Adam Smith on the Nature of Money and Wealth
The Scottish moral philosopher Adam Smith (1723–1790) was the author of two books, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776).
In Wealth of Nations, Smith writes:
“It would be too ridiculous to go about seriously to prove, that wealth does not consist in money or in gold and silver, but in what money purchases.” (WN IV.i.17)
In this quotation, Smith reiterates that our wealth is not the same thing as how much money we have. In Book II Chapter 2 of Wealth of Nations, Smith details the history of money and argues that it should be considered just one sort of capital rather than a measure of overall wealth.
Here, in Book IV chapter 1, Smith makes the point again because the idea that the amount of money, measured in gold and silver, that a country holds is the real measure of its wealth (that is, the idea that gold and silver holdings are the measure of the wealth of nations) underpins the mercantile system, which Smith is attacking throughout Wealth of Nations and attacks most directly in this section.
Increasing the amount of money in a country is the idea behind pursuing a positive balance of trade, or a trade surplus, and avoiding a negative balance of trade, or trade deficit, through trade policy. Smith argues that these are altogether the wrong concerns. Instead, wealth consists in what is produced by and what can be purchased by the people of a country. Trade restrictions, argues Smith, undermine true wealth.