Smith’s “liberal system” was not concerned solely with international trade. He used “liberal” to describe application of the same principles to domestic policy issues. Smith was a great opponent of restrictions in the labor market, favoring freedom of contract, and wished to see labor markets “resting on such liberal principles.”

Elsewhere, Smith draws an important contrast between regulating “the industry and commerce of a great country … upon the same model as the departments of a publick office”—that is, to direct the economy as though it were an organization—versus “allowing every man to pursue his own interest his own way, upon the liberal plan of equality, liberty and justice.” In drawing such a contrast, Smith again is signaling the label “liberal” for the latter, which he favors.

Smith also compliments a school of French economists: “In representing perfect liberty as the only effectual expedient” for making national wealth as great as possible, “its doctrine seems to be in every respect as just as it is generous and liberal.” At the core of Smith’s idea of liberal principles is the idea of natural liberty:

All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.

For Smith, natural liberty was not an axiom. He made exceptions to it and acknowledged that he was doing so. Still, it is his main principle, and the burden of proof is on those who would contravene it. In an open letter to Smith in 1787, Jeremy Bentham saluted him for having taught society the presumption of liberty. Bentham then proceeded to challenge Smith on one of his exceptions, saying that Smith had failed to meet the burden of proof when he made an exception to natural liberty by endorsing an existing law setting a maximum interest rate.

Shortly after The Wealth of Nations was published, Robertson wrote to Smith, saluting it as an antidote to "illiberal arrangements" and saying, “Your Book must necessarily become a Political or Commercial Code to all Europe, which must be often consulted by men both of Practice and Speculation.” Robertson’s expectation, widely shared at the time, proved accurate. And as Smith’s system spread, so did his term for it. The term became familiar in British officialdom, popping up occasionally in Parliamentary debate and even in King George III’s address at the opening of Parliament in 1782.

The term was exported to Europe and the United States as well. Some scholars have argued that the modern usage of “liberal” originated on the European continent before spreading to Britain. But using Google’s scans of books in French, Spanish, Italian, and German, we can see that usage in these countries trails Britain. I wouldn’t go so far as Arthur Herman does in the title of his splendid 2001 book, How the Scots Invented the Modern World, but it was Scots who originated the use of “liberal” in a political sense.