Adam Smith and The Bankers: Retrospect and Prospect

Dr Alfred Duncan and Professor Charles Nolan discuss Adam Smith’s vision for banking and try to deduce how Smith might have approached some current issues in banking regulation. 

To mark the tercentenary of Adam Smith’s birth, Dr Alfred Duncan and University of Glasgow’s Professor Charles Nolan try to imagine how the ‘father of modern economics’ might have applied his thoughts and ideas from 300 years ago, to answer some of the challenges of today.

‘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.’

Read this open access paper published by Cambridge University Press on behalf of the National Institute Economic Review here,