Today, we will look at a famous essay by David Hume, “On the Balance of Trade.” It was written in 1752. Hume was an early “classical” economist, in contrast to the Mercantilist tradition which was dominant in Britain from 1600 until it was definitively swept away by the success of Adam Smith’s The Wealth of Nations in 1776.
Who cares what Hume wrote in 1752? Either it is right, in which we certainly don’t need Hume to figure it out for us, or it is wrong, in which case we shouldn’t bother with old dead people who were also wrong. But, the legacy of Hume lives even today, as most economists actually still believe that international trade has something to do with money (mostly, it doesn’t). For example, the stunning incompetence displayed by economists across the spectrum during the Bretton Woods years (1944-1971) was linked to their belief that their monetary problems (the tendency of the U.S. dollar’s value to sag vs. its gold parity) had something to do with a “current account deficit,” which, as we have seen, didn’t actually exist! Nevertheless, the non-existence of the “current account deficit” didn’t seem to bother the economists, including gold-friendly economists like Robert Triffin, who consistently blamed it anyway.
October 28, 2012: Triffin’s Dilemma
July 7, 2011: The Trauma of Bretton Woods
July 24, 2014: On the Path To a Better Monetary System: Bretton Woods Didn’t Fail Because of the “Balance of Payments”
January 18, 2013: The Mind-Bending Ignorance of the Bretton Woods Years
July 10, 2014: Paul Volcker Dreams of a “New Bretton Woods.” But What Would That Look Like?
November 19, 2007: Bretton Woods II: The Folly of Large Gold Reserves
It also lives in the form of the “price/specie flow mechanism” theory of gold standard systems, which is still widely embraced by economists to describe the environment of the pre-1914 gold standard era. These economists attribute this theory to David Hume, and specifically this essay. However, as we will see, Hume does not actually propose this mechanism, and in fact most of the essay consists of an extensive refutation of any such mechanism. Actually, the “price/specie flow mechanism” was held (in a crude form) by the Mercantilist economists of Hume’s time, as Hume will explain. So, it should be no surprise that the “price/specie flow mechanism” notion is still held today mostly by Mercantilist-flavored economists (academic Keynesians) today.
I think I will talk more in the future about both the Balance of Payments and the Price/Specie Flow Mechanism in greater detail. For now, let’s just see what Hume actually said in 1752. The inability of today’s Mercantilists to make sense of Hume is directly related to their inability to make sense of either the pre-1914 period or, for that matter, the problems of Bretton Woods. This incompetence led directly to the breakup of the Bretton Woods system in 1971. In other words, this incompentence is the actual reason we do not have a world gold standard system today.
The original essay had footnotes, which are omitted here.
IT is very usual, in nations ignorant of the nature of commerce, to prohibit the exportation of commodities, and to preserve among themselves whatever they think valuable and useful. They do not consider, that, in this prohibition, they act directly contrary to their intention; and that the more is exported of any commodity, the more will be raised at home, of which they themselves will always have the first offer.°
It is well known to the learned, that the ancient laws of ATHENS rendered the exportation of figs criminal; that being supposed a species of fruit so excellent in ATTICA, that the ATHENIANS deemed it too delicious for the palate of any foreigner. And in this ridiculous prohibition they were so much in earnest, that informers were thence called sycophants among them, from two GREEK words, which signify figs and discoverer. , a There are proofs in many old acts of parliament of the same ignorance in the nature of commerce, particularly in the reign of EDWARD III. And to this day, in FRANCE, the exportation of corn is almost always prohibited; in order, as they say, to prevent famines; though it is evident, that nothing contributes more to the frequent famines, which so much distress that fertile country.
The same jealous fear, with regard to money, has also prevailed among several nations; and it required both reason and experience to convince any people, that these prohibitions serve to no other purpose than to raise the exchange against them, and produce a still greater exportation.
These errors, one may say, are gross and palpable: But there still prevails, even in nations well acquainted with commerce, a strong jealousy with regard to the balance of trade, and a fear, that all their gold and silver may be leaving them. This seems to me, almost in every case, a groundless apprehension; and I should as soon dread, that all our springs and rivers should be exhausted, as that money should abandon a kingdom where there are people and industry. Let us carefully preserve these latter advantages; and we need never be apprehensive of losing the former.[Here we have Hume’s basic propositions. First, that many people in his day were excessively worried about the exportation of gold and silver, in trade for goods and services — what we today would call a “current account deficit.” Wouldn’t the country run out of gold and silver? Hume says that this is “almost in every case a groundless apprehension.”]
It is easy to observe, that all calculations concerning the balance of trade are founded on very uncertain facts and suppositions. The custom-house books are allowed to be an insufficient ground of reasoning; nor is the rate of exchange much better; unless we consider it with all nations, and know also the proportions of the several sums remitted; which one may safely pronounce impossible. Every man, who has ever reasoned on this subject, has always proved his theory, whatever it was, by facts and calculations, and by an enumeration of all the commodities sent to all foreign kingdoms.
The writings of Mr. GEE struck the nation with an universal panic, when they saw it plainly demonstrated, by a detail of particulars, that the balance was against them for so considerable a sum as must leave them without a single shilling in five or six years. But luckily, twenty years have since elapsed, with an expensive foreign war; yet is it commonly supposed, that money is still more plentiful among us than in any former period.
Nothing can be more entertaining on this head than Dr. SWIFT; an authorb so quick in discerning the mistakes and absurdities of others. He says, in his short view of the state of IRELAND, that the whole cash of that kingdom formerly amounted but to 500,000 l.; that out of this the IRISH remitted every year a neat million to ENGLAND, and had scarcely any other source from which they could compensate themselves, and little other foreign trade than the importation of FRENCH wines, for which they paid ready money.*44 The consequence of this situation, which must be owned to be disadvantageous, was, that, in a course of three years, the current money of IRELAND, from 500,000 l. was reduced to less than two. And at present, I suppose, in a course of 30 years it is absolutely nothing. Yet I know not how, that opinion of the advance of riches in IRELAND, which gave the Doctor so much indignation, seems still to continue, and gain ground with every body.
In short, this apprehension of the wrong balance of trade, appears of such a nature, that it discovers itself, wherever one is out of humour with the ministry, or is in low spirits; and as it can never be refuted by a particular detail of all the exports, which counterbalance the imports, it may here be proper to form a general argument, that may prove the impossibility of this event, as long as we preserve our people and our industry.[Here we begin the portion of the essay that supposedly describes the “price/specie flow mechanism”, but actually does not.]
Suppose four-fifths of all the money in GREAT BRITAIN to be annihilated in one night, and the nation reduced to the same condition, with regard to specie, as in the reigns of the HARRYS and EDWARDS, what would be the consequence? Must not the price of all labour and commodities sink in proportion, and every thing be sold as cheap as they were in those ages? What nation could then dispute with us in any foreign market, or pretend to navigate or to sell manufactures at the same price, which to us would afford sufficient profit? In how little time, therefore, must this bring back the money which we had lost, and raise us to the level of all the neighbouring nations? Where, after we have arrived, we immediately lose the advantage of the cheapness of labour and commodities; and the farther flowing in of money is stopped by our fulness and repletion.°[Hume here is mistaken. Let’s say that 4/5ths of all the “money” (presumably gold and silver coins, although banknotes were common in Hume’s day) disappeared overnight. What would happen? One thing that would not happen is that the value of the coinage would change. How could it? Silver would be the same value in Britain as it was in France, except for a few factors such as the cost of transportation and also any human-imposed barriers like trade restrictions. But, whatever effects that might come from such factors are mostly a description of transport costs and trade restrictions, not anything having to do with the money itself. Silver and gold being the same value (as Hume later argues), there would be no particular reason for prices to change all that much. What might happen, however, is that people in Britain would want to accumulate more gold and silver, to replenish their supplies after this magical disappearance. To do this, they would “save,” in other words, acquire gold and silver in trade, and instead of spending it again, add to their overall holdings. In the process of “saving,” they might be enthusiastic to “make a sale,” which might lead to some modest depression of prices for labor or goods. Gold and silver would thus flow to Britain, not because of some dramatic change in the “value of money” or prices for goods and services, but rather a change in British “savings rates,” favoring activities which lead to an accumulation of gold and silver.
Note here also that Hume is describing an imaginary condition — a magical disappearance of gold and silver coins — not any description of the actual process of trade. In general, Hume makes a number of incorrect assumptions by misapplying “quantity theory,” which is true also of many economists today.]
Again, suppose, that all the money of GREAT BRITAIN were multiplied fivefold in a night, must not the contrary effect follow? Must not all labour and commodities rise to such an exorbitant height, that no neighbouring nations could afford to buy from us; while their commodities, on the other hand, became comparatively so cheap, that, in spite of all the laws which could be formed, they would be run in upon us, and our money flow out; till we fall to a level with foreigners, and lose that great superiority of riches, which had laid us under such disadvantages?[Again, Hume is mistaken. If British had more gold and silver than they wished, they would trade it for goods, services, or assets with foreigners. However, the value of gold and silver would not be appreciably different in Britain than in France, except for the effects of transport costs & etc. as described. Gold and silver would indeed flow from Britain to France, but not because of some dramatic difference in prices (or the value of money), but because British, having an perceived excess of gold and silver, would spend it on something they value more highly, namely goods and services from France. Once again, this is a magical condition, not a description of real-world mechanisms.]
Now, it is evident, that the same causes, which would correct these exorbitant inequalities, were they to happen miraculously, must prevent their happening in the common course of nature, and must for ever, in all neighbouring nations, preserve money nearly proportionable to the art and industry of each nation. All water, wherever it communicates, remains always at a level. Ask naturalists the reason; they tell you, that, were it to be raised in any one place, the superior gravity of that part not being balanced, must depress it, till it meet a counterpoise; and that the same cause, which redresses the inequality when it happens, must for ever prevent it, without some violent external operation.[Although Hume’s reasoning is flawed, he thus comes to a correct conclusion, that gold and silver are, like water he says, the same value everywhere. The physical supply is also thus proportionately the same “scarcity” everywhere, or to put it another way, in equal abundance. Thus, there can never be a “shortage” or a “surplus.” It would be immediately corrected.
An easy way to understand this is by thinking about one single person. Let’s say that this person, for whatever reason, wished to acquire more gold and silver coins. How would they do it? If we exclude for now the possibility of gifts, then the person must sell something, such as labor, goods, services, or assets, and receive coinage in return. The person then would “save” the coins, by not then spending them on something else. Thus, the person “imports” gold and their overall holdings increase, and they “export” goods, services or assets. The value of the coins doesn’t change. Nor does the prices at which the person sells their labor, goods, services, or assets. The difference is in what could be called the savings/spending patterns of the person. Alternately, let’s say that the person perceived that they had plenty of gold coins, and decided that there was something they would rather have more. For example, they could trade the coins for a government bond that paid interest (an asset), or remodel the house (goods, services, or labor depending), or go on a vacation (services). Thus, they would “export” gold and “import” goods, services and assets. Again, the value of the gold doesn’t change, nor does the value of the goods, services and labor. It’s a change in ther person’s desire to hold gold coins, or what you can call their “demand” for gold coinage. The aggregate demand of “Britain” is simply the sum of many such individuals, and individuals acting in the interest of organizations such as the family, corporation, government, etc.
Hume does not quite see this process as I have described, but he senses it, as we will see below.]
Can one imagine, that it had ever been possible, by any laws, or even by any art or industry, to have kept all the money in SPAIN, which the galleons have brought from the INDIES? Or that all commodities could be sold in FRANCE for a tenth of the price which they would yield on the other side of the PYRENEES, without finding their way thither, and draining from that immense treasure? What other reason, indeed, is there, why all nations, at present, gain in their trade with SPAIN and PORTUGAL; but because it is impossible to heap up money, more than any fluid, beyond its proper level? The sovereigns of these countries have shown, that they wanted not inclination to keep their gold and silver to themselves, had it been in any degree practicable.
But as any body of water may be raised above the level of the surrounding element, if the former has no communication with the latter; so in money, if the communication be cut off, by any material or physical impediment, (for all laws alone are ineffectual) there may, in such a case, be a very great inequality of money. Thus the immense distance of CHINA, together with the monopolies of our INDIA companies, obstructing the communication, preserve in EUROPE the gold and silver, especially the latter, in much greater plenty than they are found in that kingdom. But, notwithstanding this great obstruction, the force of the causes abovementioned is still evident. The skill and ingenuity of EUROPE in general surpasses perhaps that of CHINA, with regard to manual arts and manufactures; yet are we never able to trade thither without great disadvantage. And were it not for the continual recruits,° which we receive from AMERICA, money would soon sink in EUROPE, and rise in CHINA, till it came nearly to a level in both places. Nor can any reasonable man doubt, but that industrious nation, were they as near us as POLAND or BARBARY, would drain us of the overplus of our specie, and draw to themselves a larger share of the WEST INDIAN treasures. We need not have recourse to a physical attraction, in order to explain the necessity of this operation. There is a moral attraction, arising from the interests and passions of men, which is full as potent and infallible.
How is the balance kept in the provinces of every kingdom among themselves, but by the force of this principle, which makes it impossible for money to lose its level, and either to rise or sink beyond the proportion of the labour and commodities which are in each province? Did not long experience make people easy on this head, what a fund of gloomy reflections might calculations afford to a melancholy YORKSHIREMAN, while he computed and magnified the sums drawn to LONDON by taxes, absentees,° commodities, and found on comparison the opposite articles so much inferior? And no doubt, had the Heptarchy subsisted in ENGLAND, the legislature of each state had been continually alarmed by the fear of a wrong balance; and as it is probable that the mutual hatred of these states would have been extremely violent on account of their close neighbourhood, they would have loaded and oppressed all commerce, by a jealous and superfluous caution. Since the union has removed the barriers between SCOTLAND and ENGLAND, which of these nations gains from the other by this free commerce? Or if the former kingdom has received any encrease of riches, can it reasonably be accounted for by any thing but the encrease of its art and industry? It was a common apprehension in ENGLAND, before the union, as we learn from L’ABBE DU BOS, that SCOTLAND would soon drain them of their treasure, were an open trade allowed; and on the other side the TWEED a contrary apprehension prevailed: With what justice in both, time has shown.[This is a nice argument. The ways in which “the balance” is kept between Britain and France is exactly the same as it is kept between one town in Britain and another. We are really dealing with freely acting individual humans here, at times acting as representatives of families, corporations or governments. Freely acting individuals are no different in Britain than in France. Thus, gold and silver are the same value everywhere, and also proportionately in equal abundance everywhere.]
What happens in small portions of mankind, must take place in greater. The provinces of the ROMAN empire, no doubt, kept their balance with each other, and with ITALY, independent of the legislature; as much as the several counties of GREAT BRITAIN, or the several parishes of each county. And any man who travels over EUROPE at this day, may see, by the prices of commodities, that money, in spite of the absurd jealousy of princes and states, has brought itself nearly to a level; and that the difference between one kingdom and another is not greater in this respect, than it is often between different provinces of the same kingdom. Men naturally flock to capital cities, sea-ports, and navigable rivers. There we find more men, more industry, more commodities, and consequently more money; but still the latter difference holds proportion with the former, and the level is preserved.[We can see already that the bulk of this essay is actually the argument that there is no “price/specie flow mechanism.” Obviously, if gold and silver are the same value everywhere, then there is no meaningful change in money value or “prices”. There is just gold and silver, serving as money between people living in Britain and France just the same as it serves as money between people living London and Manchester, or next-door neighbors Mr. Smith and Mr. Jones.]
Our jealousy and our hatred of FRANCE are without bounds; and the former sentiment, at least, must be acknowledged reasonable and well-grounded. These passions have occasioned innumerable barriers and obstructions upon commerce, where we are accused of being commonly the aggressors. But what have we gained by the bargain? We lost the FRENCH market for our woollen manufactures, and transferred the commerce of wine to SPAIN and PORTUGAL, where we buy worse liquor at a higher price. There are few ENGLISHMEN who would not think their country absolutely ruined, were FRENCH wines sold in ENGLAND so cheap and in such abundance as to supplant, in some measure, all ale, and home-brewed liquors: But would we lay aside prejudice, it would not be difficult to prove, that nothing could be more innocent, perhaps advantageous. Each new acre of vineyard planted in FRANCE, in order to supply ENGLAND with wine, would make it requisite for the FRENCH to take the produce of an ENGLISH acre, sown in wheat or barley, in order to subsist themselves; and it is evident, that we should thereby get command of the better commodity.
There are many edicts of the FRENCH king, prohibiting the planting of new vineyards, and ordering all those which are lately planted to be grubbed up: So sensible are they, in that country, of the superior value of corn, above every other product.
Mareschal VAUBAN complains often, and with reason, of the absurd duties which load the entry of those wines of LANGUEDOC, GUIENNE, and other southern provinces, that are imported into BRITANNY and NORMANDY. He entertained no doubt but these latter provinces could preserve their balance, notwithstanding the open commerce which he recommends. And it is evident, that a few leagues more navigation to ENGLAND would make no difference; or if it did, that it must operate alike on the commodities of both kingdoms.
There is indeed one expedient by which it is possible to sink, and another by which we may raise money beyond its natural level in any kingdom; but these cases, when examined, will be found to resolve into our general theory, and to bring additional authority to it.
I scarcely know any method of sinking money below its level, but those institutions of banks, funds, and paper-credit, cwhich are so much practised in this kingdom. These render paper equivalent to money, circulate it throughout the whole state, make it supply the place of gold and silver, raise proportionably the price of labour and commodities, and by that means either banish a great part of those precious metals, or prevent their farther encrease. What can be more shortsighted than our reasonings on this head? We fancy, because an individual would be much richer, were his stock of money doubled, that the same good effect would follow were the money of every one encreased; not considering, that this would raise as much the price of every commodity, and reduce every man, in time, to the same condition as before. It is only in our public negociations and transactions with foreigners, that a greater stock of money is advantageous; and as our paper is there absolutely insignificant, we feel, by its means, all the ill effects arising from a great abundance of money, without reaping any of the advantages.[Hume has a little confusion here between gold-linked paper banknotes, such as the reliable gold-linked banknotes of the Bank of England during the mid-18th century, and perhaps the unreliable and in practice heavy devalued paper currencies of the American Colonies. A gold-linked banknote will not have any inflationary effects that would “raise the price of labour and commodities,” as Adam Smith well understood.]
Suppose that there are 12 millions of paper, which circulate in the kingdom as money, (for we are not to imagine, that all our enormous funds are employed in that shape) and suppose the real cash of the kingdom to be 18 millions: Here is a state which is found by experience to be able to hold a stock of 30 millions. I say, if it be able to hold it, it must of necessity have acquired it in gold and silver, had we not obstructed the entrance of these metals by this new invention of paper. Whence would it have acquired that sum? From all the kingdoms of the world. But why? Because, if you remove these 12 millions, money in this state is below its level, compared with our neighbours; and we must immediately draw from all of them, till we be full and saturate, so to speak, and can hold no more. By our present politics, we are as careful to stuff the nation with this fine commodity of bank-bills and chequer-notes, as if we were afraid of being overburthened with the precious metals.[As Hume describes, the use of banknotes indeed replaces gold and silver. Thus, people perceive that they have more gold and silver coinage than they need. This is then used for payment for imports. Despite his earlier arguments, Hume lapses a bit here, combining an unfocused suspicion that exportation of precious metals is somehow “bad” with a rightful distrust of banknotes.]
It is not to be doubted, but the great plenty of bullion in FRANCE is, in a great measure, owing to the want of paper-credit. The FRENCH have no banks: Merchants bills do not there circulate as with us: Usury or lending on interest is not directly permitted; so that many have large sums in their coffers: Great quantities of plate are used in private houses; and all the churches are full of it. By this means, provisions and labour still remain cheaper among them, than in nations that are not half so rich in gold and silver. The advantages of this situation, in point of trade as well as in great public emergencies, are too evident to be disputed.[“Prices” in Britain may have been noticeably higher than in France, just as “prices” in the United States are higher than they are in Mexico (in dollar terms). Probably, owing to higher taxes and the primitive state of the financial system as described, France simply had a less active economy, and was thus somewhat “poorer” than Britain at this time.]
The same fashion a few years ago prevailed in GENOA, which still has place in ENGLAND and HOLLAND, of using services of CHINA-ware instead of plate; but the senate, foreseeing the consequence, prohibited the use of that brittle commodity beyond a certain extent; while the use of silver-plate was left unlimited. And I suppose, in their late distresses, they felt the good effect of this ordinance. Our tax on plate is, perhaps, in this view, somewhat impolitic.
Before the introduction of paper-money into our colonies, they had gold and silver sufficient for their circulation. Since the introduction of that commodity, the least inconveniency that has followed is the total banishment of the precious metals. And after the abolition of paper, can it be doubted but money will return, while these colonies possess manufactures and commodities, the only thing valuable in commerce, and for whose sake alone all men desire money.
What pity LYCURGUS did not think of paper-credit, when he wanted to banish gold and silver from SPARTA! It would have served his purpose better than the lumps of iron he made use of as money; and would also have prevented more effectually all commerce with strangers, as being of so much less real and intrinsic value.
It must, however, be confessed, that, as all these questions of trade and money are extremely complicated, there are certain lights, in which this subject may be placed, so as to represent the advantages of paper-credit and banks to be superior to their disadvantages. That they banish specie and bullion from a state is undoubtedly true; and whoever looks no farther than this circumstance does well to condemn them; but specie and bullion are not of so great consequence as not to admit of a compensation, and even an overbalance from the encrease of industry and of credit, which may be promoted by the right use of paper-money. It is well known of what advantage it is to a merchant to be able to discount his bills upon occasion; and every thing that facilitates this species of traffic is favourable to the general commerce of a state. But private bankers are enabled to give such credit by the credit they receive from the depositing of money in their shops; and the bank of ENGLAND in the same manner, from the liberty it has to issue its notes in all payments. There was an invention of this kind, which was fallen upon some years ago by the banks of EDINBURGH; and which, as it is one of the most ingenious ideas that has been executed in commerce, has also been thought advantageous to SCOTLAND. It is there called a BANK-CREDIT; and is of this nature. A man goes to the bank and finds surety° to the amount, we shall suppose, of a thousand pounds. This money, or any part of it, he has the liberty of drawing out whenever he pleases, and he pays only the ordinary interest for it, while it is in his hands. He may, when he pleases, repay any sum so small as twenty pounds, and the interest is discounted from the very day of the repayment. The advantages, resulting from this contrivance, are manifold. As a man may find surety nearly to the amount of his substance, and his bank-credit is equivalent to ready money, a merchant does hereby in a manner coin his houses, his household furniture, the goods in his warehouse, the foreign debts due to him, his ships at sea; and can, upon occasion, employ them in all payments, as if they were the current money of the country. If a man borrow a thousand pounds from a private hand, besides that it is not always to be found when required, he pays interest for it, whether he be using it or not: His bank-credit costs him nothing except during the very moment, in which it is of service to him: And this circumstance is of equal advantage as if he had borrowed money at much lower interest. Merchants, likewise, from this invention, acquire a great facility in supporting each other’s credit, which is a considerable security against bankruptcies. A man, when his own bank-credit is exhausted, goes to any of his neighbours who is not in the same condition; and he gets the money, which he replaces at his convenience.[A number of things can cause people’s desire to hold gold and silver coins to be reduced. Banknote subsitution is one. Also, the use of bank deposits, instead of vaults full of coins, is another. In addition, merchants’ ability to acquire short-term loans (discounting of bills of trade) allowed them to function with less working capital. Contrast with the situation in France as described earlier.]
After this practice had taken place during some years at EDINBURGH, several companies of merchants at GLASGOW carried the matter farther. They associated themselves into different banks, and issued notes so low as ten shillings, which they used in all payments for goods, manufactures, tradesmen’s labour of all kinds; and these notes, from the established credit of the companies, passed as money in all payments throughout the country. By this means, a stock of five thousand pounds was able to perform the same operations as if it were six or seven; and merchants were thereby enabled to trade to a greater extent, and to require less profit in all their transactions. But whatever other advantages result from these inventions, it must still be allowed that, besides giving too great facility to credit, which is dangerous, they banish the precious metals; and nothing can be a more evident proof of it, than a comparison of the past and present condition of SCOTLAND in that particular. It was found, upon the recoinage made after the union, that there was near a million of specie in that country: But notwithstanding the great encrease of riches, commerce and manufactures of all kinds, it is thought, that, even where there is no extraordinary drain made by ENGLAND, the current specie will not now amount to a third of that sum.
But as our projects of paper-credit are almost the only expedient, by which we can sink money below its level; so, in my opinion, the only expedient, by which we can raise money above it, is a practice which we should all exclaim against as destructive, namely, the gathering of large sums into a public treasure, locking them up, and absolutely preventing their circulation. The fluid, not communicating with the neighbouring element, may, by such an artifice, be raised to what height we please. To prove this, we need only return to our first supposition, of annihilating the half or any part of our cash; where we found, that the immediate consequence of such an event would be the attraction of an equal sum from all the neighbouring kingdoms. Nor does there seem to be any necessary bounds set, by the nature of things, to this practice of hoarding. A small city, like GENEVA, continuing this policy for ages, might engross nine-tenths of the money of EUROPE. There seems, indeed, in the nature of man, an invincible obstacle to that immense growth of riches. A weak state, with an enormous treasure, will soon become a prey to some of its poorer, but more powerful neighbours. A great state would dissipate its wealth in dangerous and ill-concerted projects; and probably destroy, with it, what is much more valuable, the industry, morals, and numbers of its people. The fluid, in this case, raised to too great a height, bursts and destroys the vessel that contains it; and mixing itself with the surrounding element, soon falls to its proper level.
So little are we commonly acquainted with this principle, that, though all historians agree in relating uniformly so recent an event, as the immense treasure amassed by HARRY VII. (which they make amount to g2,700,000 pounds,) we rather reject their concurring testimony, than admit of a fact, which agrees so ill with our inveterate prejudices. It is indeed probable, that this sum might be three-fourths of all the money in ENGLAND. But where is the difficulty in conceiving, that such a sum might be amassed in twenty years, by a cunning, rapacious, frugal, and almost absolute monarch? Nor is it probable, that the diminution of circulating money was ever sensibly felt by the people, or ever did them any prejudice. The sinking of the prices of all commodities would immediately replace it, by giving ENGLAND the advantage in its commerce with the neighbouring kingdoms.
Have we not an instance, in the small republic of ATHENS with its allies, who, in about fifty years, between the MEDIAN and PELOPONNESIAN wars, amassed ha sum not much inferior to that of HARRY VII.? For all the GREEK historians and orators agree, that the ATHENIANS collected in the citadel more than 10,000 talents, which they afterwards dissipated to their own ruin, in rash and imprudent enterprizes. But when this money was set a running, and began to communicate with the surrounding fluid; what was the consequence? Did it remain in the state? No. For we find, by the memorable census mentioned by DEMOSTHENES and POLYBIUS, that, in about fifty years afterwards, the whole value of the republic, comprehending lands, houses, commodities, slaves, and money, was less than 6000 talents.
What an ambitious high-spirited people was this, to collect and keep in their treasury, with a view to conquests, a sum, which it was every day in the power of the citizens, by a single vote, to distribute among themselves, and which would have gone near to triple the riches of every individual! For we must observe, that the numbers and private riches of the ATHENIANS are said, by ancient writers, to have been no greater at the beginning of the PELOPONNESIAN war, than at the beginning of the MACEDONIAN.
Money was little more plentiful in GREECE during the age of PHILIP and PERSEUS, than in ENGLAND during that of HARRY VII.: Yet these two monarchs in thirty years collected from the small kingdom of MACEDON, a larger treasure than that of the ENGLISH monarch. PAULUS ÆMILIUS brought to ROME about 1,700,000 pounds Sterling. PLINY says, 2,400,000. And that was but a part of the MACEDONIAN treasure. The rest was dissipated by the resistance and flight of PERSEUS.*61
We may learn from STANIAN, that the canton of BERNE had 300,000 pounds lent at interest, and had above six times as much in their treasury. Here then is a sum hoarded of 1,800,000 pounds Sterling, which is at least quadruple what should naturally circulate in such a petty state; and yet no one, who travels in the PAIS DE VAUX, or any part of that canton, observes any want of money more than could be supposed in a country of that extent, soil, and situation. On the contrary, there are scarce any inland provinces in the continent of FRANCE or GERMANY, where the inhabitants are at this time so opulent, though that canton has vastly encreased its treasure since 1714, the time when STANIAN wrote his judicious account of SWITZERLAND.
The account given by APPIAN of the treasure of the PTOLEMIES, is so prodigious, that one cannot admit of it; and so much the less, because the historian says, that the other successors of ALEXANDER were also frugal, and had many of them treasures not much inferior. For this saving humour of the neighbouring princes must necessarily have checked the frugality of the EGYPTIAN monarchs, according to the foregoing theory. The sum he mentions is 740,000 talents, or 191,166,666 pounds 13 shillings and 4 pence, according to Dr. ARBUTHNOT’S computation. And yet APPIAN says, that he extracted his account from the public records; and he was himself a native of ALEXANDRIA.
From these principles we may learn what judgment we ought to form of those numberless bars, obstructions, and imposts, which all nations of EUROPE, and none more than ENGLAND, have put upon trade; from an exorbitant desire of amassing money, which never will heap up beyond its level, while it circulates; or from an ill-grounded apprehension of losing their specie, which never will sink below it. Could any thing scatter our riches, it would be such impolitic contrivances. But this general ill effect, however, results from them, that they deprive neighbouring nations of that free communication and exchange which the Author of the world has intended, by giving them soils, climates, and geniuses, so different from each other.[A government that wished to accumulate large amounts of gold and silver does not need restrictions on trade. It must either steal the gold and silver in conquest, or receive it in taxes and tribute, and then not spend it again. In this way, a government is no different than a private individual.]
Our modern politics embrace the only method of banishing money, the using of paper-credit; they reject the only method of amassing it, the practice of hoarding; and they adopt a hundred contrivances, which serve to no purpose but to check industry, and rob ourselves and our neighbours of the common benefits of art and nature.[“The only method of amassing it, the practice of hoarding,” or what I am calling “saving.”]
All taxes, however, upon foreign commodities, are not to be regarded as prejudicial or useless, but those only which are founded on the jealousy above-mentioned. A tax on GERMAN linen encourages home manufactures, and thereby multiplies our people and industry. A tax on brandy encreases the sale of rum, and supports our southern colonies. And as it is necessary, that imposts should be levied, for the support of government, it may be thought more convenient to lay them on foreign commodities, which can easily be intercepted at the port, and subjected to the impost. We ought, however, always to remember the maxim of Dr. SWIFT, That, in the arithmetic of the customs, two and two make not four, but often make only one.*64 It can scarcely be doubted, but if the duties on wine were lowered to a third, they would yield much more to the government than at present: Our people might thereby afford to drink commonly a better and more wholesome liquor; and no prejudice would ensue to the balance of trade, of which we are so jealous. The manufacture of ale beyond the agriculture is but inconsiderable, and gives employment to few hands. The transport of wine and corn would not be much inferior.
But are there not frequent instances, you will say, of states and kingdoms, which were formerly rich and opulent, and are now poor and beggarly? Has not the money left them, with which they formerly abounded? I answer, If they lose their trade, industry, and people, they cannot expect to keep their gold and silver: For these precious metals will hold proportion to the former advantages. When LISBON and AMSTERDAM got the EAST-INDIA trade from VENICE and GENOA, they also got the profits and money which arose from it. Where the seat of government is transferred, where expensive armies are maintained at a distance, where great funds are possessed by foreigners; there naturally follows from these causes a diminution of the specie. But these, we may observe, are violent and forcible methods of carrying away money, and are in time commonly attended with the transport of people and industry. But where these remain, and the drain is not continued, the money always finds its way back again, by a hundred canals, of which we have no notion or suspicion. What immense treasures have been spent, by so many nations, in FLANDERS, since the revolution, in the course of three long wars?*65 More money perhaps than the half of what is at present in EUROPE. But what has now become of it? Is it in the narrow compass of the AUSTRIAN provinces? No, surely: It has most of it returned to the several countries whence it came, and has followed that art and industry, by which at first it was acquired. iFor above a thousand years, the money of EUROPE has been flowing to ROME, by an open and sensible current; but it has been emptied by many secret and insensible canals: And the want of industry and commerce renders at present the papal dominions the poorest territory in all ITALY.
In short, a government has great reason to preserve with care its people and its manufactures. Its money, it may safely trust to the course of human affairs, without fear or jealousy. Or if it ever give attention to this latter circumstance, it ought only to be so far as it affects the former.
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And so we come to the end. Hume does make some errors that suggest a “price/specie flow mechanism,” but then also makes observations (“like water everywhere, at an even level”) and arguments (“what happens in small portions of mankind, must happen in greater”) that contradict such a model. Hume was a little confused. But, it was 1742. Not bad for the era, and much better than conventional wisdom of the time, as Hume describes. Alas, economists today have no such justifications.
Practically speaking, we can see that a modern gold standard system uses gold as a standard of value, and that gold’s value is “like water,” the same everywhere. Thus, it does not particularly matter whether gold bullion moves here, there or elsewhere, because it is the same value no matter whose vault it is in. Gold-based currencies, likewise, do not change in value whether the Bank of France accumulates gold or the Federal Reserve disaccumulates it. Today, and also in Hume’s time as well when there was actually quite a lot of cross-border lending and investment, the “balance of payments” is determined largely by the interaction of the “current accounts” and the “financial accounts,” which is a reflection of savings/investment versus borrowing/consumption, which doesn’t really have very much to do with the unit of monetary account. In other words, a “current account deficit” is financed by the financial account (cross-border lending and investment, which is a different way of saying trade in assets), not by any movements in actual base money, whether that be gold or even Federal Reserve banknotes.
If all this is still a little confusing, let’s think about today’s dollar bills. Florida, for example, has a population of 20 million, which is more than a lot of countries in the world, and certainly more than Britain in 1742, which had a population of about 5.5 million. Since Florida does not have a Federal Reserve bank or a U.S. Mint, all of the dollar bills in Florida must be “imported.” It is a little like Britain in 1742, which did not have much in the way of gold or silver mines, and thus had to import most of its gold and silver. People in Florida acquire dollar banknotes in much the way that British people acquired gold and silver coins in the mid-18th century. They receive them in trade for some kind of good, service or asset. Yet, there is no “price/specie flow mechanism” for dollar bills in Florida. The dollars in Florida, “like water,” have the same value as dollar bills throughout the United States and indeed the world, since about 50% of all dollar bill banknotes are outside the United States. Prices do not need to go up and down. Many people might have a “shortage of money” in the sense that, for example they are broke and need to pay bills. However, there is never any shortage of the medium of exchange, dollar bills.]