[§ 9. That National Opulence does not consist in Money.]

We have shown what rendered money the measure of value, but it is to be observed that labour, not money, is the true measure of value4. National opulence consists therefore in the quantity of goods, and the facility of barter. This shall be next considered.

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The more money that is necessary to circulate the goods of any country, the more is the quantity of goods diminished. Suppose that the whole stock of Scotland in corn, cattle, money, &c. amounts to twenty millions, and if one million in cash is necessary to carry on the circulation, there will be in the country only nineteen millions of food, clothes, and lodging, and the people have less by one million than they would have if there were no occasion for this expedient of money. It is therefore evident that the poverty of any country increases as the money increases, money being a dead stock1 in itself, supplying no convenience of life. Money in this respect may be compared to the high roads of a country, which bear neither corn nor grass themselves, but circulate all the corn and grass in the country. If we could find any way to save the ground taken up by highways, we would increase considerably the quantity of commodities, and have more to carry to the market2. In the same manner as [the worth of] a piece of ground does not lie in the number of highways that run through it, so the riches of a country does not consist in the quantity of money employed to circulate commerce, but in the great abundance of the necessaries of life. If we could therefore fall on a method to send the half of our money abroad to be converted into goods, and at the same time supply the channel of circulation at home, we would greatly increase the wealth of the country.

Hence the beneficial effects of the erection of banks and paper credit. It is easy to show that the erection of banks is of advantage to the commerce of a country. Suppose as above that the whole stock of Scotland amounted to twenty millions, and that two millions are employed in the Edition: current; Page: [192] circulation of it, [and] the other eighteen are in commodities. If then the banks in Scotland issued out notes to the value of two millions, and reserved among them £300,000 to answer immediate demands, there would be one million seven hundred thousand pounds circulating in cash, and two millions of paper money besides. The natural circulation however is two million and the channel will receive no more. What is over will be sent abroad to bring home materials for food, clothes, and lodging. That this has a tendency to enrich a nation may be seen at first sight, for whatever commodities are imported, just so much is added to the opulence of the country. The only objection against paper money is that it drains the country of gold and silver, that bank notes will not circulate in a foreign market, and that foreign commodities must be paid in specie. This is no doubt the case; but if we consider attentively we will find that this is no real hurt to a country. The opulence of a nation does not consist in the quantity of coin, but in the abundance of commodities which are necessary for life, and whatever tends to increase these tends so far to increase the riches of a country.

Money is fit for none of the necessaries of life. It cannot of itself afford either food, clothes, or lodging, but must be exchanged for commodities fit for these purposes. If all the coin of the nation were exported, and our commodities proportionably increased, it might be recalled on any sudden emergency sooner than anyone could well imagine. Goods will always bring in money, and as long as the stock of commodities in any nation increases, they have it in their power to augment the quantity of coin, if thought necessary, by exporting their stock to foreign countries. This reasoning is confirmed by matter of fact. We find that the commerce of every nation in Europe has been prodigiously increased by the erection of banks. In this country everybody is sensible of their good effects, Edition: current; Page: [193] and our American colonies, where most of the commerce is carried on by paper circulation, are in a most flourishing condition1.

What first gave occasion to the establishment of banks was to facilitate the transference of money. This at this day is the only design of the bank at Amsterdam. When commerce is carried to a high pitch, the delivery of gold and silver consumes a great deal of time. When a great merchant had ten or twenty thousand pounds to give away, he would take almost a week to count it out in guineas and shillings. A bank bill prevents all this trouble. Before the erection of the bank2 at Amsterdam, the method the merchants fell upon to lessen the trouble of counting out great quantities of cash, was to keep certain sums put up in bags to answer immediate demands. In this case you must either trust the honesty of the merchant, or you must take the trouble of counting it over. If you trusted his fidelity, frequent frauds would be committed, if not, your trouble was not lessened. The inconveniences arising from this gave occasion to the erection of that bank, of which the whole transaction is this: you deposit a certain sum of money there, and the bank gives you a bill to that extent. This money is secure, and you never call for it, because the bill will generally sell above par, and it is therefore an advantage to yourself to let it lie; the bank has no office for payment, because there is seldom any payment demanded. In this manner the bank of Amsterdam has a good effect in facilitating commerce, and its notes circulate only there; the credit of that city is not in the least endangered by the bank. In 17013, when the French army was at Utrecht, a sudden demand was made upon it, and all Holland was alarmed with the expected fatal Edition: current; Page: [194] consequences, but no danger ensued. Before this a suspicion prevailed that the bankers had fallen into a custom of trading with the money, but at that time it was found that a great quantity of the money had been scorched by a fire that happened in the neighbourhood about fifty years before that1. This plainly showed that there was no ground for the suspicion, and the credit of the bank remained unhurt. It has been affirmed by some that the bank of Amsterdam has always money in its stores to the amount of eighty or ninety millions; but this has lately been shown by an ingenious gentleman to be false, from a comparison of the trade of London and Amsterdam2.

The constitution of the banks in Britain differs widely from that in Amsterdam. Here there is only about a sixth part of the stock kept in readiness for answering demands, and the rest is employed in trade. Originally they were Edition: current; Page: [195] on the same footing with the Amsterdam bank, but the directors taking liberty to send out money, they gradually came to their present situation. The ruin of a bank would not be so dangerous as is commonly imagined. Suppose all the money in Scotland was issued by one bank, and that it became bankrupt, a very few individuals would be ruined by it, but not many; because the quantity of cash or paper that people have in their hands bears no proportion to their wealth. Neither would the wealth of the whole country be much hurt by it, because the hundredth part of the riches of a country does not consist in money. The only method to prevent the bad consequence arising from the ruin of banks, is to give monopolies to none, but to encourage the erection of as many as possible. When several are established in a country, a mutual jealousy prevails, they are continually making unexpected runs on one another. This puts them on their guard and obliges them to provide themselves against such demands. Was there but one bank in Scotland it would perhaps be a little more enterprising, as it would have no rival, and by mismanagement might become bankrupt; but a number puts this beyond all danger: even though one did break, every individual [would] have very few of its notes. From all these considerations it is manifest that banks are beneficial to the commerce of a country, and that it is a bad police to restrain them.

Several political writers have published treatises to show the pernicious nature of banks and paper money. Mun, a London merchant, published one with this intention, in answer to a book that had been written on the opposite before. He affirms that as England is drained of its money, it must go to ruin. The circulation of paper banishes gold and silver from the country; all other goods which we have in our possession being spent upon our subsistence, gradually diminish, and must at last come to an end. Money never decays, a stock of it will Edition: current; Page: [196] last for ever, and by keeping up great quantities of it in the country we shall insure our riches as long as the world stands. This reasoning was in those days thought very satisfactory, but from what has been said before concerning the nature of public opulence, it appears evidently absurd1.

Some time after that, Mr. Gee, likewise a merchant, wrote with the same intention2. He endeavours to show that England would soon be ruined by trade with foreign countries; by the exchange he calculates that the balance is always against us, and consequently that in almost all our commercial dealings with other nations we are losers3; as they drain us of our money, we must soon come to ruin. The absurdity of this is likewise evident from former considerations, and we find that though no stop was put to the manner of carrying on foreign commerce by any regulations, the nation has prodigiously increased in riches, and is still increasing4. He proposed indeed some regulations to prevent our ruin from this quarter, which if the government had been [so] foolish [as] to have complied Edition: current; Page: [197] with, they would more probably have impoverished the nation1.

Mr. Hume published some essays2 showing the absurdity of these and other such doctrines. He proves very ingeniously that money must always bear a certain proportion to the quantity of commodities in every country; that whenever3 money is accumulated beyond the proportion of commodities in any country, the price of goods will necessarily rise; that this country will be undersold at the foreign market, and consequently the money must depart into other nations; but on the contrary whenever the quantity of money falls below the proportion of goods, the price of goods diminishes, the country undersells others in foreign markets, and consequently money returns in great plenty. Thus money and goods will keep near about a certain level in every country4. Mr. Hume’s reasoning is exceedingly ingenious. He seems, however, to have gone a little into the notion that public opulence consists in money5, which was considered above.

We may observe upon this that human industry always multiplies goods and money together, though not always in the same proportion. The labour of men will always be employed in producing whatever is the object of human desire, and things will increase in proportion as it is in the power of man to cultivate them. Corn and other commodities of that kind must always be produced in greater abundance than gold, precious stones, and the like, Edition: current; Page: [198] because they are more within the reach of human industry. Almost any part of the surface of the earth may, by proper culture, be made capable of producing corn, but gold is not to be found everywhere, and even where it is to be found, it lies concealed in the bowels of the earth, and to produce a small quantity of it, long time and much labour are requisite1. For these reasons money never increases in proportion to the increase of goods, and consequently money will be sold at a cheaper rate in proportion as a country becomes opulent. In savage nations money gives a vast price, because savages have no money but [what] they acquire by plunder, for they have not that knowledge which is necessary for producing money in their own country. But when a nation arrives at a certain degree of improvement in the arts, its value diminishes; then they begin to search the mines and manufacture it themselves. From the fall of the Roman Empire to the discovery of the West Indies, the value of money was very high, and continually increasing. Since that latter period its value has decreased considerably2.

Mr. Locke, too, published a treatise to show the pernicious consequences of allowing the nation to be drained of money. His notions were likewise founded upon the idea that public opulence consists in money, though he treats the matter in a more philosophical light than the rest. He affirms, with Mr. Mun, that if there is no money in a nation it must soon come to ruin, that all commodities are soon spent, but money lasts for ever3.

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Upon the whole we may observe on this subject, that the reason why our riches do not consist in money but commodities is, that money cannot be used for any of the purposes of life, but that commodities are fitted for our subsistence. The consumptibility, if we may use the word, of goods, is the great cause of human industry1, and an industrious people will always produce more than they consume. It is easy to show how small a proportion the cash in every country bears to the public opulence. It is generally supposed that there are thirty millions of money circulating in Britain2, but the annual consumption amounts to much more than a hundred millions, for, computing the inhabitants of the island at ten millions, and allowing ten pounds per annum for the subsistence of each person, which is by much too little, the whole annual consumption amounts to that sum. So it appears that the circulating cash bears but a small proportion to the whole opulence of the country. It is probable, however, that there are not thirty millions in Britain, and in that case the proportion will be still less.

It is said by some who support the notion that the Edition: current; Page: [200] riches of a country consists in money, that when a person retires from trade he turns his stock immediately into cash. It is plain, however, that the reason of this is that as money is the instrument of commerce, a man can change it for the necessaries and elegancies of life more easily than anything else. Even the miser who locks up his gold in his chest has this end in view. No man in his senses hoards up money for its own sake, but he considers that by keeping money always by him, he has it in his power to supply at once all the necessities of himself and his family.

This opinion that riches consist in money, as it is absurd in speculation, so it has given occasion to many prejudicial errors in practice, some of which are the following.