lib. ii. cap. xii. § 17; Pufendorf, utility, portability, indestructi- De iure naturae et gentium, lib. v. bility, homogeneity, divisibility, cap. i. § 13; Locke, Some Considera- stability of value, cognisability, and lions of the Consequences of the one in addition, the quality of not Lowering of Interest and Raising requiring to be fed like cattle. the Value of Money, 2nd ed. 1696, The five given in the text above p. 31; Law, Money and Trade are to be found in Harris. considered, 1705, ch. i.; Hutche- Divisibility, which he also men- son, Introduction to Moral Philo- tions, reappears in W. of N. sophy, p. 211; Montesquieu, bk. i. ch. iv. vol. i. pp. 24, 25. Esprit des his, liv. xxii. ch. ii; l MS. reads 'been.' Cantillon, Essai, pp. 153, 355- 2 Harris, Money and Coins, pt. 357; Harris, Money and Coins, i. § 28.
pt. i. §§ 22-27. Taken together, 3 W. of N. bk. i. ch. iv. vol. i.
these passages include all the p. 27.
properties enumerated by Jevons * Ibid. ch. v. vol. i. p. 41.
(Money and the Mechanism of Harris, Money and Coins, pt. i.
CHEAPNESS OR PLENTY 187 are now a great deal more. In like manner what was called Troy weight, from Troy, a town in Champaigne ], where then the greatest commerce was carried on, gave rise to a heavier weight, because there was usually given the cast of the balance along with it, and as this rendered dealings inaccurate, it was necessary that this cast of the balance should be determined. Accordingly, averdupois (avoir du poise2), or heavy weight, was settled at thirteen ounces; but as this was a number not easily divided, it was settled at sixteen, the ounces being made proportioned to it 3.
Thus the measure of quantity has been increasing; we shall next show how the coin decreased. When the government takes the coinage into its own hands, the expenses naturally fall upon it, and if any private man coins, he must lessen the value or have nothing but his labour for his pains; and besides, as no man's authority can be so great as to make his coin pass in common payments, he must forge the stamp of the government. As the government took the task upon themselves, they would endeavour, in order to prevent frauds, to prevent counter feiting the king's coin, and encroaching on his prerogative; besides, as the public faith was engaged, it was necessary to prevent all kinds of fraud, because it was likewise necessary that people should be obliged to receive the coin according to its denomination, and that if any refused it after a legal tender of payment was made, the debtor should be free, and the creditor guilty of felony4. In rude and 1 In W. of N. bk. i. ch. iv. vol. recollection of Martin - Leake. i. p. 27, Adam Smith writes, Historical Account of English ' Troyes in Champaign' and Money, and ed. 1745, pp. 30, 31. ' Troyes weight.' The original number of ounces 2 The spelling of the MS. is in the pound avoirdupois is retained. there given as fifteen.
3 This account of the origin * To refuse legal tender was of avoirdupois weight may per- never felony.
haps be the result of an inaccurate l88 PART II: POLICE barbarous periods the government was laid under many temptations to debase the coin, or, according to the mint language, to raise it; when, for instance, on any important occasion, such as paying of debts, or of soldiers, it has occasion for two millions, but has no more than one, it calls in the coin of the country, and, mixing with it a greater quantity of alloy, makes it come out two millions, as like as possible to what it was before. Many operations of this kind have been performed in every country; but England, from the freedom which it has almost uninter ruptedly enjoyed, has been less troubled with this than an'y other nation. There it has only fallen to one-third, but in many other countries it is not a fiftieth of its original value.
The inconveniences of such practices are very great. The debasement of the coin hinders commerce, or, at least, greatly embarrasses it. A new calculation must be made how much of the new coin must be given for so much of the old. People are disposed to keep their goods from the market, as they know not what they will get for them. Thus, a stagnation of commerce is occasioned; besides, the debasing of the coin takes away the public faith. Nobody will lend any sum to the government, or bargain with it, as he perhaps may be paid with one half of it. As there is a fraud committed by the government, every subject must be allowed to do the same, and pay his debts with the new money, which is less than he owed. This scheme, however, serves the purpose for some small time, on the following account. The use of money is two fold: for the payment of debts, and the purchasing of commodities. When the coin is debased, a debt of twenty shillings is then paid with ten; but if the new coin be carried to a foreign market, it will give nothing but the old value. All day-labourers are paid in the new coin. The necessities of life must be sold at what the greater part of people can give, and consequently their price will CHEAPNESS OR PLENTY 189 for some time be diminished. However, the king himself loses much, though he gains in the meantime. His doubling it is no doubt a present advantage, but it neces sarily diminishes his revenue, because all his taxes are paid in the new coin. To prevent this loss the French, and indeed all other nations on a like occasion, when they double the money by edict without re-coinage, make the augmentation after the money is called in, and before it goes out, and a diminution is made before next term of payment1. A diminution has always a worse effect than an augmentation. An augmentation injures the creditor, a diminution the debtor, who should always be favoured 2. If I bind for ten pounds and be obliged to pay fifteen, common industry must be excessively embarrassed 3.
The coins of most countries are either of copper, silver, or gold. We are obliged even to receive payment in sixpences, which sometimes is the occasion of confusion and loss of time. The different coins are regulated, not by the caprice of the government, but by the market price of gold and silver, and according to this the proportion of gold and silver [is] settled. This proportion sometimes varies a little. The guineas some time ago were valued at 1 The French understood by an p. 715.
augmentation without recoinage * ' Les diminutions favorisent an increase of the number of le creancier, et les augmentalivres (a money of account, not tions le dcbiteur; et tout le reste actual coins) which go to a coin of egal en matiere d'Etat, c'est le given weight, and by a diminu- debiteur qui doit etre favorise.'
tion a decrease of this number. Ibid. ch. xii. ad fin. Dutot criti- Melon gives an example in which cizes the proposition and the a debtor who has borrowed 2400 historical examples adduced livres in 100 louis d'or is obliged in support of it somewhat seto repay 120 louis d'or of the same verely. Reflexions politiques sur weight when there is a diminution les finances et le commerce, 1738, of one-sixth and the number of ch. i. (ibid. pp. 789, sqq.)
livres equal to a louis d'or conse- 3 W. ofN. bk. i. ch. iv. vol. i. pp.
quently reduced from 24 to 20. 28, 29, strongly condemns aug- Essai polititjiie 1734, ch. xii. mentations or debasements, but in Daire's Econoinisles financiers, says nothing of diminutions.
190 PART II: POLICE twenty-two shillings, and at other times they have been at twenty1. The gold rises more in proportion in Britain than anywhere else, and as it makes the silver of some what less value it is the cause of a real inconvenience. As silver buys more gold abroad than at home, by sending abroad silver they bring gold in return, which buys more silver here than it does abroad. By this means a kind of trade is made of it, the gold coin increasing and the silver2 diminishing 3. Some time ago a proposal was given in to remedy this, but it was thought so complex a case that they resolved for that time not to meddle with it.
[§ 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.
1 Guineas were twenty-shilling guineas at 225. The maximum pieces when first coined in 1663, was reduced to 2is. by proclabut were soon taken at 2is., and mation, 060.22,1717, in pursuance later at 215. 6d. Immediately of Newton's Representation (in before the great silver recoinage Select Tracts on Money, 1856, pp.
they passed at 305. The act 7 274-279). See Ruding, Annals and 8 Will. Ill, cap. 10, provided of the Coinage, 1817, vol. ii. pp.
that they should not be taken 405-410, 427, 446; Snelling, View at more than 265., but prescribed of the Gold Coin and Coinage of no lower limit. Cap. 19 of the England, 1763, pp. 30-32; London same year reduced this maxi- Gazette, Dec. 21-4, 1717.
mum 10225. and the current value, 2 MS. reads ' value.'
which was recognized by the 3 IV. of N. bk. i. ch. v. vol. i. pp.
revenue officers, fell to 2is. 6./. in 42-46; Harris, Essay on Money 1699, after the House of Commons and Coins, pt. ii. §§ 25, 39; below, had passed a resolution declaring p. 203.
that the act 7 and 8 Will. Ill, cap. 4 IV. of N. bk. i. ch. v. vol. i.
19, did not oblige any one to accept pp. 30-38.
CHEAPNESS OR PLENTY 191 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 stock l 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 market'-. 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 1 Harris speaks of laying up Essay on Money and Coins, pt. i.
' a kind of dead stock of the § 51.
precious metals against any '2 W. of N. bk ii. ch. ii. vol. i.
emergencies that might happen.' p. 322.
IQ2 PART II: POLICE circulation of it, [and] the other eighteen are in com modities. 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 com modities 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 com modities 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, CHEAPNESS OR PLENTY 193 and our American colonies, where most of the commerce is carried on by paper circulation, are in a most flourishing condition l.
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 honest)* 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 1701 3, when the French army was at Utrecht, a sudden demand was made upon it, and all Holland was alarmed with the expected fatal 1 W. of N. bk. v. ch. iii. vol. ii. 3 A mistake for 1672, the date p. 542. given in W. of N, bk. iv. ch. iii.
2 MS. reads ' banks.' vol. ii. pp. 59, 61.
O PART II: POLICE 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 that l. 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 Amsterdam 2.
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 1 'Soon after the bank was established. ' W. of N. bk. iv. ch.
2 The ' ingenious gentleman ' is Nicolas Magens (the ' Mr. Meg- gens ' of W. of N. bk. i. ch. xi. vol. i. pp. 218, 222). He says: ' Now it is known that although Amsterdam has in proportion to its inhabitants more merchants than London; but as London contains four to one more people than Amsterdam, there are more merchants and men of business who keep accounts with the Bank. The utmost which appear in the London Directory are 2800, and most probably at Amsterdam not half so many; and although many have accounts with the Bank who are not resident in Amsterdam, it is the same in respect to London; and if it was even admitted that there were in Amsterdam 3000, and each of these to have on advance 10,000 guilders, the amount is 30,000,000 of guilders; am persuaded is much nearer the truth than what is asserted above' [i. e. by Melon, eighty millions sterling, and by Davenant, thirty- six millions sterling]. Universal Merchant (anon.), edited by William Horsley, 1753, p. 33. The story of the scorched money is not taken from Magens. The description of the bank in W. ofN. bk. iv. ch. iii. vol. ii. pp. 54- 62, was obtained from Mr. Henry Hope, no printed account having ever appeared ' satisfactory or even intelligible' to Adam Smith, as he says in the Preface or ' Ad vertisement ' to the 4th edition of W. o/N.
CHEAPNESS OR PLENTY 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 196 PART II: POLICE 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 absurd 7.
Some time after that, Mr. Gee, likewise a merchant, wrote with the same intention 2. 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 losers 3; 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 com- 1 No work attributed to Mun pernicious, and the reporter would was published with the intention misunderstand him to mean that of showing the pernicious nature Mun and Gee held that paper of banks and paper money, and money was pernicious. W. of N.
as his principal work, England's bk. iv. ch. i. vol. ii. pp. 4-7 contains Treasure by Foreign Trade, 1664, a correct summary of Mun's arguwas reprinted at Glasgow in 1755, ment and a nearly verbatim it is not likely that Adam Smith quotation from the fourth chapter was criticizing it before he had of England's Treasure.
seen it. The most plausible 2 I. e. according to the explanexplanation is that he was using ation suggested in the preceding the proved utility of banks and pa- note, 'with the intention of insistper money as an argument against ing on the accumulation of treathe theory that the wealth of a sure.' Joshua Gee's Trade and country is represented by its stock Navigation of Great Britain Conof the precious metals. He would sidered, 1730, was reprinted at say that if the contention of Glasgow in 1750 and 1755.
writers like Mun and Gee were 3 Chapters i-xii, xxxiv.
correct, paper money must be most 4 Hume, ' Of the Balance of CHEAPNESS OK PLENTY 197 plied with, they would more probably have impoverished the nation l.
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 whenever 3 money is accumulated beyond the pro portion 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 money 6, 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, Trade,' uses the same argument Trade' in Essays and Treatises, against Gee. Political Discourses, 1758.
1 Gee's 'regulations' (chs. 4 'Of the Balance of Trade.' xxiv-xxxiii.) are chiefly directed Political Discourses, 1752, p. 82 towards extracting wealth from sqq.
the colonies by various encourage- 3 Perhaps where he argues ments and restrictions. against paper money. ' Of Money ' 2 ' Of Money, ' ' Of the Balance and « Of the Balance of Trade.' of Trade, ' in Political Discourses, Ibid. pp. 43~45' 89-91.
1752, and ' Of the Jealousy of 198 PART II: POLICE 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 considerably 2.
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 ever a.
1 Cp. § 7 above. about 1640, when it fell; and 1570 2 The ' Digression concerning to 1766, when it remained nearly the variations in the value of. stationary.
silver during the course of the 3 It is difficult to discover an)' four last centuries ' in W. of N. relation between this summary bk. i. ch. xi. vol. i. pp. 187-227 and Locke's Some Considerations deals with three periods— 1350 to of the Consequences of the Low ring 1570, when silver rose; 1570 to of Interest and Raising the Value of CHEAPNESS OR PLENTY 199 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 industry l, 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 Britain 2, 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 wrhole 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 Money, 1691, or the other two 1'interet rcciproque nous rend tracts reprinted along with it in communs.
1696 under the title of Several Tous ces biens se communi- Papers relating to Money, Interest quent a nous en circulant d'un and Trade, &c. But as the sum- endroit a 1'autre, jusqu'a ce que mary agrees with that in W.of N. nos besoins satisfaits les aient bk. iv. ch. i. vol. ii. pp. 2, 3, it is im- consumes. La circulation est possible in this case to suppose done 1'essence du commerce, la error on the part of the reporter. consommation en est la fin.'
Adam Smith probably had in his Dutot, Reflexions politiques sur les mind pp. 17, 18 and 77-79 of Some finances etle commerce, 1738, ch. iii.
Considerations (1696 edition), and art. 7 ad init. (p. 898 in Daire's perhaps also §§ 46-50 of Civil Economistes financiers); W.ofN.
Government, where the indestruc- bk. iv. ch. viii. vol. ii. p. 244.
tibility of money is insisted on. 2 'The most exaggerated com- 1 ' Le commerce est 1'echange putation which I remember to des biens distribucs par la nature have either seen or heard of