NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Upon Daedalian Wings of Paper Money: Adam Smith and the Crisis of 1772

Hugh Rockoff

NBER Working Paper No. 15594
Issued in December 2009
NBER Program(s):DAE

Adam Smith advocated laissez faire for most sectors of the economy, but he believed that banking and finance required several forms of regulation including usury laws and the prohibition of small-denomination bank notes. Smith's support for banking regulation appears to have been a response to the shocks that hit the Scottish banking system during the time that he was composing the Wealth of Nations. The most important was the Crisis of 1772, which has been described as the first modern banking crisis faced by the Bank of England. It resembles the Crisis of 2008 in a number of striking ways. This paper describes the Crisis of 1772, the other shocks that hit the Scottish banking system, and the evolution of Smith's views on the regulation of banking. It is based on Smith's writings, the secondary sources, and a quantification of the new issues of Scottish bank notes during Smith's era.

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Document Object Identifier (DOI): 10.3386/w15594

Published: “ Parallel Journeys: Adam Smith and Milton Friedman on the Regulation of Banking. ” Journal of Cultural Economy , Volume 4, Number 3 (August 2011): 255 - 284.

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