We join our friends at Liberty Matters in celebrating the 250th anniversary of the publication of Inquiry into the Nature and Causes of the Wealth of Nations through a six-part weekly essay series.
In the second essay, Maria Pier Paganelli considers Volume 2 of The Wealth of Nations and discusses how nations maintain the capital needed to support their division of labor. From the article:
Perpere (2024) explains that Smith adopts the medieval distinction that money can be both pecunia (medium of exchange) and capital. Gold and silver can be used as a medium of exchange (pecunia), but also 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 an empty highway. If a road is on the ground, you can’t use that ground to produce anything. But once that road is suspended in the sky, the ground beneath it is freed up and can be used for agricultural purposes. By using another medium of exchange, such as paper, gold and silver can be freed from that function and used for investment purposes.
