Moneyby David Hume
Money is not a subject of commerce. It is only the instrument which men have agreed upon to facilitate the exchange of one commodity for another.
It is not the wheel of trade. It is the oil which renders the motion of the wheels more smooth and easy.
The amount of money is of no consequence in any country since the prices of commodities are always proportional to the amount of money. A crown in Henry 7th’s time served the same purpose as a pound does at present.
It is only the public which draws any advantage from the greater plenty of money. They get this advantage only in their wars and negotiations with foreign states.
All rich countries have employed mercenary troops from poorer neighbours. If they used their native subjects, it would be very expensive. Our small army of 20,000 men is maintained at as great expence as a French army twice the size. The English fleet during the late war needed as much money as all the imperial Roman legions, which ruled the known world.
Most people and their industry are serviceable at home and abroad, in private, and in public. But money is very limited in its use. This limitation may even sometimes be a loss to a nation in its foreign commerce. This limitation naturally:
- checks the growth of trade and riches
- hinders them from being confined entirely to one people
This confinement is naturally dreaded at first. If Nation X is ahead of Nation Y in trade, it is very difficult for Nation Y catch up because of the superior industry and skill of Nation X and the greater stocks of its merchants. These enable them to trade on smaller profits.
Natural Economic Development from the Price of Labour
But these advantages are offset somewhat by the low price of labour in poor countries. This makes manufacturing gradually shift to poor countries. They leave those countries which they have already enriched to fly to others where they are enticed by the cheapness of provisions and labour until they have enriched these also. They are then again banished by the same causes.
In general, price inflation from the plenty of money is a disadvantage which attends an established commerce. It limits commerce in every country by enabling the poorer states to undersell the richer in all foreign markets.
This has made me doubt the benefit of banks and paper-credit, which are so generally esteemed advantageous to every nation.
The dearness of the provisions and labour from the encrease of trade and money is:
- an unavoidable inconvenience
- the effect of that public prosperity which we all want.
It is compensated by the advantages of us having metal money, which we can use in foreign wars and negotiations.
But there is no reason to increase that inconvenience by a counterfeit money that foreigners will not accept. Any great disorder in the state will reduce counterfeit money to nothing.
There are many rich people who prefer secure paper because it is easier and safer to transport. If the public does not provide a bank, private bankers will provide it.
- Goldsmiths formerly did it in London
- Bankers do it presently in Dublin
A Single State-owned Bank
People think that a state-owned bank should give out loans to private people.
But no trading nation would have an interest to artificially try to increase such a credit because it would encrease money beyond its natural proportion to labour and commodities. It would lead to inflation from the merchant and manufacturer.
Thus, the most advantageous bank is one that:
- has locked up all the money it received, and
- never augmented the circulating coin, as is usual, by returning part of its treasure into commerce.
A state-owned bank, by this expedient, might cause private bankers and money-jobbers to lose their business.
- The state would pay the salaries of its directors and tellers.
- The state would have no profit from its dealings.
But it would be compensated by:
- the resulting low price of labour and destruction of paper-credit.
- having a large a sum ready in times of great public danger: any used part of it might be replaced at leisure, when peace was restored.
I will now explain two observations from our speculative politicians.
Anacharsis The Scythian had never seen money in his own country. He shrewdly observed that the Greeks only used gold and silver to assist them in counting and arithmetic.
Speculative Observation 1: Money is nothing but the representation of labour and commodities.
It is a method of rating or estimating them. If coin were abundant, more of it will be needed to represent the same amount of goods.
It would have the same effect to a nation as a change in a merchant’s books has an effect on his business. It would be the same as changing the numbering system from Roman into Arabic. The Arabic needs fewer characters than the Roman. Needing more money to do the same thing is as inconvenient as the Roman characters. It requires more trouble both to keep and transport it.
Since the discovery of the American mines, industry has increased in all European nations, except in the nations that owned those mines.
This increase in industry may justly be ascribed, amongst other reasons, to the encrease of gold and silver. In every kingdom where more money flows in, everything takes a new face:
- Labour and industry gain life
- The merchant becomes more enterprising
- The manufacturer more diligent and skillful
- The farmer follows his plough with greater alacrity and attention. This is not easily to be accounted for, if we consider only the increase of coin.
- It raises the price of commodities.
- It obliges everyone to pay more of these yellow or white pieces for everything he buys.
How Inflation Happens
A great plenty of money is disadvantageous for foreign trade because it raises the price of labour. The high price of commodities is a necessary consequence of the encrease of gold and silver.
But it does not happen immediately. Some time is needed before the money circulates through the whole state, and makes its effect felt on all.
At first, no alteration is perceived. By degrees, the prices rise. First of one commodity, then of another. Until the whole at last reaches a just proportion with the new quantity of specie in the kingdom.
The encreasing quantity of money is favourable to industry only during between the acquisition of money and rise of prices. When money is imported into a nation, it is not dispersed into many hands immediately. It confined to a few persons, who immediately seek to employ it to advantage.
For example, merchants receive gold and silver for goods they sent to Cadiz. This enables them to employ more workers. The workers use the money to buy more goods at the market.
The farmers find that all their commodities are sold. They can now afford to buy more clothes. They thus grow more crops. Thus, the increase in money quickens everyone’s diligence before it encreases the price of labour.
The frequent operations of the French king on money proved that money rises higher before it increases the price of labour. They found that augmenting the numerary value did not produce a proportional rise of the prices, at least for some time.
In the last year of Louis 14th, money was raised 3/7, but prices increased only by 1/7. Grain in France is now sold at the same price, or for the same number of livres, that it was in 1683. Silver was then at 30 livres the mark, and is now at 50. This is despite the great addition of gold and silver since the former period.
The Labor Theory of Value: Human Labor is the foundation of wealth
We may conclude, that the amount of money does not affect the domestic happiness of a state.
Economic policy should only keep it continually encreasing, so that the spirit of industry is kept alive and the stock of labour increases.
All real power and riches is in labour.
A nation with a decreasing amount of money is actually weaker and more miserable than another nation with an encreasing amount. This is because changes in the quantity of money do not immediately lead to proportionable changes in the price of commodities. There is always an interval before matters are adjusted to their new situation.
If gold and silver are diminishing, this interval is as pernicious to industry as it is advantageous when these metals are encreasing.
- The worker becomes unemployed unlike the manufacturer and merchant, even if he pays the same price for everything in the market.
- The farmer cannot sell his corn and cattle even if he must pay the same rent to his landlord.
The poverty, beggary, and sloth, which must ensue, are easily foreseen.
Speculative Observation 2: Money is so scarce in some European countries that the landlord cannot get money from his tenants
He is obliged to take his rent in kind, and either:
- consume it himself, or
- bring it to places where he may find a market.
European princes are able to levy a few taxes and receive small benefit from them. It means that such a kingdom has little force even at home. It cannot maintain fleets and armies compared to if it were abundant in gold and silver.
There is a greater difference between Germany’s current forces compared to 300 years ago, than there is in its industry, people, and manufactures.
The Austrian dominions are generally large, well peopled, and well cultivated. But they have no proportionable political and military power in Europe. Austrian political weakness is commonly blamed on their scarcity of money. But this is wrong since our principle says that a nation’s political power is unaffected by the amount of metal money that it has.
Our principle says that if a sovereign has many subjects with many commodities, then he would be great and powerful, and they rich and happy. The huge amount of commodities:
- are independent of the amount of their precious metals
- admit of divisions and subdivisions [of labor] to a great extent.
If the metals become so small as to be easily lost, it is easy to mix the gold or silver with a baser metal as is practised in some European countries. This raises the pieces to a bulk more sensible and convenient. They still serve as tools of exchange, whatever their number or color.
People think that weakness comes from the scarcity of money because of their own manners and customs. We usually mistake a collateral effect for a cause.
It is an obvious maxim:
- The prices of everything* depend on the proportion between commodities and money
- Any considerable alteration on either has the same effect, either of heightening or lowering the price.
*Superphysics Note: Hume here means nominal prices, otherwise he would be contradicting himself.
Encrease the commodities, they become cheaper. Increase the money, they rise in their value. Reduce the commodities, they become more expensive. Decrease the money, they fall in their value.
The prices do not so much depend on the absolute quantity of commodities and money which are in a nation. It depends more on the amount of commodities which are in the market* and the amount of money which circulates.
*Superphysics Note: This is the basis for Adam Smith’s Natural Price
- If the coin were locked up in chests, it would affect prices in the same way as if it were annihilated.
- If the commodities were hoarded in magazines and granaries, a like effect follows.
In these cases, the money and commodities never meet and cannot affect each other.
Our estimation on food-grain prices should never include the grain which the farmer reserves for seed [capital] and for the maintenance of himself and family [stock for consumption]. It is only the surplus*, compared to the demand, that determines the value of food-grains.
*Superphysics Note: This is the basis for Smith’s Net revenue which is the proper alternative to GDP
In the first uncultivated ages of any state:
- fancy has confounded human wants with those of nature,
- men are content with the produce of their own fields, or with those rude improvements which they themselves can do,
- have little occasion for exchange, at least for money which, by agreement, is the common measure of exchange.
The wool of the farmer’s own flock is spun in his own family and wrought by a neighbouring weaver who receives his payment in grain or wool. It suffices for furniture and cloathing. The carpenter, the smith, the mason, the tailor, are retained by wages in kind. The landlord is content to receive his rent in the commodities raised by the farmer. Most of these he consumes at home, in rustic hospitality. The rest he disposes of for money to the neighbouring town, from where he draws the few materials of his expence and luxury.
But after men begin to refine on all these enjoyments, they do not live always at home. They are not content with what can be raised in their neighbourhood. There is more exchange and commerce of all kinds, and more money enters into that exchange. The tradesmen will not be paid in grain because they want something more than grains to eat. The farmer goes beyond his own parish for the commodities that he buys. He cannot always carry his commodities to the merchant who supplies him.
The landlord lives in the capital, or in a foreign country. He demands his rent in gold and silver, which can easily be transported to him. Great undertakers, manufacturers, and merchants, arise in every commodity. These can conveniently deal in coins. Consequently, the coin enters into many more contracts and is used much more than before.
Provided the money does not encrease in the nation, this causes everything to become much cheaper in times of industry and refinement, than in rude, uncultivated ages. It is the proportion between the circulating money and the commodities in the market which determines the prices.
Goods that are consumed at home never come to market. They do not affect the value of the coin. It is the same as if those goods were totally annihilated. Consequently, hoarding goods reduces their amount in the market and encreases the prices.
But after money enters into all contracts and sales, and is everywhere the measure of exchange:
- the same national cash has a much greater task to perform;
- all commodities are then in the market;
- the sphere of circulation is enlarged;
It is the same case as if that amount of money circulated in a larger kingdom. It would make the ratio of money less than the goods, causing everything to be gradually cheaper as the money circulates more and more.
The prices of all things in Europe have only risen four times since the discovery of the West Indies. But no one will assert that the coin in Europe increased only by four times in the 15th century compared to previous centuries. The following bring home about 6,000,000 a year:
- The Spaniards And Portuguese from their mines
- the English, French, and Dutch, by their African trade by their interlopers in the West Indies
Of these up to 2,000,000 goes to the East Indies. This sum alone, in 10 years, would probably double the ancient stock of money in Europe. All prices have not risen to a much more exorbitant height only because of the change of customs and manners.
More of the same commodities are produced by additional industry and come to the market. This causes people to depart from their ancient simplicity of manners. This productivity encrease is less than the increase of money, but is big compared to the ancient productivity. It has preserved the proportion between money and commodities nearer to the ancient standard.
The refined way of living is more advantageous than the simple way of living, in a view to politics at least. This as an additional reason to encourage trade and manufactures. Men who live in the ancient simple manner supply all their necessaries from domestic industry or from the neighbourhood. This prevents the sovereign from levying taxes in money on them. He can only impose taxes paid in kind, which is very inconvenient.
All the money he can raise is from his principal cities, where alone it circulates. The revenue from this is much less compared to if the money circulated through the whole state. This diminution of the revenue causes the public’s poverty when the sovereign receives less money. The same money will also circulate less during times of low productivity and lack of commerce. It will cause an increase in prices which will cause poverty.
Historians commonly remark that any state that lacks money is weak, even if it is fertile, populous, and well cultivated. This is wrong.
The lack of money can never injure any state within itself, because people and commodities are the real strength of any community. It is the simple manner of living which here hurts the public by:
- confining money to a few hands
- preventing the circulation of goods
On the contrary, industry and refinements integrate goods with the whole state, however small its quantity may be. They digest it into every vein. It makes it enter into every transaction and contract. No hand is entirely empty of it. It causes prices to fall, which gives the sovereign a double advantage:
- He may draw money by his taxes from every part of the state.
- What he receives, goes farther in every purchase and payment.
We may infer, from a comparison of prices, that money is not more plentiful in China, than it was in Europe three centuries ago. Yet China has immense power as proven by the civil and military institutions maintained by it.
Polybius tells us that provisions were so cheap in Italy during his time, that in some places, the price for a meal at the inns was a semis a head, little more than a farthing! At that time, the Romans had subdued the whole known world.
A century before that, the Carthaginian ambassador said, by way of raillery, that the Romans were the most sociable amongst themselves because in every meal, for foreign ministers, they served the same dish at every table.
The absolute quantity of the precious metals is a matter of great indifference. There are only two important circumstances:
- their gradual encrease, and
- their thorough concoction and circulation through the state.