Chap 8-9: Money

Chap 8: Money as the Measure of Value and Medium of Exchange

 

Measures of value and measures of quantity

  • We now consider money as:
    1. The measure of value, and then
    2. The medium of exchange.
  • When people deal [183] in many kinds of goods, one of them must be considered as the measure of value.
  • Suppose there were only three commodities, sheep, corn, and oxen.
    • We can easily remember them comparatively.
    • But if we have 100 different commodities, there are 99 values of each, arising from a comparison with each of the rest.
      • These cannot easily be remembered.
  • People naturally use a common standard to compare the rest.
    • This will naturally at first be the commodity with which they are best acquainted.
    • Accordingly, we find that black cattle and sheep were the standard in Homer’s time.
      • The armour of one of his heroes was worth nine oxen.
      • That of another was worth 100.
    • Black cattle was the common standard in ancient Greece.
    • In Italy, and particularly in Tuscany, everything was compared with sheep,their principal commodity.
    • This is the ‘natural measure of value’.
  • Similarly, there were natural measures of quantity, such as fathoms, cubits, inches.
    • These were taken from the human body’s proportions.
    • These were used before in every nation.
  • But they found that:
    • one man’s arm was longer or shorter than another’s, and
    • one was not to be compared with the other.
  • Therefore, wise men tried to fix some more accurate measure, so that equal quantities might be of equal values.
    • This method became absolutely necessary when people came to deal in many commodities in big amounts.
  • An inch was inconsiderable when their dealings were confined to a few yards.
    • More accuracy was required [184] when they came to deal in some thousands.
  • The remains of this inaccuracy can be found in countries with small dealings.
    • The accuracy of the balance is not important in their coarse commodities.

 

  • Generally, metals seemed best to answer this purpose.
    • Of these metals, the value of gold and silver could best be ascertained.
  • The temper of steel cannot be precisely known.
    • But the amount alloy in gold and silver can be exactly known.
  • Gold and silver were therefore:
    • fixed as the most exact standard to compare goods with, and
    • considered as the most proper measure of value.

 

  • In consequence of gold and silver becoming the measure of value, it also came to be the instrument of commerce.
    • It soon became necessary that goods should be carried to market.
    • They could never be cleverly exchanged unless the measure of value was also the instrument of commerce.
  • In the age of shepherds, it might not be too inconvenient that cattle should be the medium of exchange.
    • The expense of maintaining them was nothing.
    • The whole country was considered as one great common.
    • But when lands became divided and the division of labour introduced, this custom would create very big inconveniences.
  • The butcher and shoemaker might at times have no use for each other’s commodities.
    • The farmer very often cannot maintain one cow.
    • It would be a very great hardship [185] on a Glasgow merchant to give him a cow for one of his commodities.
  • To remedy this, those materials which were before considered as the measure of value, came also to be the instrument of exchange.
  • Gold and silver had all the advantages.
    • They can be kept without expense.
    • They do not waste.
    • They are very portable.
  • However, gold and silver do not get their whole utility from being the medium of exchange.
    • They never had been used as money.
    • But they are more valuable than any other metal.
      • They have a superior beauty.
      • They are capable of a finer polish.
      • They are more proper for making any instrument, except those with an edge.
    • This is why gold and silver became:
      • the proper measure of value, and
      • the instrument of exchange.
    • But to make them more proper for these purposes, their weight and fineness needed to be ascertained.
  • At first, their balances were not very accurate.
    • Therefore, frauds were easily committed.
    • However, this was remedied gradually.
    • But common business does not allow the needed experiments to precisely fix the degree of fineness.
    • They looked pure even if they had a lot of alloy.
  • To facilitate exchange therefore, they needed some expedient to ascertain the accuracy of weight and fineness.
    • Coinage most effectually secures these.
    • A stamp was put on certain pieces so that whoever saw them might have the public faith that they were of a certain weight and fineness.
      • This would be first marked on the coin, as being of the most important.

[186]

  • Accordingly, the coins of every country bore the weights corresponding to them.
  • The British pound sterling seems to have been originally a pound weight of pure silver.

 

  • Gold could be easily exchanged into silver.
    • Silver always came to be the standard or measure of value.
  • There cannot be two standards.
    • In most purchases, silver is necessary.
    • We say a man is worth so many pounds, not guineas.

 

  • The measure of quantity has always increased, while the measure of value has decreased.
    • The British pound’s original value was 63 shillings.
      • It has now decreased to less than 1/3, while the measure of quantity has considerably increased.
    • This is because the government’s interest requires this.
  • It is the baker and brewer’s interest to make the measure of quantity as small as possible.
    • Therefore, inspectors were appointed to always settle the quantity a little higher when it is brought down.
  • All our measures taken from the Roman foot, fathom, and inch, [187] are now much more.
    • ‘Troy weight’ was from Troy, a town in Champaigne where then the greatest commerce was carried on.
    • Troy weight gave rise to a heavier weight, because there was usually given the cast of the balance along with it.
    • This rendered dealings inaccurate.
      • It was necessary that this cast of the balance should be determined.
  • Accordingly, averdupois (avoir du poise), or heavy weight, was settled at 13 ounces.
    • This number was not easily divided.
    • It was settled at 16, the ounces being proportioned to it.

 

  • Thus the measure of quantity has been increasing.
    • We shall next show how the coin decreased.
  • When the government takes the coinage into its own hands, the expenses naturally fall on it.
    • If any private man coins, he must lessen the value or have nothing but his labour for his pains.
    • Besides, no man’s authority can be so great as to make his coin pass in common payments.
      • He must forge the stamp of the government.
  • The government took the task upon themselves.
    • To prevent frauds, they would try to prevent:
      • counterfeiting the king’s coin, and
      • encroaching on his prerogative.
    • Besides, the public faith was engaged.
    • It was necessary to prevent all kinds of fraud, because it was likewise necessary that people should be obliged to receive the coin according to its denomination.
    • If any refused it after a legal tender of payment was made:
      • the debtor should be free, and
      • the creditor guilty of felony.
  • In rude and [188] barbarous periods, the government was laid under many temptations to debase the coin, or, according to the mint language, to raise it.
    • For example, when on any important occasion, such as paying of debts, or of soldiers, it needed 2 millions, but only has 1 million, it calls in the coin of the country.
    • It mixes more alloy with it to come out as 2 million, as like as possible to what it was before.
  • Many operations of this kind have been performed in every country.
    • But England, from the freedom which it has almost uninterruptedly enjoyed, has been less troubled with this than any other nation.
    • In England, it has only fallen to 1/3.
    • But in many other countries it is not 1/50 of its original value.

 

  • The inconveniences of such practices are very great.
    • The debasement of the coin hinders commerce, or, at least, greatly embarrasses it.
    • A new calculation must be made how much of the new coin must be given for so much of the old.
  • People keep their goods from the market because they do not know what they will get for them.
    • Thus, a stagnation of commerce is created.
    • Besides, the debasing of the coin takes away the public faith.
  • Nobody will lend any sum to the government, or bargain with it because he might be paid with half of it.
    • This is a fraud committed by the government.
    • Every subject must be allowed to do the same and pay his debts with the new money, less than he owed.
  • However, this scheme serves its purpose for a short time.
    • Money has two uses:
      1. The payment of debts
      2. The buying of commodities
  • When the coin is debased, a debt of 20 shillings is then paid with 10 shillings.
    • But if the new coin is carried to a foreign market, it will give the old value.
    • All day-labourers are paid in the new coin.
    • Life’s necessities must be sold at what most people can give.
    • Consequently, their price will [189for some time be reduced.
    • The king himself gains in the meantime, but loses much.
      • His doubling it is a present advantage.
      • But it reduces his revenue, because all his taxes are paid in the new coin.
  • To prevent this loss, the French and all other nations on a like occasion, when they double the money by edict without re-coinage, make the augmentation after the money is called in, and before it goes out, and a reduction is made before next term of payment.
  • A reduction is always worse than an augmentation.
    • An augmentation injures the creditor.
    • A reduction injures the debtor, who should always be favoured.
  • If I owe 10 pounds and am obliged to pay 15, common industry must be excessively embarrassed.

 

  • The coins of most countries are either of copper, silver, or gold.
    • We are obliged even to receive payment in sixpences.
    • This sometimes causes confusion and loss of time.
  • The different coins are regulated by the market price of gold and silver, not by the government’s caprice.
    • The proportion of gold and silver is settled according to this market price.
    • This proportion sometimes varies a little.
  • Guineas have been valued [190] between 20-22 shillings.
  • The gold rises more in proportion in Britain than anywhere else.
    • It makes the silver of less value.
    • This causes a real inconvenience.
  • Silver buys more gold abroad than at home.
    • By sending abroad silver, they bring gold in return.
    • This gold buys more silver here than abroad.
    • Through this, a kind of trade is made.
      • The gold coin increases and the silver diminishes.
  • Some time ago, a proposal was given in to remedy this.
    • But it was thought so complex a case that they resolved not to meddle with it at that time.

CHAP 9: NATIONAL OPULENCE DOES NOT CONSIST IN MONEY

  • We have shown what rendered money the measure of value.
  • But labour, not money, is the true measure of value.
  • Therefore, national opulence consists in:
    • the quantity of goods and
    • the facility of barter [191].

 

  • The more money that is needed to circulate the goods of any country, the fewer the goods.
  • Suppose Scotland’s total stock of corn, cattle, money, etc. amounts to 20 million.
    • If 1 million in cash is needed to circulate it, there will only be 19 million of food, clothes, and lodging.
    • The people have less by 1 million than they would have if there were no need for this money.
  • Therefore, the poverty of any country increases as the money increases.
    • Money is a dead stock in itself.
    • It supplies no life convenience.
  • Money in this respect may be compared to the high roads of a country.
    • It does not create corn or grass.
    • But it circulates all the corn and grass in the country.
  • If we could find any way to save the ground taken up by highways, we would:
    • considerably increase the quantity of commodities, and
    • have more to carry to the market.
  • The worth of a piece of ground does not lie in the number of highways that run through it.
    • Similarly, the riches of a country does not consist in the amount of money used to circulate commerce, but in the great abundance of life’s necessaries.
  • We would greatly increase our country’s wealth if we:
    • could find a way to send the half of our money abroad to be converted into goods, and
    • supply the channel of circulation at home, at the same time.

 

  • Hence, the beneficial effects of the creation of banks and paper credit.
    • It is easy to show that banks are advantageous to the country’s commerce.
  • Suppose as above, that:
    • the whole stock of Scotland amounted to 20 million,
    • 2 million metal money are employed in the [192] circulation of it, and
    • the other 18 million are in commodities.
  • If the banks in Scotland issued notes to the value of 2 million reserving £300,000 metal money to answer immediate demands, there would be
    • 1.7 million pounds circulating in cash, and
    • 2 million of paper money besides.
  • The natural circulation however is 2 million.
    • The channel will receive no more.
  • What is over will be sent abroad to bring home materials for food, clothes, and lodging.
    • This has a tendency to enrich a nation and may be seen immediately.
    • For whatever commodities are imported, just so much is added to the country’s opulence.
  • The only objection against paper money is that it drains the country of gold and silver.
    • Bank notes will not circulate in a foreign market.
    • Foreign commodities must be paid in coins.
  • But if we consider attentively, we will find that this is no real hurt to a country.
    • The nation’s opulence does not consist in the amount of coin.
    • It consists in the abundance of commodities necessary for life.
    • Whatever increases these commodities increases the country’s riches.

 

  • Money is not fit for the necessaries of life.
    • It cannot be food, clothes, or lodging.
    • It must be exchanged for commodities for these purposes.
  • If all the coin of the nation were exported, and our commodities increased proportionally, it might be recalled on any sudden emergency sooner than anyone could imagine.
    • Goods will always bring in money.
    • As long as the stock of commodities in any nation increases, they can augment the amount of coin if necessary, by exporting their stock overseas.
  • This reasoning is confirmed by matter of fact.
    • The commerce of every European nation has been remarkably increased by the creation of banks.
    • Everybody in Britain is sensible of their good effects [193].
    • Our American colonies are most flourishing.
      • Most of the commerce there is carried on by paper.

 

  • Banks were first established to facilitate the transference of money.
    • At this day, this is the only design of the bank at Amsterdam.
  • When commerce is carried to a high pitch, the delivery of gold and silver consumes a lot of time.
    • When a great merchant had 20,000 pounds to give away, he would take almost a week to count it out in guineas and shillings.
    • A bank bill prevents all this trouble.
  • Before the creation of the bank at Amsterdam, the merchants kept certain sums in bags to answer immediate demands.
    • This was done to lessen the trouble of counting out huge amounts of cash.
  • In this case, you must either:
    • trust the merchant’s honesty or
      • If you trusted his fidelity, frequent frauds would be committed.
    • you must take the trouble of counting it over.
      • If you did not trust him, your trouble was not lessened.
  • The inconveniences from this led to the creation of that bank.
    • You deposit money there.
    • The bank gives you a bill to that extent.
    • This money is secure.
    • You never call for it because the bill will generally sell above par.
      • Therefore it is advantageous to you to let it lie.
    • The bank has no office for payment, because there is seldom any payment demanded.
  • In this way, the bank of Amsterdam has a good effect in facilitating commerce.
    • Its notes circulate only there.
    • Amsterdam’s credit is not endangered by the bank.
  • In 1701, when the French army was at Utrecht, a sudden demand was made on it.
    • Holland was alarmed with the expected fatal [194] consequences.
    • But no danger ensued.
  • Before this, a suspicion prevailed that the bankers had fallen into a custom of trading with the money.
    • But at that time, it was found that a great amount of the money had been scorched by a fire that happened in the neighbourhood about 50 years before that.
  • This plainly showed that:
    • there was no ground for the suspicion, and
    • the bank’s credit remained unhurt.
  • It has been affirmed by some that the bank of Amsterdam has always money in its stores of 80 or 90 million.
    • But this has lately been shown by an ingenious gentleman to be false, from a comparison of the trade of London and Amsterdam.

 

  • The constitution of the banks in Britain differs widely from that in Amsterdam.
    • Here there is only about 1/6 of the stock kept in readiness for answering demands.
    • The rest is employed in trade.
  • Originally, they were [195] on the same footing with the Amsterdam bank.
    • But the directors took liberty to send out money.
    • They gradually came to their present situation.
  • The ruin of a bank would not be so dangerous as is commonly imagined.
  • Suppose all the money in Scotland was issued by one bank, and that it became bankrupt.
    • A very few individuals would be ruined by it, but not many.
    • Because the amount of cash or paper that people have in their hands bears no proportion to their wealth.
  • The wealth of the whole country would not be much hurt by it, because 1% of the country’s riches does not consist in money.
  • The only method to prevent the bad consequence from the ruin of banks is to:
    • give monopolies to none, and
    • to encourage the creation of as many as possible.
  • When several are established in a country, a mutual jealousy prevails.
    • They are continually making unexpected runs on one another.
      • This puts them on their guard.
      • It obliges them to provide themselves against such demands.
  • If there were just one bank in Scotland, it would perhaps be a little more enterprising, as it would have no rival.
    • By mismanagement, it might become bankrupt.
  • But having many banks puts this beyond all danger.
    • Even if one did break, everyone would have very few of its notes.
  • From all these considerations, banks are beneficial to the country’s commerce.
    • It is a bad policy to restrain them.

 

  • Several political writers have published treatises to show the pernicious nature of banks and paper money.
    • Mun, a London merchant, published one with this intention.
      • It was a reply to a book written on the opposite before.
      • He affirms that England must go to ruin if it is drained of its money.
      • The circulation of paper banishes gold and silver from the country.
      • All other goods which we have are spent on our subsistence.
      • These goods gradually diminish and must finally come to an end.
      • Money never decays.
        • A stock of it will [196] last forever.
        • By keeping up big amounts of it in the country, we shall insure our riches as long as the world stands.
  • This reasoning was thought very satisfactory in those days.
    • But from what has been said before concerning the nature of public opulence, it is absurd.

 

  • Some time after that, Mr. Gee, also a merchant, wrote with the same intention.
    • He tried to show that England would soon be ruined by trade with foreign countries.
    • By the exchange, he calculates that the balance is always against us.
    • Consequently, in almost all our commercial dealings with other nations we are losers.
    • As they drain us of our money, we must soon come to ruin.
  • The absurdity of this is also evident from former considerations.
    • Foreign commerce was not stopped by any regulations.
      • The nation has prodigiously increased in riches, and is still increasing.
    • He proposed some regulations to prevent our ruin from this quarter.
    • If the government had been so foolish as to have complied [197] with, they would more probably have impoverished the nation.

 

  • Mr. Hume published some essays showing the absurdity of these and other such doctrines.
    • He proves very ingeniously that:
      • money must always bear a certain proportion to the amount of commodities in every country.
      • whenever money is accumulated beyond the proportion of commodities in any country, the price of goods will necessarily rise.
        • This country will then be undersold at the foreign market
        • Consequently, the money must go to other nations.
  • On the contrary, whenever the amount of money falls below the proportion of goods, the price of goods reduces.
    • The country undersells others in foreign markets.
    • Consequently, money returns in great plenty.
  • Thus, money and goods will keep near about a certain level in every country.
  • Mr. Hume’s reasoning is exceedingly ingenious.
    • However, he seems to have gone a little into the notion that public opulence consists in money.

 

  • Human industry always multiplies goods and money together, though not always in the same proportion.
    • The labour of men will always be employed in producing whatever is the object of human desire.
    • Things will increase in proportion as it is in the power of man to cultivate them.
  • Corn and other commodities of that kind must always be produced in greater abundance than gold, precious stones, and the like, [198] because they are more within the reach of human industry.
    • By proper culture, almost any part of the earth’s surface can produce corn.
    • But gold cannot be found everywhere.
    • Even where it is found, it lies concealed in the bowels of the earth.
      • A long time and much labour are needed to produce a small amount of it.
  • For these reasons, metal money never increases in proportion to the increase of goods.
    • Consequently, metal money will be sold more cheaply the richer a country becomes.
  • In savage nations, money gives a vast price, because their only money is what they get by plunder.
    • They do not know what is needed to produce money in their own country.
  • But when a nation arrives at a certain degree of improvement in the arts, the value of money diminishes.
    • They then begin to search the mines and make it themselves.
    • From the fall of the Roman Empire to the discovery of the West Indies, the value of money was very high, and continually increasing.
    • Since that latter period its value has decreased considerably.

 

  • Mr. Locke also published a treatise to show the pernicious consequences of allowing the nation to be drained of money.
  • His notions were also founded on the idea that public opulence consists in money.
    • Though he treats it in a more philosophical light.
  • He affirms, with Mr. Mun, that:
    • if there is no money in a nation it must soon come to ruin
    • all commodities are soon spent, but money lasts for ever.

[199]

  • Our riches do not consist in money but commodities because money cannot be used for any of life purposes, but commodities can.
    • The ‘consumptibility’ of goods is the great cause of human industry.
    • An industrious people will always produce more than they consume.
  • It is easy to show how small a proportion the cash in every country bears to the public opulence.
  • It is generally supposed that there are 30 million of money circulating in Britain.
    • But the annual consumption is much more than 100 million.
    • At a population of 10 million and allowing 10 pounds per annum for the subsistence of each person, which is by much too little, the whole annual consumption amounts to 100 million.
    • So it appears that the circulating cash bears but a small proportion to the whole opulence of the country.
    • However, it is probable that there are less than 30 million people in Britain.
      • In this case, the proportion will be still less.

 

  • Some who support the notion that the [200] country’s riches consists in money, say that when a person retires from trade he turns his stock immediately into cash.
    • This is because money is the instrument of commerce.
    • A man can change it for the necessaries and elegancies of life more easily than anything else.
    • Even the miser who locks up his gold in his chest has this end in view.
  • No man hoards up money for its own sake.
    • He considers that by keeping money always by him, he can supply at once all the necessities of himself and his family.

 

  • The opinion that riches consist in money is absurd in speculation.
  • It has caused so many prejudicial errors in practice, such as the following.

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