Smith, who died in 1790, having lived out his days as a quiet Customs official with his mother, will become the first Scotsman to appear on a Bank of England note when he replaces Edward Elgar next spring.

He was the author of The Wealth of Nations, which made the case for free markets and free trade against the mercantilist philosophy of the 18th century, and which argued that individual self-interest would promote the common good “led by an invisible hand”. His principles became the cornerstone of Britain’s 19th-century industrial might.

He is revered by Baroness Thatcher, and has also been championed by Gordon Brown, who argues that Smith stood for supporting the most vulnerable in society. The Chancellor is proud of having been born in the same town, Kirkcaldy, as the economist.

The honouring of Smith was announced last night by Mervyn King, the Governor of the Bank of England.

Giving the annual Adam Smith Lecture in Kirkcaldy, Mr King said: “It is a sign of the resurgence of interest in Adam Smith that at almost every point on the political spectrum one can find people who claim Smith as their own.”

He praised Smith’s writing as remarkable for its “comprehensive and eclectic examination of ideas and facts”, and said that he had influenced the way the world thinks about the route to economic prosperity.

There are more than a billion £20 notes in circulation, according to the Bank. The notes have an average lifespan of about two years.

The new note will also carry a picture of the pin factory used by Smith to illustrate his observations and theories in The Wealth of Nations.

At a time when manufacturing was in its infancy, Smith was the first to recognise the productivity gains from dividing of labour into specialised tasks. Next to the picture will be the quotation, “and the great increase in the quantity of work that results”. Mr King said: “From next spring, when visitors to our country look carefully at their new £20 notes . . . I hope they will absorb the lesson that specialisation in production and trade across the world are the way to improve living standards in all countries. And perhaps when they return home they will press their own politicians to support the opening up of trade, which has been at the heart of the British Government’s efforts to reform the world economy.”

Economists expressed their delight. Eamonn Butler, director of the Adam Smith Institute, a think-tank, said: “Smith is the father of modern economics. He was for free markets, deregulation, low taxes and individual freedom.”

The institute is building a £250,000 life-size bronze statue of Smith, which it hopes to place on the Royal Mile in Edinburgh next year.

WHO WAS ADAM SMITH?

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