It was as obvious 300 years ago as it is today:

“Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from those rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous and frequently fatal to the banking company which attempts it.”

-Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, PART III. Of the Expense of public Works and public Institutions, ARTICLE I.—Of the public Works and Institutions for facilitating the Commerce of the Society.

Hat tip Lee

Category: Bailouts, Really, really bad calls

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6 Responses to “QOTD: Adam Smith on Banking”

  1. Rick Caird says:

    Rules are useless unless there is a penalty for violating those rules: either bankruptcy or jail. However, it is fair to say if there is no punishment, there are no rules.

  2. Frwip says:

    To (presumptuously) rewrite Adam Smith :

    Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to a single technique : borrow on short terms to lend on long terms.

    Any activity that relies on this technique, directly or indirectly, in obvious or obfuscated ways, is a bank and must be regulated as such.

  3. Tim says:

    Brilliant QOTD!!!

  4. ElSid says:

    There’s a lot of things in that book that the so-called capitalists forget or ignore. As if Ronald Reagan or any of those people ever read it.

    All they can tell you about it is the “invisible hand”, which recently showed us that it’s really the “blind hand”.

  5. 873450 says:

    “To depart upon any occasion from those rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous and frequently fatal to the banking company which attempts it.”

    Smith could not possibly imagine elected government misappropriating the people’s treasure and future to excuse, rescue and reward degenerate speculators wilful departure from those rules. Nor could he possibly imagine elected government transferring bailed out speculators’ extraordinary losses onto the backs of the people whose treasure and future were misappropriated to rescue them.

  6. rmasand says:

    “To depart upon any occasion from those rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous and frequently fatal to the banking company which attempts it.”

    The above quote, very obviously, has been obsolete for sometime. Its updated revision is below.

    “To depart upon any occasion from those rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous and frequently fatal to the economy of the nation the bank is a resident of. The banking company itself is shielded by the consequences of its follies by the legislators it bought in more prosperous time”