At Chapter III of Book IV of The Wealth of Nations, Adam Smith makes the following assertion:

Even in ordinary and quiet times, it is in the interest of the holders of receipts to depress the agio, in order either to buy bank money (and consequently the bullion which their receipts would then enable them to take out of the bank) so much cheaper, or to sell their receipts to those who have bank money, and who want to take out bullion, so much dearer; the price of a receipt being generally equal to the differences between the market price of bank money and that of the coin or bullion for which the receipt had been granted. It is the interest of the owners of bank money, on the contrary, to raise the agio, in order to sell their bank money so much dearer, or to buy so much cheaper.

My understanding:

  • agio = interest charged by the bank for taking out a loan against an over-collateralised deposit of gold or silver bullion.
  • receipts = official documents that were given to depositors, which entitled them to withdraw the metals before the expiration of the contract; these receipts were later traded on the secondary markets.
  • bank money = paper money that made trade more efficient, which was given as credit after making the metal deposit.

Now, I want to understand why receipt holders are incentivised to lower the agio, and bank money holders to raise it.

Is this like interest rates and bonds today? When interest rates fall, bond prices increase, and vice-versa, when interest rates increase, bonds prices fall. Is it the same logic here?


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