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Does Adam Smith and Capitalism support a Central Bank/Federal Reserve?

I am trying to read through the book "Wealth of Nations" to understand. Having a central/regulatory figure dictate supply and interest rates, seems less laissez faire. However curious if Adam Smith has any documentation on this subject.

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    $\begingroup$ Capitalism does not support anything, it is not a specific institution or a person and makes no statements. $\endgroup$
    – Giskard
    Jul 24 at 6:41
  • $\begingroup$ Who is Capitalism? $\endgroup$
    – user253751
    Jul 26 at 12:49
  • $\begingroup$ I would keep the question intact or close it down, if it makes no sense, $\endgroup$
    – mattsmith5
    Jul 27 at 22:53
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Does Adam Smith ... support a Central Bank/Federal Reserve?

Adam Smith was firmly in favor of central banking (although not necessarily in the same way as understood today). In Chapter 3 Book 4 of The Wealth of Nations he writes:

“In order to remedy the inconvenience to which this disadvantageous exchange must have subjected their merchants, such small states, when they began to attend to the interest of trade, have frequently enacted, that foreign bills of exchange of a certain value should be paid not in common [coin] currency, but by an order upon, or by a transfer in the books of a certain bank, established upon the credit, and under the protection of the state”.

Regarding the Federal Reserve, it is impossible to say. Fed is not just central bank but also research institution and it does banking regulation and supervision. Adam Smith, contrary to widely held beliefs was not principally anti-regulation, in fact in WoN he supports all sorts of pragmatic regulations such as the act of navigation which he rigorously defended.

As argued by Reisman (1998) [emphasis mine]:

Adam Smith was not a single-minded advocate of a laissez-faire market in which the minimal State had no more than a protective function. Rather, he was a pragmatic social thinker who in each case selected the tool that was the best suited to his meta-objective of rapid economic growth. .... In Wealth of Nations . . . laissez-faire becomes only a qualified presumption rather than a hard-and-fast rule

Given his pragmatic stance on regulation, and that according to our best modern understanding banking regulation is essential, Tarullo, 2019) he would likely not oppose it, although without inventing time machine we can only conjecture what he would say. In addition, central bank does not fulfill the same role in present day fiat monetary system as it did under gold standard. Again, save of having time machine we can just conjecture how he would respond to that. Smith in his writing does not directly address fiat money systems, these became commonplace only during 20th century (there are arguably few historical exceptions (see Peter Bernholz (2003). Monetary Regimes and Inflation: History, Economic and Political Relationships) but Smith does not discuss these, and he might not have been even aware of such systems.

Does ... Capitalism support a Central Bank/Federal Reserve?

  1. Capitalism is name for economic/social system. A system has no will it cannot support anything. That is like asking if solar system supports banning smoking in public places.
  2. If you are interested in knowing if having central bank is consistent with capitalism that depends on your definition of capitalism. The word capitalism is typically not used in economics as it is very poorly defined and it can mean anything (there are scholars that consider USSR capitalist country). For example, Mankiws principles of economics have word capitalism printed only three times (in a textbook of over 850 pages), and all of those three times, two are quotes from newspapers and one is from a quote from Churchill used in introduction to one chapter.

However, if you wish to use the dictionary definition of capitalism (from Merriam-Webster):

: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market

then central banks or Fed are fully consistent with capitalist system. The description above talks about system that is just characterized by private ownership, and where the distribution of goods is mainly determined by competition in free market. Thus, having central bank or even whole sectors like let's say healthcare, controlled by government is fully consistent with capitalism provided the economy mainly relies on free market.

However, under some different specific definitions of capitalism the above may not hold. Since capitalism is poorly defined and value laden term it is best to just avoid it as done throughout most of modern economic literature (or if you have to use it it is best to refer to some specific definition).

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  • $\begingroup$ how is central bank a free market system? the supply of money and interest rate is determined by 10 people in a room, similarly how USSR people determined the Prices and Rations of potatoes; in a real economy, interest rates are determine by millions of buyers and sellers, $\endgroup$
    – mattsmith5
    Jul 24 at 0:20
  • $\begingroup$ additionally people are not allowed to transform or burn money, unlike other capital items, people are allowed to destroy factory equipment or tools, finally, can you address this question? Adam Smith Does mention gold and silver over 50 times in his book, I do not think he was a believer in Fiat, however, I never read his premise on Federal Reserve, thanks $\endgroup$
    – mattsmith5
    Jul 24 at 0:21
  • $\begingroup$ anyways, is the underlying answer yes or no , or not sure from Adam Smith on central banks? maybe we will never know, because there Was No central bank in his time? I am trying to read through documents, maybe he does believe in a Central Bank with Money Backed by an actual substance (Gold, Silver, or whatever the market deems value) ? $\endgroup$
    – mattsmith5
    Jul 24 at 0:22
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    $\begingroup$ @mattsmith5 1. Per dictionary definition of capitalism, A) capitalism is not synonymous with laisse-faire B) system only needs to be mostly based on free market. A central bank is for sure not a free market element but as long as most of the economy is organized along free-market lines it apparently does not matter using dictionary definition of capitalism. 2. As mentioned in my answer if you have different definition of capitalism it might not apply, capitalism is not precisely defined term in economics, again some scholars in full seriousness claim USSR was capitalist country $\endgroup$
    – 1muflon1
    Jul 24 at 0:37
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    $\begingroup$ @mattsmith5 asking whether Adam Smith supports fiat money or not is like asking whether Edison would support iPhone or be Samsung guy. Fiat money is primarily modern post 20th century monetary arrangement. Although there are few historical occasions where fiat money system existed in the past (eg in late Iron Age China) Adam Smith was likely not aware of that since there was no fiat system during his lifetime, and history/archeology was in its infancy. Adam Smith was supporter of use of bank notes instead using gold coins, but he cited safety issues, and transportation issues as his reasons $\endgroup$
    – 1muflon1
    Jul 24 at 9:16

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