn money, unlike other capital items, people are allowed to destroy factory equipment or tools, finally, can you address this question? Adam Smith Does mention gold and silver over 50 times in his book, I do not think he was a believer in Fiat, however, I never read his premise on Federal Reserve, thanks  
> **username_0**: anyways, is the underlying answer yes or no , or not sure from Adam Smith on central banks?  maybe we will never know, because there Was No central bank in his time? I am trying to read through documents,  maybe he does believe in a Central Bank with Money Backed by an actual substance (Gold, Silver, or whatever the market deems value) ?  
> **username_0**: I updated question little bit, for part 2, thanks for the input  
> **username_0**: notation *, "additionally people are not allowed to transform or burn money, unlike other capital items, people are allowed to destroy factory equipment or tools" , meaning people do not actually own the monetary capital  
> **username_3**: @username_0 1. Per dictionary definition of capitalism, A) capitalism is not synonymous with laisse-faire B) system only needs to be **mostly** based on free market. A central bank is for sure not a free market element but  as long as **most** of the economy is organized along free-market lines it apparently does not matter using dictionary definition of capitalism. 2. As mentioned in my answer if you have different definition of capitalism it might not apply, capitalism is not precisely defined term in economics, again some scholars in full seriousness claim USSR was capitalist country  
> **username_0**: cool, thanks for the help, does Adam Smith also believe in Fiat money, part 2 of question, I gave thumbs up to  answer by the way  
> **username_1**: @username_0 Do not "update" your question with a part 2 after it has been answered, just post it as a new question. I rolled back the edit.  
> **username_3**: @username_0 asking whether Adam Smith supports fiat money or not is like asking whether Edison would support iPhone or be Samsung guy. Fiat money is primarily modern post 20th century monetary arrangement. Although there are few historical occasions where fiat money system existed in the past (eg in late Iron Age China) Adam Smith was likely not aware of that since there was no fiat system during his lifetime, and history/archeology was in its infancy. Adam Smith was supporter of use of bank notes instead using gold coins, but he cited safety issues, and transportation issues as his reasons  
> **username_3**: But he never talks about fiat monetary system. During his lifetime counties were on gold/silver standard (or even direct gold/silver monetary system) for centuries probably he did not even imagine fiat monetary system could exist  
> **username_0**: true there is very few cases of fiat in history https://www.dinardirham.com/the-rise-and-fall-of-fiat-currencies/  
> **username_3**: @username_0 there are even less than the page suggests. 1. Roman denarius was not a fiat currency, it is true that there was hyperinflation in Roman empire due to currency debasement, but fiat currency **by definition** cannot be backed by anything. Denarius was always backed by metal, just the  content of that metal was debased. 2. That Chinese example, is an actual example of fiat currency you will find in literature but Smith had no way of knowing about ancient Chinese monetary systems, in Smiths time China was on silver standard. 3. That French example, again that was an example of gold  
> **username_3**: standard, with some extra shenanigans, the system in France at that time was based on notes convertible into coinage <- that is not fiat, by definition in fiat monetary system money are inconvertible, as long as there is any convertibility guaranteed by money issuer, we are not talking about fiat money  
> **username_2**: @username_3 oh so US dollar bills aren't fiat because you can exchange them for nickels.  
> **username_3**: @user253751 nickels are part of the fiat currency and they are not backed by anything… that’s like asking if $100 note is not fiat because it can be converted into $1 paper notes. … you can have commodity money backed backed by paper (some non fiat currencies were historically backed by hemp which is not that far away from paper) but for that the currency has to be actually redeemable in that commodity. Not only nickels are not redeemable but it is illegal to melt them or even transport them in large quantities so in no economically meaningful way are USD convertible claiming it is would be  
> **username_3**: Just an equivocation fallacy of exploiting the fact redeemable or convertible has different meaning in common English or in different areas of study  
> **username_2**: @username_3 so nickels are not coinage?  
> **username_3**: @user253751 they are fiat coinage if you refer to the French system that was not fiat system because the coinage was directly based on gold coins which were redeemable in gold (you could convert them into gold without punishment). The French system was just forerunner of gold standard where you circulate banknotes (and also coins) which are convertible to metal, in fact even during early gold standard most of the gold was still in form of coins in the vault  

---

