Superphysics
Bank Notes versus Promissory Notes
by Adam Smith
2 minutes • 316 words
Table of contents
The Increase in Bank Notes Representing Precious Metals Does Not Increase Inflation
95 A paper money made up of bank notes is equal in value to gold and silver money when it is:
- issued by people of undoubted credit,
- payable on demand without any condition,
- always readily paid as soon as presented, and
- equal in value to gold and silver, since gold and silver money can be had for it at any time.
96 The increase of paper money* is said to:
- reduce the value of currency, and
- increase the money price of commodities.
Superphysics Note
The increase of paper money here is the increased subdivision of metal value into smaller values such as 5 or 10 shillings, as opposed to large pound values. In modern speak, it means the creation of more pennies instead of $100 bills. It follows that if all $100 bills were converted to their penny-equivalents for easier small transactions, then inflation will not be affected.
In reality, paper money does not necessarily increase the amount of currency, because the gold and silver removed from the currency is always equal to the paper added to it.
From the start of the 17th century to 1776, food prices were cheapest in Scotland in 1759.
- In 1759, there was more paper money than now, from the circulation of 10 and 5 shilling bank notes.
- The great multiplication of banks in Scotland began in 1749.
But the proportion between food prices in Scotland and England is the same now in 1776 as before 1749.
- In addition, wheat is fully as cheap in England as in France even if there is more paper money in England and scarce any in France.
In 1751 and 1752 after the great multiplication of paper money in Scotland, the price of food probably rose due to the badness of the seasons.
- It was not from the multiplication of paper money.
