Enlightened banking

Adam Smith had firm views about the banking industry. He believed that services in general were unproductive, and would clearly have taken a dim view of claims about the contribution of banking to GDP (see my forthcoming Feb 2014 book, [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief and Affectionate History[/amazon_link]).

[amazon_image id=”0691156794″ link=”true” target=”_blank” size=”medium” ]GDP: A Brief but Affectionate History[/amazon_image]

I was just looking at the new¬†[amazon_link id=”0199605068″ target=”_blank” ]Oxford Handbook of Adam Smith[/amazon_link] (editors Christopher Berry, Maria Pia Paganelli and Craig Smith) as I prepare for a panel session on banking at the Festival of Economics in Bristol later this month.

[amazon_image id=”0199605068″ link=”true” target=”_blank” size=”medium” ]The Oxford Handbook of Adam Smith (Oxford Handbooks in Economics)[/amazon_image]

The essays in the section on money, banking and prices underline Smith’s caution. It describes a metaphor in The Wealth of Nations (I didn’t remember it) comparing banking to a wagon road through the air – immensely useful in helping business expand beyond its earth-bound confines, but in danger of melting if it gets too close to the sun. He was explicitly opposed to banks investing in real estate, and his descriptions of what they should be lending for are exactly the kind of provision of working capital to business that modern banks hardly do at all – it amounts to just 3% of UK banks’ total lending. A figure worth bearing in mind when the banks claim that higher equity capital requirements would restrict their ability to lend to business, as a small decline in next to nothing is less than next to nothing….

The Handbook, by the way, is a great resource for Smith-ites. I’ve dipped into it, and found some great chapters, including those on his Enlightenment context and (by Amartya Sen) on his contemporary relevance. One part covers economics; others are on the entire range of his work – for example on history, civil society, moral society. I also liked the introduction from Nicholas Phillipson, who write an excellent biography of Smith, [amazon_link id=”0713993960″ target=”_blank” ]Adam Smith: An Enlightened Life[/amazon_link] (which I reviewed for the New Statesman).

[amazon_image id=”0713993960″ link=”true” target=”_blank” size=”medium” ]Adam Smith: An Enlightened Life[/amazon_image]