Book IV, Chapter I, 1

OF SYSTEMS OF POLITICAL ECONOMY.

Political economy, regarded as a branch of the knowledge required of a statesman or legislator, has two distinct aims: first, to provide the people with ample revenue or subsistence—or, more precisely, to enable them to provide it for themselves; and second, to provide the state or commonwealth with enough revenue for public services. It seeks to enrich both the people and the sovereign.

The different paths by which different ages and nations have grown prosperous have given rise to two systems of political economy concerning the enrichment of the people. One may be called the system of commerce, the other the system of agriculture. I shall try to explain both as fully and clearly as I can, beginning with the system of commerce. It is the modern system, and the one best understood in our own country and our own time.

OF THE PRINCIPLE OF THE COMMERCIAL OR MERCANTILE SYSTEM.

The popular belief that wealth consists of money, or of gold and silver, arises naturally from money’s two functions: it is the instrument of commerce and the measure of value. As the instrument of commerce, money enables us to obtain whatever else we need more readily than any other commodity can. The great difficulty, we always find, is getting money. Once we have it, any subsequent purchase is easy. As the measure of value, money provides the quantity against which we estimate the value of all other commodities in exchange. We say a rich man is worth a great deal and a poor man is worth very little money. A frugal man, or one eager to grow rich, is said to love money; a careless, generous, or extravagant man is said to care little about it. To grow rich is to get money; in ordinary speech, wealth and money are, in short, treated as synonymous in every respect.

Just as a rich man is thought to have plenty of money, so a rich country is thought to abound in it; and piling up gold and silver in a country is thought the quickest way to enrich it. For some time after America was discovered, Spaniards arriving on an unknown coast would first ask whether there was gold or silver in the neighborhood. From the answer they judged whether it was worth establishing a settlement there or conquering the country. Plano Carpino, a monk sent as ambassador by the king of France to a son of the famous Gengis Khan, says that the Tartars frequently asked whether the kingdom of France had plenty of sheep and oxen. Their question had the same purpose as the Spaniards’: they wanted to know whether the country was rich enough to be worth conquering. Among the Tartars, as among other pastoral peoples generally unfamiliar with money, livestock served as the instrument of commerce and the measure of value. In their eyes, therefore, wealth consisted in livestock, just as in the Spaniards’ eyes it consisted in gold and silver. Of these two beliefs, the Tartar one was perhaps closer to the truth.

Mr Locke distinguishes money from other movable goods. All other movable goods, he says, are so readily consumed that the wealth they constitute cannot be much relied upon: a nation abundant in them one year may, without exporting any, be in great want of them the next through its own waste and extravagance. Money, by contrast, is a steadfast friend; though it passes from hand to hand, it is not readily wasted or consumed if it can be kept from leaving the country. Gold and silver are therefore, in his view, the most solid and substantial part of a nation’s movable wealth, and increasing its supply of these metals should accordingly be a principal aim of its political economy.

Others concede that if a nation could be cut off from the rest of the world, the amount of money circulating within it would not matter. The consumable goods circulated through money would merely exchange for a greater or smaller number of coins; the country’s real wealth or poverty, they acknowledge, would depend entirely on the abundance or scarcity of those goods. But, they think, the situation is different for countries connected with foreign nations and obliged to fight wars abroad and maintain fleets and armies in distant lands. They say this cannot be done without sending money abroad to pay for it, and a nation cannot send much money abroad unless it has plenty at home. Every such nation must therefore try to accumulate gold and silver in peacetime, so that it has the means to conduct foreign wars when the need arises.

Under the influence of these popular ideas, every European nation has tried every conceivable way, with little success, to accumulate gold and silver at home. Spain and Portugal, which own the principal mines supplying Europe with those metals, have either prohibited their export under the severest penalties or subjected it to a substantial duty. A similar ban seems once to have formed part of the policy of most other European nations. It appears even where we would least expect it: some old Scotch acts of Parliament forbid the removal of gold or silver from the kingdom under heavy penalties. The same policy formerly prevailed in both France and England.

When those countries became commercial, merchants found this ban extremely inconvenient on many occasions. They could often buy the foreign goods they wanted, whether for import into their own country or for shipment to another, on better terms with gold and silver than with any other commodity. They therefore protested that the ban harmed trade.

First, they argued that exporting gold and silver to buy foreign goods did not always reduce the quantity of those metals in the kingdom; on the contrary, it could often increase it. If domestic consumption of foreign goods did not thereby increase, those goods could be exported again to other countries, where a profitable sale could bring back far more treasure than had first been sent out to buy them. Mr Mun compares this operation of foreign trade with sowing and harvesting in agriculture. “If we only behold,” he says, “the actions of the husbandman in the seed time, when he casteth away much good corn into the ground, we shall account him rather a madman than a husbandman. But when we consider his labors in the harvest, which is the end of his endeavors, we shall find the worth and plentiful increase of his actions.”

Second, they argued that a ban could not stop gold and silver from leaving the country: because these metals are so small in bulk relative to their value, they can readily be smuggled abroad. Only proper attention to what they called the balance of trade could stop their export. If the country exported goods worth more than its imports, foreign nations would owe it the difference, which would necessarily be paid in gold and silver and increase its supply of those metals. But if its imports were worth more than its exports, it would owe the difference to foreign nations and necessarily pay in the same way, diminishing its supply. In that case, a prohibition on exporting the metals could not prevent their departure, but would make it more costly by making it more dangerous. The exchange rate would therefore move further against the country that owed the balance than it otherwise would: a merchant buying a bill on a foreign country would have to pay the banker selling it not just for the ordinary risk, trouble, and expense of sending money there, but for the additional risk created by the ban. The more the exchange rate moved against a country, they said, the more its balance of trade would necessarily turn against it, since its money would necessarily lose that much value relative to the money of the country to which the balance was owed. If the rate between England and Holland, for example, was five per cent. against England, it would take 105 ounces of silver in England to buy a bill payable in Holland for 100 ounces of silver. Thus 105 ounces of silver in England would be worth only 100 ounces in Holland, buying only a corresponding quantity of Dutch goods; conversely, 100 ounces of silver in Holland would be worth 105 ounces in England and buy a corresponding quantity of English goods. English goods sold to Holland would sell that much cheaper, and Dutch goods sold to England that much dearer, because of the difference in exchange rates. The former would bring that much less Dutch money into England, while the latter would take that much more English money into Holland. The balance of trade would therefore necessarily turn further against England, requiring a greater balance of gold and silver to be sent to Holland.

These arguments were partly sound and partly misleading. They were sound in maintaining that exporting gold and silver in the course of trade could often benefit a country, and sound too in maintaining that no ban could prevent such exports when private individuals stood to gain by them. But they were misleading in assuming that maintaining or increasing the supply of these metals needed any more government attention than maintaining or increasing the supply of other useful commodities, which free trade unfailingly supplies in the proper quantity without such attention. They were perhaps misleading too in claiming that a high exchange rate necessarily increased what they called an unfavorable balance of trade or caused more gold and silver to be exported. A high rate was certainly very harmful to merchants who owed money abroad: they paid more for the bills their bankers issued on foreign countries. But though the danger posed by the ban could impose an additional cost on the bankers, it did not necessarily carry any more money out of the country. That cost would generally be incurred wholly within the country in smuggling money out, and would seldom lead to the export of a single sixpence beyond the precise amount of the bill. A high exchange rate would also naturally encourage merchants to bring their exports as close as possible to their imports, so that they paid the high rate on as little as possible. Moreover, by raising the price of foreign goods, the high rate would necessarily act like a tax and reduce their consumption. It would therefore tend not to increase but to reduce what they called the unfavorable balance of trade, and with it the export of gold and silver.

Such as they were, these arguments persuaded their audience. Merchants presented them to parliaments and the councils of princes, to nobles and country gentlemen: people presumed to understand trade addressed people who knew themselves to be ignorant of it. Experience showed the nobles and country gentlemen, no less than the merchants, that foreign trade enriched the country, but none of them properly understood how. Merchants understood perfectly how it enriched them; understanding that was their business. Understanding how it enriched the country was not. They considered that question only when they needed to seek a change in the laws governing foreign trade. Then they had to say something about the benefits of that trade and the way existing laws obstructed them. The authorities judging the matter found it entirely satisfactory to be told that foreign trade brought money into the country, while the laws at issue prevented it from bringing in as much as it otherwise would. These arguments therefore achieved their desired effect. In France and England, the ban on exporting gold and silver was limited to each country’s own coin. Foreign coin and bullion could be exported freely. In Holland and some other places, the freedom extended even to domestic coin. Government ceased trying to guard against the export of gold and silver and instead watched the balance of trade, as though it alone could cause the supply of those metals to grow or shrink. One fruitless concern gave way to another, far more intricate and troublesome, but just as fruitless. The title of Mun’s book, England’s Treasure in Foreign Trade, became a fundamental maxim of political economy not only in England but in every commercial country. Domestic or home trade—the most important trade of all, in which the same capital provides the greatest revenue and gives the country’s people the most employment—was regarded as subordinate to foreign trade. It neither brought money into the country nor carried it away, people said. The country could therefore become richer or poorer through domestic trade only insofar as its prosperity or decline indirectly affected foreign trade.

On Systems of Political Economy

Political economy, as a subject for a statesman or lawmaker, has two separate goals. First, it aims to give people enough revenue or means of living—or, more precisely, to enable them to provide these for themselves. Second, it aims to provide the state with enough revenue for public services. Its goal is to enrich both the people and the sovereign.

The different ways wealth has grown in different times and nations have led to two systems of political economy for enriching the people. One can be called the commercial system, and the other the agricultural system. I will explain both as clearly and fully as I can, beginning with the commercial system. It is the modern system, and people in our country and time understand it best.

On the Principle of the Commercial or Mercantile System

The widespread belief that wealth consists of money, or gold and silver, naturally comes from money’s two roles: it is a tool for trade and a measure of value. Because it is a tool for trade, money lets us obtain whatever else we need more easily than any other commodity does. Getting money, we always find, is the hard part. Once we have it, we can easily make further purchases. Because money is a measure of value, we judge the value of all other commodities by how much money they can be exchanged for. We say a rich man is worth a great deal and a poor man is worth very little money. We say that a thrifty person, or someone eager to become rich, loves money, while a careless, generous, or extravagant person does not care about it. In ordinary language, becoming rich means getting money, and wealth and money mean the same thing in every respect.

Likewise, people assume that a rich country has plenty of money and that piling up gold and silver is the quickest way to enrich it. For a while after America was discovered, the first thing the Spaniards asked when they reached an unfamiliar coast was whether gold or silver could be found nearby. The answer told them whether the land was worth settling or conquering. Plano Carpino, a monk sent as an ambassador by the king of France to a son of the famous Gengis Khan, says that the Tartars often asked him whether France had plenty of sheep and oxen. They asked this for the same reason as the Spaniards: to find out whether the country was rich enough to conquer. The Tartars, like other shepherding peoples who generally did not use money, used cattle to trade and to measure value. So they thought wealth consisted of cattle, just as the Spaniards thought it consisted of gold and silver. Of these two views, the Tartar view was perhaps closer to the truth.

Mr Locke points out a difference between money and other movable goods. All other movable goods, he says, are consumed so easily that a nation cannot count on wealth held in them. A nation with plenty of them one year may lack them badly the next, even without exporting any, simply through waste and extravagance. Money, by contrast, is a dependable friend. Although it changes hands, it is unlikely to be used up if it can be kept inside the country. He therefore thinks gold and silver are the most solid, lasting part of a nation’s movable wealth. For that reason, he believes increasing their supply should be the main goal of political economy.

Others agree that if a nation were cut off from the rest of the world, the amount of money in circulation would not matter. The goods people consume would simply trade for more or fewer coins. They acknowledge that the country’s real wealth or poverty would depend entirely on whether those goods were plentiful or scarce. But they think the situation is different for countries connected with foreign nations that must fight wars abroad and maintain fleets and armies far away. Those forces, they say, can be paid only by sending money abroad. A nation cannot send much abroad unless it has plenty at home. Therefore, in peacetime every such nation must build up gold and silver to fund foreign wars when necessary.

Because of these popular beliefs, every European nation has tried, with little success, every possible way to pile up gold and silver at home. Spain and Portugal own the main mines that supply Europe with these metals. They have either banned their export under the harshest penalties or imposed a substantial duty on it. Similar bans seem to have been part of most other European nations’ earlier policies. They even appear where we would least expect them: some old acts of the Scotch Parliament forbid taking gold or silver out of the kingdom under heavy penalties. France and England once followed the same policy.

When these countries began trading more extensively, merchants often found the ban extremely inconvenient. They could frequently buy the foreign goods they wanted more cheaply with gold or silver than with any other commodity. They wanted these goods either to import into their own country or to carry on to another foreign country. So they protested that the ban harmed trade.

Their first argument was that exporting gold and silver to buy foreign goods did not always reduce the amount of those metals at home. It could often increase it instead. If the country did not consume more foreign goods as a result, it could export those goods again and sell them abroad for a large profit, bringing home much more treasure than it had first sent out. Mr Mun compares this foreign trade to sowing and harvesting: “If we look only at what the farmer does at sowing time, when he throws plenty of good grain into the ground, we will think him mad rather than a farmer. But when we look at his work at harvest, which is the purpose of all his efforts, we will see the value and plentiful increase produced by what he did.”

Their second argument was that the ban could not stop gold and silver from being exported. These metals were easy to smuggle because they were small in size compared with their value. Only proper attention to what they called the balance of trade could prevent their export. If a country exported goods worth more than its imports, foreign nations owed it the difference. They had to pay in gold and silver, increasing the supply at home. If the country imported more than it exported, it owed foreign nations the difference, had to pay them in the same way, and lost some of those metals. In this case, they argued, banning their export could not stop it; by adding danger, the ban only made it cost more. The exchange rate would then move further against the country that owed the balance. A merchant buying a bill payable in the foreign country had to pay the banker not just for the normal risk, work and cost of sending money there, but also for the extra risk caused by the ban. They argued that the worse the exchange rate was for a country, the more unfavorable its balance of trade necessarily became. Its money was worth correspondingly less than the money of the country it owed. If the exchange rate between England and Holland was five per cent. against England, for example, it would take 105 ounces of silver in England to buy a bill for 100 ounces of silver in Holland. Thus 105 ounces in England would be worth only 100 ounces in Holland and would buy only a corresponding quantity of Dutch goods. Conversely, 100 ounces in Holland would be worth 105 ounces in England and would buy a corresponding quantity of English goods. The exchange-rate difference would make English goods sold in Holland that much cheaper and Dutch goods sold in England that much more expensive. As a result, the first would bring that much less Dutch money to England and the second would take that much more English money to Holland. England’s trade balance would therefore become that much worse, requiring a larger payment of gold and silver to Holland.

These arguments were partly sound and partly misleading. They were sound in saying that exporting gold and silver for trade could often benefit a country. They were also sound in saying that a ban could not prevent exports when private people found it profitable to export the metals. But they were misleading in assuming that the government must do more to preserve or increase the supply of these metals than it must do for any other useful goods. Free trade supplies those other goods in the proper quantity without government attention. They were perhaps also misleading in claiming that an unfavorable exchange rate must worsen what they called an unfavorable balance of trade or cause more gold and silver to be exported. A high exchange rate did impose a heavy cost on merchants who had payments to make abroad. They had to pay more for bankers’ bills payable in those countries. But although the ban’s added risk might cost bankers something extra, it did not necessarily send any more money abroad. That extra cost would generally be spent at home to smuggle the money out. It would rarely result in the export of even a single sixpence beyond the exact sum owed. A high exchange rate would also encourage merchants to bring their exports as close as possible to their imports, so they would pay the costly exchange rate on as little money as possible. Further, it would act like a tax: it would raise the price of foreign goods and reduce their consumption. So it would tend to reduce, not increase, what they called the unfavorable balance of trade and the resulting export of gold and silver.

Despite their flaws, these arguments persuaded the people who heard them. Merchants presented them to parliaments, princes’ councils, nobles and country gentlemen. People thought the merchants understood trade, while their listeners knew they understood little about it. Experience showed nobles, country gentlemen and merchants alike that foreign trade enriched the country. None of them knew very well how. Merchants knew perfectly well how it enriched themselves; knowing that was their business. Knowing how it enriched the country was not. They considered that question only when they wanted their country to change a law governing foreign trade. They then needed to say something about the benefits of foreign trade and how the existing laws kept it from providing those benefits. The people who had to decide the matter found it very satisfying to hear that foreign trade brought money into the country but the laws stopped it from bringing in as much as it could. So the arguments had the desired effect. France and England restricted their bans on exporting gold and silver to their own coins. They allowed foreign coins and bullion to be exported freely. Holland and some other places extended this freedom even to their own coins. Governments stopped trying to guard against exports of gold and silver and turned instead to monitoring the balance of trade, which they took to be the only cause of a rise or fall in their supply. They exchanged one pointless task for another that was far more complex, more troublesome and just as pointless. The title of Mun’s book, England’s Treasure in Foreign Trade, became a basic principle of political economy not only in England but in every trading country. Domestic trade is the most important trade of all: with an equal amount of capital, it brings the country’s people the greatest revenue and employment. Yet it was treated as useful only insofar as it helped foreign trade. People said that domestic trade brought no money into the country and took none out, so it could make a country richer or poorer only by indirectly affecting foreign trade.