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[SECT. III.—: ON THE EFFECTS OF PLENTY OR SCARCITY OF THE PRECIOUS METALS UPON PRICES.] - Dugald Stewart, Lectures on Political Economy, vol. 1 
Lectures on Political Economy. Now first published. Vol. I. To which is Prefixed, Part Third of the Outlines of Moral Philosophy, edited by Sir William Hamilton (Edinburgh, Thomas Constable, 1855).
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ON THE EFFECTS OF PLENTY OR SCARCITY OF THE PRECIOUS METALS UPON PRICES.]
I now proceed to offer some remarks on the principles by which the relative values of money and commodities are adjusted in commercial transactions. It is a subject of extreme difficulty, and I am much afraid that what I have to state will tend more to invalidate the reasonings of others, than to establish any satisfactory conclusions of my own.
I begin with examining a speculation of Montesquieu, which has contributed greatly to mislead those of his successors. This I shall state in Montesquieu’s own words, after which I shall consider particularly the different steps of his argument.
“Money is the price of merchandise or manufactures. But how will this price be fixed? that is to say, by what price of money will each thing be represented?
“If we compare the mass of gold and silver in the whole world, with the quantity of merchandise therein contained, it is certain that every commodity or merchandise in particular, may be compared to a certain portion of the entire mass of gold and silver. As the total of the one is to the total of the other, so part of the one will be to part of the other. Let us suppose that there is only one commodity or merchandise in the world, or only one to be purchased, and that this is divisible like money, a part of this merchandise will answer to a part of the mass of gold and silver, the half of the total of the one to the half of the total of the other; the tenth, the hundredth, the thousandth part of the one, to the tenth, the hundredth, the thousandth part of the other. But as that which constitutes property amongst mankind is not all at once in trade; and as the metals or money which are the signs of property, are not all in trade at the same time, the price is fixed in the compound ratio of the total of things, with the total of signs, and that of the total of things in trade, with the total of signs in trade also. And as the signs which are not in trade to-day, may be in trade to-morrow; and the signs not now in trade may enter into trade at the same time, the establishment of the price of things always fundamentally depends on the proportion of the total of things to the total of signs.” . . . “If since the discovery of the Indies, gold and silver have increased in Europe in the proportion of one to twenty, the price of provisions and goods must have been increased in the proportion of one to twenty. But if, on the other hand, the number of articles of merchandise has increased as one to two, it necessarily follows that the price of these articles and provisions has risen in the proportion of one to twenty, and fallen in proportion of one to two,—it necessarily follows, I say, that the proportion is only as one to ten.”1
It is observed by Sir James Steuart,* that this theory of Montesquieu is of an older date than his writings, being alluded to in one of the papers of the Spectator, and very explicitly stated by Mr. Locke. The ideas of this last writer are strongly expressed in a passage which has been already quoted during this Lecture, from his considerations on lowering the rate of interest.†
It is, however, from Montesquieu and Mr. Hume, that this theory has chiefly derived its authority, and it is surprising to what a degree it has influenced the opinions of commercial politicians since their time, although neither of these eminent writers have attempted any explanation whatever of the principle on which it proceeds. In the passage above quoted from the Spirit of Laws, it is said to be certain; and it is represented by Mr. Hume as next to a self-evident proposition,—“That the prices of everything depend on the proportion between commodities and money, and that any considerable alteration on either has the same effect, either of heightening or lowering the price. Increase the commodities, they become cheaper; increase the money, they rise in their value. As, on the other hand, a diminution of the former, and that of the latter, have contrary tendencies.
“It is also evident, that the prices do not so much depend on the absolute quantity of commodities and that of money which are in a nation, as on that of the commodities which come or may come to market, and of the money which circulates.”‡
The same doctrine has been repeated by numberless writers of a later date; and among others, by Dr. Wallace, in a small book entitled Characteristics of the present Political State of Great Britain; a coincidence the more remarkable that it is the great object of the latter to oppose some consequences that have been deduced by Mr. Hume, and I apprehend, very logically, from the theory.
“Let us suppose,” says Dr. Wallace, “that there is a certain quantity of money and of commodities in any country. The quantity of money may be said to represent the commodities, and to determine the prices of them. The prices of particular commodities may vary in different circumstances; but if the sums of the money and of the commodities continue much the same, the prices, on the whole, cannot much alter. In such a case, if no more money comes into the country, unless the dispositions of the people are remarkably changed by some extraordinary accident or revolution, it will be very difficult to carry on a great deal of more work on a sudden, as speedily to increase the sum of the commodities.
“But, if a great sum of money should be brought into the nation at once, and be distributed in any way whatever, provided the labouring and industrious part of the nation do not get such sums as will keep them idle; though some part of it would undoubtedly be hoarded up, and would thereby be rendered useless, yet the greatest part of it would be employed and become useful. . . . Every one would be enabled to spend a little more, and to carry on his business better. By these means there would be everywhere more labour. Of course, the commodities, or real riches, which are quite different from money, would be greatly increased.
“Again: If the stock of money should be increased by this industry; or, if another sum of money should be introduced by other means, and be distributed as before, this would again increase the stock of commodities. And so on continually, or to a certain limit.”*
The general conclusion in which these authors agree, has been adopted with great zeal by Mr. Arthur Young, who has produced various arguments in defence of his opinion, which I do not think it necessary to quote.
Among the consequences inferred by Mr. Hume from this doctrine, the two following are the most important:—The first is the advantage of hoarding large sums in public treasuries, so as to prevent completely their circulation. The second consequence deduced from this principle is, that banks, funds, and paper credit of every kind are injurious to the commerce and wealth of a nation. The contrariety of these conclusions of Mr. Hume to the prevailing opinions among our best political writers, together with their alarming aspect when considered in relation to the policy of this country, excited the attention of Dr. Wallace, the learned and ingenious author of the Dissertation on the Numbers of Mankind; and gave rise to the publication just quoted, in which he opposes the applications which Mr. Hume makes of Montesquieu’s principle, without, however, expressing any doubts concerning the principle itself.
The most elaborate refutation that I know of these speculations of Montesquieu and Mr. Hume, is in Sir James Steuart’s Political Œconomy; and I shall, accordingly, avail myself freely of his ideas wherever I find them to my purpose; attempting, as far as I am able, to avoid that profusion of vague and indefinite words with which this very ingenious and well-informed writer is so apt to obscure his meaning. Much additional light has been thrown on this subject by several foreign authors, particularly by Mr. Pinto, in his celebrated Essay on Circulation and Credit. I need scarcely add, with respect to Mr. Smith, that in treating of this important article of Political Economy, as far as it was connected with his great plan, he has displayed his usual superiority over all other writers; establishing, in the most satisfactory manner, some general principles which conclude decisively against the theory in question. But I shall avoid his view of the subject, as it is more generally known, and as he has passed over some topics more slightly than he probably would have done, if Mr. Hume had not given the sanction of his name to Montesquieu’s errors. [?]
In order to avoid circumlocution, I shall distinguish this doctrine by ascribing it to Montesquieu; although, from what has been already said, it appears to have been current in this country at a much earlier period. I shall direct my remarks, too, more particularly against his statement of the doctrine than against Mr. Hume’s, as he has been at more pains to explain the sense in which he wishes it to be understood. Indeed, in his attempt to unfold the nature of his doctrine, it is surprising that he did not discover the vagueness of the ideas which he annexes to the words which he employs.
“Let us suppose,” says Montesquieu, “that there is but one commodity to be bought and sold,” &c. [above, p. 372.] In this passage, he uses the French word répondre, by which he would seem to intimate, that the tenth or hundredth part of the commodities is equal in exchangeable value to the tenth or hundredth part of the money. But whether this was Montesquieu’s idea or not, it is of little consequence, as it follows necessarily from his fundamental principle, that the whole money in circulation is either equal in value to the whole commodities, or that it is equal to some determinate part, such as a half, &c., and that this proportion never varies. Unless we admit this conclusion, we must reject the general principle, that the price of commodities varies proportionally with the quantity of money. The truth is, that it is not an easy matter to put any precise or intelligible interpretation on the language which has been employed by Montesquieu, and those who have followed him on this subject. They tell us that the money represents a commodity; that it is the sign of the commodity; that it answers to the commodity. These are expressions which, if they have any determinate meaning, seem to imply, that the whole of the money is equal to the whole of the commodity, the half to the half, and so on in proportion. If this be not the meaning of these expressions, when introduced in order to prove or illustrate the principle, that prices must bear relation to the quantity of money, what other interpretation can be put upon them?
“Were a statesman,” says Sir James Steuart, “to perform the operation of circulation and commerce, by calling in, from time to time, all the proprietors of specie in one body, and all those of alienable commodities, workmen, &c., in another; and were he, after informing himself of the respective quantities of each, to establish a general tariff of prices, according to our author’s [Hume’s] rule; this idea of representation might easily be admitted, because the particles of manufactures would then seem to be adapted to the pieces of the specie, as the rations of forage for the horses of an army are made larger or smaller, according as the magazines are well or ill provided at the time; but has this any resemblance to the operations of commerce?”*
It is indeed wonderful how much this subject has been perplexed by the use of words that are indefinite or equivocal in their meaning. Coin has been called a representation; and because it is a representation, it must bear an exact proportion to the thing represented. And since in some particular examples this representation has been found to hold, the rule has been made general. If, for instance, a merchant has £1000 worth of grain, the thousandth part of the commodity is said to be equivalent to the thousandth part of the sum, because both are determinate in their quantity. But the parcels of this corn, though exactly proportioned to the quantities of money, do not draw their value from this proportion, but from the total value of the whole mass; a value which is determined, not by the amount of the specie in the country, but by the complicated operations of competition. To call coin a representation of commodities and labour, because the possession of the one commands the enjoyment of the other, is plainly an abuse of language. Coin, indeed, by being the established medium of exchange, may be regarded as a universal equivalent. But it is not the only equivalent for things alienable; for although it were banished altogether, alienations and exchanges would still continue, though in a more inconvenient form. And even at present this takes place in many instances, as where a peasant receives meat and clothes as an equivalent for personal service.
Why, then, should coin be considered as the representation of all the manufactures and industry of a country more than any other equivalent? If it did represent or answer to them, in the only sense in which the proposition seems intelligible, it would follow that “every commodity of a country,” as Sir James Steuart observes, “should be sold, like the parcel of grain in the foregoing example, by the rule of three.”* If the proposition, indeed, be supposed to imply no more than this, that the value of every commodity is reckoned in pounds, shillings, and pence, the word representation is not inaptly employed. But in this sense the proposition is nugatory, and altogether foreign to the present question.
It is not, however, in considering coin as the only equivalent for things vendible, that the principal fault of this theory consists. When stripped of equivocal language, it will be found necessarily to involve the following supposition: that as in every bargain of buying and selling, the price paid is equivalent to the thing bought,—therefore, for everything bought, there must exist a sum of money of equal value; a proposition of which the fallacy is obvious, as it overlooks completely that virtual multiplication of the quantity of money which arises from its circulation. It takes for granted that money has been employed which was never given in payment before, and never will be given again; a supposition which is contrary to one of the most familiar and indisputable facts, that a guinea will pass through many hands in a day, and in the course of a year may pay for a hundred times its value in commodities. It may be proper to illustrate this idea a little more fully, because, familiar as the fact is, it leads to consequences which have not always been attended to, in discussing the question now under consideration.
In Mr. Pinto’s Treatise on Circulation and Credit, it has been shewn with much ingenuity, how a quick circulation makes money go far in exchanges. And the following anecdote is mentioned by this very well-informed writer as an illustration:—“Pendant le siège de Tournay en 1745, et quelque temps auparavant, la communication étant coupée, on était embarrassé, faute d’argent, de payer le prêt à la Garnison. On s’avisa d’emprunter des Cantines la somme de 7000 florins. C’était tout ce qu’il y avoit. Au bout de la semaine les 7000 florins étaient revenus aux Cantines, où la même somme fut empruntée encore une fois. Cela fut répété ensuite jusqu’à la reddition pendant sept semaines, de sorte que les mêmes 7000 florins firent l’effet de 4900 florins.”* It was, therefore, with very good reason, that Bishop Berkeley long ago proposed the following query, “Whether less money swiftly circulating be not in fact equivalent to more money slowly circulating?”†
From these observations it seems evident, that the quantity of money and notes in circulation, must bear but a small proportion to the value of goods to be bought and sold, and that this proportion must vary according to the quickness with which the money circulates or shifts from one hand to another. According to Mr. Pinto, there is not in the whole world half the silver coin which would pay all the expenses of Paris for a single year, if the same piece were never to change its possessor but once.
In order to illustrate this subject a little farther, I shall suppose that a labouring man gains ten shillings a week, which he receives always on Saturday, and that he spends proportionally through the week these ten shillings on his family, so as to have no money in his pocket next Saturday. This man may be said, on a medium, to be possessed of five shillings; and a hundred men in this situation may be said to be in possession of £25. This is all they have used, though they have each of them spent ten shillings a week.
I make a second supposition, that each of these men lives on credit; that his ten shillings are spent by the time they are earned; and that every man pays his debt when he receives his weekly wages. In this case, the money may never have been a single hour in their hands; and it is a chance of a hundred to one, if they are masters of twenty shillings amongst them; and yet each of them, as before, spends ten shillings a week.
I have only another supposition to make, that each of these hundred labourers will live at the same rate as formerly; that they ask no credit; and that they are paid their wages once a year. They will thus receive at once £26; which, having no other use for their money, they will gradually spend on their families in the course of a year, at the rate of ten shillings a week. It is evident, that these men will at a medium be possessed of £13 a piece, and that their whole money will be equal to £1300; though their wages and consumption are the same as those of a hundred men who could not produce twenty shillings among them.
The obvious inferences from these suppositions are, firstly, that £25 with a quick circulation, will go as far as £1300 with a slow circulation; secondly, that even where the circulation is equally quick, £1 with credit will purchase as much as £25 without credit; and, thirdly, that as both the circulation and quantity of money may vary in consequence of a variety of causes, both natural and moral, it is extremely improbable that the money in circulation should always bear a fixed and invariable proportion to the value of all the commodities used in commerce. Yet it is demonstrable, that if the price of commodities bears a constant proportion to their total amount, as Mr. Hume and Montesquieu have both maintained, the whole amount of the commodities must either be equal to the whole money, or bear some fixed and invariable proportion to it.
As a farther proof of the fallaciousness of the reasonings formerly quoted from Montesquieu, it may be worth while to take notice of some remarkable facts which have been preserved with respect to prices among the ancients. These facts will exhibit a striking contrast to the state of modern Europe, and will, I hope, throw some additional light on the subject under discussion, the simple structure of society in the ancient world enabling us to trace whatever relation subsists between the quantity of money and its exchangeable value, more easily than when it is affected by such a complication of circumstances, as operate so powerfully on that order of things which falls under our observation. The same facts will afford an additional illustration of what I have already so often remarked concerning the essential changes which, in modern Europe, trade, and industry, and the freedom of the lower orders, have produced on the circumstances of mankind.
“It is a question with me,” says Sir James Steuart, “whether the mines of Potosi and Brazil have produced more riches to Spain and Portugal than the treasures heaped up in Asia, Greece, and Egypt, after the death of Alexander furnished to the Romans, during the two hundred years which followed the defeat of Perseus and the conquest of Macedonia.”* Soon after this inundation of wealth, the Roman republic went to destruction; and a succession of the most prodigal princes ever known in history succeeded each other for two hundred years; giving all the circulation to these treasures which was compatible with the actual state of commerce at the time. It is, however, extremely remarkable, that while in consequence of the extravagance of the Romans, the prices of superfluities rose to an excessive height, those of necessaries kept astonishingly low. Of this the most satisfactory evidence is produced by Dr. Wallace, in his Dissertation on the Numbers of Mankind; and by Dr. Arbuthnot in his Tables of Ancient Coins.
In times somewhat earlier, before this great influx of money, the cheapness of the necessaries of life was much greater. According to Polybius, the Sicilian medimnus of wheat was even in his time sold commonly in some parts of Italy at four oboli, and the same quantity of barley for two: at which rate, if we admit Dr. Wallace’s computation, the English quarter of wheat would have sold at a price equivalent to about fifteen pence. Polybius informs us farther, that there was such plenty of provisions in the north of Italy at that time, that a traveller was well entertained at an inn with all necessaries, and seldom paid more than a quarter of an obolus, equal to a third of a penny. Long before this period, however, immense prices had been paid for things merely ornamental; and the plenty of money could not fail to be great.
But afterwards, the contrast between the extravagance of the rich, and the simple manners of the people in general, became far more conspicuous under Augustus. In illustration of this, I shall point out a few facts, taken at random from Dr. Arbuthnot’s work on Ancient Coins, Weights, and Measures. Before proceeding to these, I shall just mention that the debts of Julius Cæsar, before he had been in any public office at Rome, amounted to 1300 talents, a sum which Dr. Arbuthnot estimates at £221,875 sterling. According to a Latin translation of Appian, the debts of the same person, before he held any foreign command, amounted to £2,000,000 sterling. A Greek manuscript has a different reading, and states them at half this sum. But, on either supposition, the fact is sufficient to convey an idea of the quantity of the precious metals which then existed in Rome; for as great debts are the effect of great credit, so they are an indication of great riches. Æsopus the player, as noticed by Arbuthnot, spent a sum equal to £4000 sterling on a single dish; Vitellius the Emperor consumed upon one supper a sum equal to £87,000 sterling, and in the course of seven months that he continued Emperor, spent upon eating and drinking a sum amounting to upwards of £4,000,000 sterling.
I have mentioned these facts, chiefly to have an opportunity of introducing a most extraordinary circumstance, that nearly about the same time when the debts of Julius Cæsar amounted to the enormous sum stated above, Pomponius Atticus, who lived with great hospitality, and even with some degree of simple elegance, associating with all the first characters in Rome, did not spend more than £9, 13s. 9d. a month, or in the whole year £116, 5s. On this point we have the decisive evidence of Cornelius Nepos, in the following remarkable passage:—“Nec hoc præteribo, (quanquam nonnullis leve visum iri putem,) cum imprimis lautus esset Eques Romanus, et non parum liberaliter domum suam omnium ordinum homines invitaret; scimus non amplius, quam terna millia aeris, peræque in singulos menses, ex Ephemeride eum expensum sumtui ferre solitum. Atque hoc non auditum sed cognitum prædicamus. Sæpe enim propter familiaritatem, domesticis rebus interfuimus.”*
These facts appear to me to illustrate strongly the essential difference between the state of society in ancient and modern times. In truth, the circulation of money among the Romans had little or no resemblance to what is now called circulation in our systems of Political Economy. Fortunes were then made by corruption, fraud, and plunder, instead of trade and regular industry. The consequence was, that there was no relation whatever between the prices of articles ministering to the desires of the great, and of articles subservient to the necessities of the poor. It is to be observed, too, that in the curious examples collected by Dr. Arbuthnot, of such articles as brought the most extravagant prices, we only find those which could not be multiplied in proportion to the demand. These prices, therefore, arose not from the abundance of money, but from the impossibility of suiting the supply to the market. The cheapness of necessaries did not proceed from their plenty, but from the small number of individuals who were led by their situation to purchase them. As none who were fed by the labour of slaves, or on grain distributed gratuitously, had any occasion to go to market, the competition must have been confined to a comparatively inconsiderable portion of the community. The manner, too, in which the market was then provided, must be taken into account. It was supplied partly by the surplus corn produced on the lands of great men, laboured by slaves, who, being fed on the lands, the surplus cost a mere trifle; and as the number of buyers was very small, this surplus must necessarily have been sold very cheap. Besides, the grain distributed among the people must have kept down the market, as a part of it must have sometimes been superfluous to those who received, and consequently must have come to be sold in competition with that which was raised at private expense.
In judging of the very low prices of grain in our own country some centuries ago, similar considerations must be taken into account. A very large proportion of the inhabitants then drew their subsistence directly from the soil, and consequently, the demand for grain in the markets must have been comparatively inconsiderable. In such a state of society, the demand must have been proportioned, not to the consumers, but to the buyers.
Shall we, therefore, say, that the quantity of money in a State has no effect whatever on price? That it does not vary with it proportionally, and that in estimating its effects on the commercial system, the rate of circulation must always be combined with the amount of the circulating mass, is a proposition abundantly evident. Much, too, must depend on the manner in which the money is distributed, among the different classes of the community, and in various other circumstances connected with the condition and habits of the people, of which it is easy to perceive the general influence, but which it is impossible to subject to calculation in accounting for particular phenomena. It does not, however, follow from this as a consequence, that the relative proportion of money and commodities, though not the only cause which regulates prices, may not, in certain circumstances, operate on them very powerfully, how difficult soever it may be from the extreme complacency of the subject, to trace the extent of its influence.
A distinction of Mr. Smith’s relative to this question is extremely worthy of attention, though it may be doubted whether it authorizes all the important consequences which he supposes it to involve.
“The quantity of the precious metals may increase in any country from two different causes: either, first, from the increased abundance of the mines which supply it; or secondly, from the increased wealth of the people from the increased produce of their annual labour. The first of these causes is no doubt necessarily connected with the diminution of the value of the precious metals; but the second is not.
“When more abundant mines are discovered, a greater quantity of the precious metals is brought to market, and the quantity of the necessaries and conveniences of life for which they must be exchanged being the same as before, equal quantities of the metals must be exchanged for smaller quantities of commodities. So far, therefore, as the increase of the quantity of the precious metals in any country arises from an increased abundance of the mines, it is necessarily connected with some diminution of their value.
“When, on the contrary, the wealth of any country increases, when the annual produce of its labour becomes gradually greater and greater, a larger quantity of coin becomes necessary in order to circulate a greater quantity of commodities; and the people, as they can afford it, as they have more commodities to give for it, will naturally purchase a greater and a greater quantity of plate. The quantity of their coin will increase from necessity, the quantity of their plate from vanity and ostentation, or from the same reason that the quantity of fine statues, pictures, and of every other luxury and curiosity, is likely to increase among them. But as statuaries and painters are not likely to be worse rewarded in times of wealth and prosperity, than in times of poverty and depression, so gold and silver are not likely to be worse paid for.”* After illustrating at some length this remark, Mr. Smith states, that “From about 1570 to about 1640, during a period of about seventy years, the variation in the proportion between the value of silver and that of corn held a quite opposite course. Silver sunk in its real value, or would exchange for a smaller quantity of labour than before; and corn rose in its nominal price, and instead of being commonly sold for about two ounces of silver the quarter, or about ten shillings of our present money, came to be sold for six and eight ounces of silver the quarter, or about thirty or forty shillings of our present money.”†
On this distinction Mr. Smith founds his reply to Mr. Hume’s celebrated argument against banks and paper credit. “These,” says Mr. Hume, “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 increase. What can be more short-sighted 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 increased; 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 negotiations 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.
“Suppose that there are twelve 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 eighteen millions: Here is a State which is found by experience to be able to hold a stock of thirty 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 twelve 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.
“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.”*
In opposition to this doctrine, Mr. Smith labours to prove, that “the whole paper money of every kind which can easily circulate in any country, never can exceed the value of the gold and silver of which it supplies the place, or which, the commerce being supposed the same, would circulate there if there had been no paper money.”* A few pages after Mr. Smith proceeds to an examination of Mr. Hume’s doctrine in the following words:—
“The increase of paper money, it has been said, by augmenting the quantity, and consequently diminishing the value of the whole currency, necessarily augments the money price of commodities. But as the quantity of gold and silver, which is taken from the currency, is always equal to the quantity of paper which is added to it, paper money does not necessarily increase the quantity of the whole currency. From the beginning of the last century to the present time, provisions never were cheaper in Scotland than in 1759, though, from the circulation of ten and five shilling bank-notes, there was then more paper money in the country than at present. The proportion between the price of provisions in Scotland and that in England, is the same now as before the great multiplication of banking companies in Scotland. Corn is, upon most occasions, fully as cheap in England as in France; though there is a great deal of paper money in England, and scarce any in France. In 1751 and in 1752, when Mr. Hume published his Political Discourses, and soon after the great multiplication of paper money in Scotland, there was a very sensible rise in the price of provisions, owing, probably, to the badness of the seasons, and not to the multiplication of paper money.
“It would be otherwise, indeed, with a paper money consisting in promissory notes, of which the immediate payment depended, in any respect, either upon the good-will of those who issued them, or upon a condition which the holder of the notes might not always have it in his power to fulfil, or of which the payment was not exigible till after a certain number of years, and which in the meantime bore no interest. Such a paper money would, no doubt, fall more or less below the value of gold and silver, according as the difficulty or uncertainty of obtaining immediate payment was supposed to be greater or less; or according to the greater or less distance of time at which payment was exigible.”*
That this reasoning of Mr. Smith involves some very sound and important principles, cannot be disputed. At the same time, I believe, it is now very generally admitted, that it also involves some material mistakes and oversights. The assertion, in particular, that the whole paper money of every kind that can easily circulate in any country, never can exceed the value of the gold and silver of which it supplies the place, is an assumption completely refuted by our actual experience since Mr. Smith’s time. Indeed, if we had had no such experience, it would have been easily susceptible of refutation from a theoretical view of the subject. On this point, however, I shall not now enlarge, as it will again come under our consideration before the completion of these lectures.
Another oversight of still greater consequence, is almost equally manifest, I mean the inattention manifested by Mr. Smith to that remarkable depreciation in the value of money which has taken place during the last century, and more especially during the present reign. To what causes this depreciation is to be ascribed, whether to the substitution of factitious instead of real money, or to the weight of our public burdens, or to both of these circumstances combined, is a different question, on which I shall afterwards hazard some remarks. But the fact is too obvious to the most careless observer to admit of a moment’s controversy. The truth seems to be, that Mr. Smith has been led to his general conclusion, by too partial attention to the price of corn as a standard of the value of money. He did not sufficiently reflect on the effects of an extended and improved agriculture in preventing an increase of the price of grain, in comparison with that of other commodities. He was farther confirmed in his opinion by the partial view which he took of the nature of paper-credit, already noticed. Proceeding on the supposition that factitious money could only supply the place of that quantity of gold and silver which would otherwise have circulated in its stead, he could perceive no possible way in which it could have any tendency to depreciate the value of money; and as the best information which he could obtain, satisfied him, that the annual supply of bullion from America did not materially exceed the annual consumption, it appeared to him, as a necessary consequence, that the common complaints of a depreciation in the value of money were altogether founded in ignorance and prejudice.
During the eventful interval which has elapsed since the publication of the Wealth of Nations, the question concerning the effects of paper currency on prices has assumed completely a new aspect, inasmuch, that granting all Mr. Smith’s principles in their fullest extent, no fair inference whatever could be drawn from them at all applicable to the present condition of the commercial world; as his whole reasoning on this subject proceeds on the supposition, that the issues of bank-notes are limited by the obligation of paying them in specie on demand. But the problem still remains concerning the effects on prices of a paper currency that is not convertible at pleasure into gold and silver. On this point, however, I shall not at present enlarge.
Having been led to allude to the depreciation of money, I shall avail myself of the opportunity which the subject affords, to mention a circumstance which escaped me yesterday, in treating of the real and nominal prices of commodities.
In the passage which I then quoted, [above, p. 362,] from Mr. Locke, that profound writer observes, that “wheat in this part of the world, (and that grain which constitutes the general food of any other country,) is the fittest measure to judge of the altered value of things in any long tract of time. Therefore, wheat here, rice in Turkey, &c., is the fittest thing to reserve a rent in,” &c.
That this principle of Mr. Locke, although stated by him in terms much too strong and unqualified, contains a great deal of truth and good sense, I formerly remarked; and the utility of the practical rule which it recommends, has been sufficiently confirmed by the experience of those who have had the prudence to adopt it. It is remarked by Mr. Smith, in his Wealth of Nations, that “the rents in England which have been reserved in corn, have preserved their value much better than those which have been reserved in money.” I have introduced this passage from Mr. Smith, merely to do justice to the uncommon foresight of the great man, by whose advice the memorable statute, mentioned by Mr. Smith, was passed, which first introduced a provision of this sort into college leases. This person was Sir Thomas Smith, principal Secretary of State to Edward VI. and Queen Elizabeth; whose merits in this respect cannot fail to rise in our estimation, when we consider how very near he lived to the period when the depreciation of the precious metals first furnished a subject of political discussion. One of his biographers gives an articulate account of this provision.
[1 ]Spirit of Laws, B. XXII. c. vii., viii.
[* ] [Political Œconomy, Book II. chap. xxviii.; Works, Vol. II. p. 84.]
[† ] [Above, p. 362.]
[‡ ] [Essays, Vol. I. Of Money.]
[* ] [Part I. pp. 21-23.]
[* ] [Political Œconomy, Book II. chap. xxviii.; Works, Vol. II. p. 100.]
[* ] [Ibid. p. 102.]
[* ] [Partie I. p. 34, Note, orig. edit.]
[† ] [Querist, Q. xxii.]
[* ] [Political Œconomy, Book II. chap. xxx.; Works, Vol. II. p. 135, seq.]
[* ] [Excellentium Imperatorum Vitæ, Atticus.]
[* ] [Wealth of Nations, Book I. chap. xi.; Vol. I. p. 294, seq., tenth edition.]
[† ] [Ibid. p. 299, seq.]
[* ] [Essays, Vol. I. On the Balance of Trade.]
[* ] [Wealth of Nations, Book II. chap. ii.; Vol. I. p. 448, tenth edition.]
[* ] [Ibid., pp. 490-492.]