The Influence of Adam Smith
[Alexander] Hamilton’s ideas showed the influence of Adam Smith. Smith, a Scottish economist, published his Wealth of Nations in 1776. In it Smith described capital - money available for investment. Capital can produce wealth, Smith said. Smith pointed out that money that lies under a mattress does not make money. It is just being stored. On the other hand, money that is invested or lent produces wealth.
Banks help circulate money by paying people interest for putting their savings in the bank. Then the banks lend the savings out to other people. A bank might lend money to a manufacturer, for instance, to build a factory. The factory makes goods that are sold. Some of the money collected from those sales goes to wages for the factory’s employees. Employees buy goods with some of their wages and put some of it in the bank. The bank also gets money from the factory, because the factory must pay back the loan with an additional interest charge. The borrowed money therefore works to create more money. Smith therefore favored the development of banking and of paper money.
Adam Smith also favored private enterprise over mercantilism. He thought the government should set as few limits as possible over business, trade, and manufacturing. Today, Adam Smith’s ideas go by the name of capitalism. This economic system has two main features:
1. Most businesses are privately owned and operated.
2. Competition and the free market primarily determine what will be produced and at what price it will sell.
Capitalism describes an economic system in which anything that can be used to produce goods and services - capital - is privately owned. . . . the same is not true in command economic systems. These are systems where the government controls the four factors of production: land, labor, capital, and management. Individuals are not allowed the freedom to make their own economic decisions.
Capitalism is based on the following four principles:
1. Freedom to own - every person has the right to own things, such as land, or personal belongings, for themselves.
2. Freedom of choice - individuals are free to choose where they live and work, while business owners can produce the product of their choice.
3. Freedom to compete - businesses compete with one another for customers and for profits, the income left after expenses are paid.
4. Freedom to earn a living - people have the right to better themselves, whether through school, changing their job, or starting their own business.
Mason, Jacobs, and Ludlum. History of the United States. Volume 1. Boston: Houghton-Mifflin,
1992, pp. 297 - 8, 624 – 5.