Economist Charles Rist noted the unfortunate extent to which Adam Smith adopted John Law's fraudulent concepts. This partly explains why our Anglo-Saxon economic system so closely resembles the one created by John Law.
Charles Rist, "History of Monetary and Credit Theory from John Law to the Present Day" Chapter I, Confusion between Credit and Money, p. 44
The failure of John Law's unfortunate attempt to establish a bank of issue in France dominated the ideas of the eighteenth century about credit. His contention that to create money is to create wealth was vigorously rejected by all of his contemporaries. The efforts made in the course of the century by so many writers, including Smith, Hume, and Turgot, to reduce the role of money in the national economy to nothing or to insignificance, were directed against Law rather than against mercantilist ideas about money, which had already worn thin. Had not Law announced that an increase in the quantity of money was the only way of stimulating the national economy?
In the "Wealth of Nations" Adam Smith calls John Law's System "the most extravagant project both of banking and stock jobbing that, perhaps the world ever saw." (Adam Smith, Wealth of Nations, Bk, II, Chapter II. Cannan edition, Vol. I, p. 301) The nineteenth and twentieth centuries have at times been less critical of Law. Certain passages written in restrained and reasonable manner are quoted as expressing the real essence of Law's thought. Actually, they are tactical concessions to the necessities of the moment.
It has also been said that he was an unrecognized forerunner, because certain bankers today have taken up some of his most debatable formulas. It would be more correct to regard these belated disciples as backsliders. The eighteenth century was not mistaken in its attitude. It saw through the fundamental confusion between credit and money that Law deliberately and persistently maintained throughout all of the vicissitudes of his tormented career. I would go further: credit had no interest for him except as a means of making the public familiar with paper money.
He was, it is true, influenced by banking experiences which are today completely forgotten, but to which he constantly refers, and which were bound to maintain that confusion. This has not been sufficiently stressed; but unless these experiences are borne in mind, there is a danger of not understanding his real thoughts.
The identity of thought between John Law and Adam Smith has not been sufficiently noted. It is however, fundamental, and explains many of the errors in English currency theory in the following century.
"Money is not the value for which goods are exchanged, but the value by which they are exchanged. The use of money is to buy goods and precious metals while money is of no other use." --
"I consider an écu itself merely as a note drawn up in these terms: Any seller whatsoever will give to the bearer the goods or merchandise which he needs up to the value of three livres, as for other goods or merchandise, and bearing as signature the portrait of the prince or another public mark."
John Law "Lettre sur le Nouveau Système des Finances, 1720"
Like Law, Smith does not regard money as a durable good whose chief function is to store up for the future the value of goods and services sold; he completely forgets its function of saving, as Walras was to call it (which becomes more important as commercial activity increases); he ignores its function of providing a bridge between the present and the future, which is the part it plays at all times, and the most important part; he can see in it only a voucher to purchase in the present, an instrument for distributing goods, not a means of conservation.
Hence that long and tedious chapter (Smith, Vol. I, p. 275) in which he tries painfully to explain that money is part of the capital and not the income of society, and which ends in the characteristic passage:
"Money, therefore, the great wheel of circulation, the great instrument of commerce, like all other instruments of trade, though it makes a part and a very valuable part of the capital, makes no part of the revenue of the society to which it belongs; and though the metal pieces of which it is composed, in the course of their annual circulation, distributes to every man the revenue which properly belongs to him, they make themselves no part of that revenue." (Smith, Vol. I, p.275)
If, indeed, metallic money is not income, if it is only a costly "instrument," then obviously any economy in its use is of advantage. But it is precisely here where the mistake lies.
Nevertheless, this idea was seized upon by with extraordinary alacrity and found high favour. Taken up by Ricardo and adopted by Count Mollien and J.-B. Say, it dominated the thought of English writers in the nineteenth century. The belief that the use of metallic money is a retrograde and costly system, to be discouraged by all possible means, is firmly fixed in British thought on currency and banking.
This is in harmony with the remarkable qualities displayed by the English as bankers. The art if utilising to the maximum the coin deposited with them, and of developing all methods of credit, has nowhere been carried so far as at London. But, in admitting their ability in this, the application of Smith's idea, held by so many after him, led the English to under-estimate the importance of a large stock of money to support a vast edifice of credit. The same conception was responsible for serious mistakes in English monetary policy, mistakes which were pointed out by such far-sighted writers Thornton and Tooke, and later Hartley Withers.
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