Category: Steve

On page 244, Smith reiterates what he said before about not counting money when reckoning wealth.  This–both his reasoning and my problems with it–are covered in my earlier posts, so there’s no point my restating them.

On page 245 he talks about the substitution of paper for gold and silver, and from there discusses the proportion of money (gold, silver, and paper) that is in circulation at any given time to the total value of the produce of a nation.  He speaks in particular of the money destined for maintainance of industry.  What is interesting here is that he seems to be implying that money is often the limiting factor in production, on a national level, whereas earlier I thought he was saying that labor was the limiting factor.  I think I’m just confused here.

NB: Page 247: The phrase “discounting bills of exchange,” which is used a lot, means “advancing money upon them before they are due.”  Now, if I just knew what “bills of exchange” were, I think I’d have it.

On page 249 he gives an example, referring to “cash accounts” as practiced at the time in Edinburgh–basically automatic short-term loans, presumably for relatively small amounts.  He talks of how merchants without access to this cash account must keep funds on hand to pay bills as they become due.  Suppose the amount this merchant must keep in hand for lack of this account is five hundred pounds.  Then, “His annual profits must be less by all that he could have made by the sale of five hundred pounds worth more goods; and the number of people employed in preparing his goods for the market, must be less by all those that five hundred pounds more stock could have employed.”  Well yes, except that he is ignoring the interest the merchant must pay on that cash account as he uses it.  He is assuming that the interest he pays must be less than what 500 pounds invested in his business would bring in; I’m not sure that is always the case.

Further down.  “The whole paper money of every kind which can easily circulate in any country never can exceed the value of the gold and silver, of which it supplies the place, or which (the commerce being supposed the same) would circulate there, if there was no paper money.”  Here he is warning against putting into circulation more paper within a country than the amount of gold and silver that would circulate there.  This says nothing about circulation (of gold and silver) outside of the country, which, added to the paper circulating within, will be a significantly greater total than the amount of gold and silver.  His objection, then, is to excess currency within a country; not to producing currency in excess of that which is backed by precious metal.

On page 250 he mentions two expenses unique to bankers.  “First, in the expence of keeping at all times in its coffers, for answering the occasional demands of the holders of its notes, a large sum of money, of which it loses the interest; And, secondly, in the expence of replenishing those coffers as fast as they are emptied by answering such occasional demands.”  I’m having trouble seeing how those two things aren’t just two ways of saying the same thing.  Moreover, it seems that, in some sense, every business must have money on hand to meet occasional expenses, barring access to a “cash account” as discussed above (in which case, there is the replacement cost of the interest on the cash account).

One of the reasons the study of capitalism is so difficult (and, in some ways, so much fun) is that so many of the processes are hidden.  In, for example, a feudal economy, things are pretty straightforward: peasant grows crops, gives some to landlord, eats the rest and makes most of his goods at home and uses them himself.  Exchanges at the market are subsidiary to the basic flow of the economy, and not all that hard to understand (need iron to make a plow?   Give me ten bushels of corn.  Thanks.  Cheers).

A market economy by it’s nature hides a lot of its activity.  For example, the exchange value of a commodity is not realized until it reaches the market; therefore, it looks as if the value is created at the market, which leads to no end of confusion.  Lord Kyenes, for example, never was able to shake the notion that the market created value, and the economists who followed him are still stuck there.  The explosive power of TNT is created when the compound is formed, but not realized until it is detonated; to say that value is created at the market would be like saying that the explosive power of TNT is created by the explosion.

Smith’s ability to lay bare many of the processes of a market economy (the creation of value by labor, the effect of infrastructure on the realization of profit, money as a circulating commodity that eases production) may not have resulted in a full understanding of these processes, but showed that they could be understood, and pointed the way to understanding them.

The role of money–a commodity used for universal exchange–in a market economy is inherently difficult to understand.  I don’t blame myself terribly for having so much trouble with it in spite of lots of smart people trying to explain it to me; I think it is just the nature of the beast.  I started this project in order to understand rent, because I need to for a book I’m working on.  I may never understand rent, and I may never understand money; but the struggle to do so is amazingly gripping, and I want to thank all of you who have been helping me with it for your patience.

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.