The Wealth of Nations · Chapter
II: Of Money Considered as a Particular Branch of the General Stock of the Society, or of the Expense of Maintaining the National Capital explained
This chapter examines money as a component of national capital, arguing that while money facilitates circulation, it is not part of society's net revenue.
What happens
This chapter examines money as a component of national capital, arguing that while money facilitates circulation, it is not part of society's net revenue. Smith distinguishes between gross and net revenue, explaining that the expense of maintaining money (like fixed capital) is a deduction from net revenue. He introduces the concept of money as a 'great wheel of circulation' and discusses how paper money can replace gold and silver, freeing up precious metals to be used productively, thereby increasing industry and annual produce.
Themes in this chapter
Wealth and Money
Smith distinguishes between money as a medium of circulation and real wealth, arguing that money is not part of net revenue but a deduction from it.
Role of Government
Reference to an act of parliament regulating banking companies indicates government intervention in financial systems.
Division of Labor
Implied in the discussion of how fixed capital increases productive powers of labor, enabling more work with the same number of laborers.
Characters to notice
- Adam Smith
Author and narrator; presents the analysis of money as part of national capital.
Key passages
“The whole expense of maintaining the fixed capital, must evidently be excluded from the neat revenue of the society.”
The cost of maintaining fixed capital is not part of society's net revenue.
Smith clarifies that fixed capital expenses are deductions from net revenue.
“The great wheel of circulation is altogether different from the goods which are circulated by means of it.”
Money, as the medium of exchange, is distinct from the goods it circulates.
Metaphor emphasizing money's role as a tool, not a component of wealth.
“When paper is substituted in the room of gold and silver money, the quantity of the materials, tools, and maintenance, which the whole circulating capital can supply, may be increased by the whole value of gold and silver which used to be employed in purchasing them.”
Replacing gold and silver with paper money frees up precious metals to be used productively, increasing the capital available for materials, tools, and wages.
Smith highlights the benefit of paper money in expanding productive capacity.