#WealthofTweets: Book 2.4

supply and demand capital interest rates usury #wealthoftweets #smithtweets teaching adam smith wealth of nations project read the wealth of nations history of money purchasing power teach economics stock lent at interest

Of Stock Lent as Interest

31 Jan • 23 tweets • adamsmithworks/status/1355900578480742401

Good morning #AdamSmith fans! Today we're talkin' stock lent at interest. It's always considered a form of capital. (I.iv.1) #WealthOfTweets  #SmithTweets

Stock lent at interest can be used for consumption or the borrower may use it as capital. If it's used as capital, the borrower can use the profits on their stock to repay the loan and pay back interest—this, says Smith, is more common. (II.iv.1–2) #WealthOfTweets #SmithTweets

Unless the borrower is a country gentleman. No one expects much of those guys.  #Ouch (II.iv.3) #WealthOfTweets #SmithTweets

Remember: money is kind of beside the point. What borrowers aren't looking for is money qua money. They're looking for "the money's worth". The purchasing power they can get by borrowing. (II.iv.4) #WealthOfTweets #SmithTweets

And so what we're talking about when we're talking about the quantity of stock isn't the quantity of money, but the purchasing power it can command. When they're lent out and paid back in money, they're monied interest. (II.iv.5) #WealthOfTweets #SmithTweets

Think of money as a "deed of assignment". It just conveys who's got the purchasing power. (II.iv.5) # WealthOfTweets #SmithTweets

The cool thing about money lent at interest is that you can use it many times without causing trouble, so long as it's borrowed for use as capital. You're just transferring (and multiplying!) purchasing power. (II.iv.5) #WealthOfTweets #SmithTweets

The more stock there is to be lent at interest, the less interest you can charge for the use of the stock. Just like other things: supply goes up, price goes down. (II.iv.8) #WealthOfTweets #SmithTweets

And, as Smith noted way back in I.ix., the rate of interest is related to the profits of stock. They fall, too, as the quantity of available stock increases. (II.iv.8) #WealthOfTweets #SmithTweets

In case you weren't sure, Smith is STILL annoyed that people are wrong about silver. He calls out Locke, Law, and Montesquieu for claiming the discovery of silver and gold in America is responsible for falling interest rates. (II.iv.9) #WealthOfTweets #SmithTweets

(Smith says his BFF Hume cleared this up. #HumeSays interest rates are a result of the demand for borrowing, the capital available to borrow, and the economic health of a nation. Not the supply of silver and gold.) (II.iv.9) #WealthOfTweets #SmithTweets

We spit out our tea a little at the comparison of using more money to command the same amount of capital having the same effect as a verbose lawyer using more words to write a deed of assignment. #Guffaw (II.iv.11) #WealthOfTweets #SmithTweets

#TLDR Smith says stop thinking that increasing the money supply is going to create more capital. All it does on its own is change nominal prices. (II.iv.11) #WealthOfTweets #SmithTweets

An increase in the quantity of commodities in the economy is a completely different story. (II.iv.12) #WealthOfTweets #SmithTweets

If the number of commodities increases, the purchasing power of money (its real value) goes up, and so the quantity of capital increases. (II.iv.12) #WealthOfTweets #SmithTweets

Because the quantity of capital increases, profits will fall. Because the purchasing power of money will be higher, nominal wages might fall (even though laborers will be able to purchase more with what they earn). (II.iv.12) #WealthOfTweets #SmithTweets

Now we get to usury. Governments try to stop it, but they really can't. Banning lending at interest tends mostly to punish borrowers, who now have to pay to borrow and to cover the risk of the lender getting caught. (II.iv.13) #WealthOfTweets #SmithTweets

Smith has thoughts about where the legislated legal ceiling for interest rates ought to be: above the lowest market rate so honest borrowers who need to pay a higher interest rate to secure credit aren't forced into the arms of usurers... (II.iv.14) #WealthOfTweets #SmithTweets

...but not so far above the lowest market rate that lenders are tempted to loan money only to "prodigals and projectors" willing to pay very high rates to access capital they couldn't otherwise get, leaving nothing for honest borrowers. (II.iv.15) #WealthOfTweets #SmithTweets

We pause now to point out a time the French got it wrong. #AsSmithDoes (II.iv.16) #WealthOfTweets #SmithTweets

And one more thing: the price of land is related to the interest rate, because anyone trying to decide how to use extra stock can choose to lend it out or buy land. Land offers low, secure returns. (II.iv.17) #WealthOfTweets #SmithTweets

If interest rates are high enough, it'll tempt people into giving up the security of collecting rent, lowering the demand (and therefore the price) of land. (II.iv.17) #WealthOfTweets #SmithTweets

(Look. We know. This isn't really the quotable Smith you're all here for. Even we, the SmithTweeters, agree. Wait'll we get to the herring ) #WealthOfTweets #SmithTweets

See Also: The AdamSmithWorks Reading Guide for this chapter.