On page 239 we find: “As the same guinea which pays the weekly pension of one man to-day, may pay that of another to-morrow, and that of a third the day thereafter, the amount of the metal pieces which annually circulate in any country, must alwys be of much less value than the whole money pensions annually paid with them.” The point appears at first glance to be reasonable: we cannot count the metal coins because we are already counting the, if I may, virtual coins as part of each person’s income. The trouble is, we also have the actual metal coins which are, at any given time, somewhere. These coins have value (for the metal they contain, if no other way). It seems to me that there is something unresolved here. In spite of several excellent remarks in previous posts, I do not believe that a mere agreement among a set of people that a certain commodity will be used to trade for any other commodity, to mediate among them, removes all value from that commodity. Among societies (mentioned, I believe, by Smith in Book 1) where pigs are a medium of exchange, pigs could still be, and were, eaten.
Well, let’s move on. Page 240: “The whole capital of the undertaker of every work is necessarily divided between his fixed and his circulating capital. While his whole capital remains the same, the smaller the one part, the greater must necessarily be the other. It is the circulating capital which furnishes the materials and wages of labor, and puts industry into motion. Every saving, therefore, in the expence of maintaining the fixed capital, which does not diminish the productive powers of labor, must increase the fund which puts industry into motion, and consequently the annual produce of land and labor, the real revenue of every society.”
Okay, there are a couple of problems here. First, yes, it is certainly the case that, by cutting the costs of machinery, more capital is available for production. But any reduction in wages and material that doesn’t reduce production (ie, cutting wages, or finding cheaper material), also provides more capital for putting into production: If you are paying 10 workers $100 a day, and cut their wages to $90 a day, you can hire another worker, and even have $10 to invest in material. The more significant problem, however, is that, in point of fact, that is not how capitalism works: the tendency is for more and more capital to be invested in machinery. As technology improves, the capitalist is forced, by competition and the need to maintain market share, to upgrade his machinery, in many cases, before the old machinery has been paid for. Of course, this was probably not as true in the 1760s, and I can’t think that Smith is culpable for not knowing it.
On page 241, he talks about the importance of confidence in a banker issuing notes. Today, this is the pervue of a government, but his point is no less valid. Notes have value insofar as it is believed that there is a commodity with actual value backing them. Further down, he speaks of a banker with one hundred thousand pounds worth of notes in circulation, but requiring only twenty thousand pounds of actual metal to have available for demands of payment. He says, “Eighty thousand pounds of gold and silver, therefore, can, in this manner, be spared from the circulation of the country; and if different operations of the same kind should, at the same time, be carried on by many different banks and bankers,, the whole circulation may thus be conducted with a fifth part only of the gold and silver which would otherwise have been requisite.” Okay, am I missing something, or is this not a recipe for inflation?
**Edited later, because I was muddled the first time**
He goes on to speak of notes circulating within a country leaving the actual metal for circulation out of the country. While I can see where this would bring additional profit to the banker, it also points out yet another reason for imperialism–that is, for capitalism to necessarily expand. Markets, not only for products, but for metals must always be available. He speaks of a “channel” within a nation being full, and therefore money being sent outside of the nation. In other words, a given nation can only, because of the amount of available labor and material, make use of a given amount of currency. However, he says, bank notes may be circulated within the country sufficient to fill the channel, leaving the actual coinage available to send (ie, invest) in other channels–that is, in other countries. This is only one, but a very important reason why capitalism becomes international. The trouble is, it seems to me, that nation to which we send the coins has it’s own “channel.” This was probably not a problem in his time (there were colonies galore, after all), but looking forward a hundred years or so, we start to see where conflicts over who gets to use what channel might eventually need to be backed up by armed might.