Book IV, Chapter I, 2

A country without mines of its own must certainly obtain gold and silver from abroad, just as one without vineyards must obtain its wine from abroad. But there seems no reason for government to devote more attention to obtaining the one than the other. A country with the means to buy wine will always obtain the wine it needs; a country with the means to buy gold and silver will never lack those metals. Like other commodities, they can be bought at a price; and just as they are the price of other commodities, so other commodities are their price. We can be entirely confident that freedom of trade will always supply us with the wine we need without any government attention; we can be equally confident that it will supply all the gold and silver we can afford to buy or employ, whether to circulate our commodities or for other uses.

The quantity of every commodity that human industry can buy or produce naturally adjusts itself in each country to effective demand: the demand of people willing to pay the full rent, wages, and profits required to prepare it and bring it to market. No commodities, however, adjust more readily or more precisely to effective demand than gold and silver. Their small bulk and great value make them easier than any others to move from one place to another: from places where they are cheap to places where they are dear, and from places where their supply exceeds effective demand to places where it falls short. If England, for example, had an effective demand for more gold, a packet boat could bring fifty tons of gold from Lisbon or wherever it could be obtained, enough to coin more than five millions of guineas. But importing grain of the same value, at five guineas a-ton, would require a million of tons of shipping, or a thousand ships of a thousand tons each. England’s navy would not suffice.

When a country imports more gold and silver than effective demand calls for, no vigilance on the part of government can prevent their export. All the brutal laws of Spain and Portugal cannot keep their gold and silver at home. Continual imports from Peru and Brazil exceed effective demand in those countries and drive the price of the metals there below their price in neighboring countries. Conversely, if the supply of those metals in a particular country fell short of effective demand, raising their price above the price in neighboring countries, the government would have no need to make any effort to import them. Even if it tried to prevent their import, it could not succeed. Once the Spartans had the means to buy them, these metals broke through every barrier that the laws of Lycurgus placed in their way into Lacedaemon. Nor can all the harsh customs laws prevent the import of teas from the Dutch and Gottenburg East India companies, because they are somewhat cheaper than the British company’s teas. Yet a pound of tea is about a hundred times bulkier than one of the highest prices commonly paid for it in silver, sixteen shillings, and more than two thousand times bulkier than the same price in gold. It is therefore just that much harder to smuggle.

Part of the reason the price of gold and silver does not fluctuate constantly, as the prices of most other commodities do, is that the metals move so easily from where they abound to where they are needed. Other commodities, because of their bulk, cannot readily change places when their market happens to be overstocked or undersupplied. The price of the metals is not, of course, entirely free from variation, but its changes are usually slow, gradual, and uniform. In Europe, for example, it is supposed—perhaps without much foundation—that throughout the present and preceding century their value has been falling steadily but gradually because of continual imports from the Spanish West Indies. But an abrupt change in the price of gold and silver, enough to raise or lower the money price of every other commodity at once in a noticeable and substantial way, requires a revolution in commerce like the one brought about by the discovery of America.

If, despite all this, gold and silver were ever scarce in a country that had the means to buy them, there would be more ways to replace them than almost any other commodity. Without manufacturing materials, industry must stop; without provisions, people must starve. But when money is lacking, barter can take its place, though at considerable inconvenience. Buying and selling on credit, with different dealers settling their accounts against one another once a-month or once a-year, can replace it with less inconvenience. Well-regulated paper money can replace it not only without inconvenience but, in some cases, with some advantages. On every count, therefore, government attention has never been more needlessly employed than when it has been directed toward preserving or increasing the quantity of money in a country.

Yet no complaint is more common than a shortage of money. Money, like wine, will always be scarce for those with neither the means to buy it nor the credit to borrow it. People with either will seldom lack the money or wine they need. Complaints of a shortage of money, however, do not always come only from reckless spendthrifts. Sometimes they are widespread throughout a trading town and the country around it. The usual cause is overtrading. Prudent men whose ventures exceed their capital are as likely to lack both the means to buy money and the credit to borrow it as spendthrifts whose expenses exceed their revenue. Before their ventures bear fruit, their stock is exhausted, and their credit along with it. They go everywhere in search of loans, and everyone tells them they have nothing to lend. Even widespread complaints of a shortage of money do not always show that fewer gold and silver coins than usual circulate in the country, but rather that many people want coins and have nothing to offer in exchange. When trading profits are higher than usual, overtrading becomes a common error among large dealers and small alike. They do not necessarily send more money abroad than usual; rather, at home and abroad they buy an unusual quantity of goods on credit and send them to distant markets, hoping that the returns will arrive before payment is due. Payment falls due first, and they have nothing on hand with which to buy money or provide sound security for a loan. The general complaint of a shortage of money arises not from any scarcity of gold and silver but from the difficulty such people face in borrowing and their creditors face in collecting payment.

It would be absurd to make a serious effort to prove that wealth consists not of money, or gold and silver, but of what money buys, and that money has value only because it buys things. Money undoubtedly always forms part of a nation’s capital; but it has already been shown to make up only a small part of it in general, and always its least profitable part.

A merchant generally finds it easier to buy goods with money than to buy money with goods, not because wealth resides more truly in money than in goods, but because money is the recognized and established instrument of commerce, readily accepted for everything, though not equally readily obtainable in exchange for everything. Most goods, moreover, perish faster than money, and he may often suffer a far greater loss by keeping them. While his goods remain unsold, too, he is more exposed to demands for money that he cannot meet than he is once their price is in his coffers. Beyond this, his profit comes more directly from selling than from buying. For all these reasons he is generally much more eager to exchange his goods for money than to exchange his money for goods. Yet although an individual merchant with a warehouse full of goods may sometimes be ruined if he cannot sell them in time, a nation or country faces no similar fate. A merchant’s entire capital often consists of perishable goods intended to buy money. But only a very small part of the annual produce of a country’s land and labor can ever be intended to buy gold and silver from its neighbors. By far the greater part circulates and is consumed at home; and even of the surplus sent abroad, the greater part is generally intended to buy other foreign goods. Thus, even if gold and silver could not be obtained in exchange for the goods set aside to purchase them, the nation would not be ruined. It might suffer some loss and inconvenience and have to resort to some of the expedients needed to replace money. The annual produce of its land and labor, however, would remain the same, or nearly so, as usual, because the same, or almost the same, consumable capital would be employed to maintain that labor. And though goods do not always command money as readily as money commands goods, in the long run they command it more necessarily than money commands them. Goods serve many purposes besides buying money, whereas money serves no purpose but to buy goods. Money must therefore seek out goods, but goods do not always or necessarily seek out money. A buyer does not always intend to sell again; often he intends to use or consume what he buys. A seller, by contrast, always intends to buy again. The buyer may often have completed the whole of his business, but the seller can never have completed more than half of his. People want money not for its own sake but for what they can buy with it.

Consumable goods, it is said, are soon destroyed, whereas gold and silver last longer; if not continually exported, they might accumulate for ages, bringing an incredible increase in the country’s real wealth. On this account, it is claimed, no trade can harm a country more than exchanging such lasting things for such perishable ones. Yet we do not call the exchange of English hardware for French wine a harmful trade, although hardware lasts a very long time and, without its continual export, might likewise accumulate for ages, incredibly increasing the country’s stock of pots and pans. But it is readily apparent that every country’s need sets a limit on the number of such utensils. It would be absurd to keep more pots and pans than are needed to cook the food ordinarily eaten there; and if the supply of food grew, the number of pots and pans would readily grow along with it, as some of the additional food was used to buy them or support more workers who made them. It should be just as apparent that every country’s need for gold and silver sets a limit on their quantity. As coin they circulate commodities, and as plate they provide a kind of household furnishing. The quantity of coin is governed by the value of the commodities it must circulate: increase that value, and part of it will immediately be sent abroad to buy, wherever it can be found, the additional coin required to circulate those commodities. The quantity of plate is governed by the number and wealth of private families who choose to indulge in that kind of splendor: increase their number and wealth, and some of the additional wealth will very likely be spent buying more plate wherever it can be found. To try to make a country richer by introducing or retaining more gold and silver than it needs is as absurd as trying to improve the meals of private families by forcing them to keep more kitchen utensils than they need. Just as buying those unnecessary utensils would reduce rather than increase the quantity or quality of the family’s provisions, buying unnecessary gold and silver must likewise diminish the wealth that feeds, clothes, and houses the people, and supports and employs them. Gold and silver, whether coin or plate, are utensils no less than kitchen furnishings; this must be remembered. Increase their use—raise the quantity of consumable goods that must be circulated, handled, and prepared with their help—and you will unfailingly increase their quantity. But if you try to increase their quantity by extraordinary measures, you will just as surely diminish their use, and even diminish their quantity, which can never exceed what that use requires. If they ever accumulated beyond that amount, they would be so easy to transport, and leaving them idle and unemployed would involve such a loss, that no law could prevent their immediate export.

A country without its own mines must get gold and silver from abroad, just as a country without vineyards must get wine from abroad. But the government need not pay more attention to one than the other. A country that can afford to buy wine will always get the wine it needs. A country that can afford to buy gold and silver will never run short of them. Like other goods, they can be bought at a price. Just as these metals pay for other goods, other goods can pay for these metals. We safely trust free trade to supply the wine we need without government attention. We can be equally sure it will supply all the gold and silver we can afford to buy or use, whether to circulate our goods or for other purposes.

In every country, the supply of each good that people can buy or produce naturally adjusts to effective demand. This is demand from people willing to pay all the rent, labor costs and profits necessary to produce it and bring it to market. No goods adjust to effective demand more easily or accurately than gold and silver. Because they have high value but take up little space, they can be moved especially easily from one place to another: from places where they are cheap to places where they are expensive, and from places with more than effective demand requires to places with less. If England needed more gold, for example, a packet boat could bring fifty tons of gold from Lisbon or anywhere else it was available. This could be minted into more than five millions of guineas. But importing grain worth the same amount, at five guineas a-ton, would require a million of tons of shipping, or a thousand ships of a thousand tons each. England’s navy would not be big enough.

If a country imports more gold and silver than its effective demand requires, no government can stop those metals from being exported. Even the harsh laws of Spain and Portugal cannot keep their gold and silver at home. Continual imports from Peru and Brazil exceed those countries’ effective demand, pushing the price of the metals there below their price in neighboring countries. Conversely, if a country had less than effective demand required, so that the price rose above its neighbors’ price, the government would not need to do anything to bring them in. Even if it tried to prevent imports, it would fail. Once the Spartans could afford to buy these metals, they got past all the barriers that the laws of Lycurgus had placed in their way into Lacedaemon. Nor can all the customs authorities’ harsh laws keep out teas from the Dutch and Gottenburg East India companies, because they are somewhat cheaper than tea from the British company. Yet a pound of tea takes up about a hundred times as much space as the amount of silver commonly paid for it at one of its highest prices, sixteen shillings. It takes up more than two thousand times as much space as the same price in gold, making it correspondingly harder to smuggle.

Gold and silver can easily move from places with plenty to places that need them. That is one reason their prices do not fluctuate constantly as the prices of most other goods do. Bulk keeps many goods from moving when a market has too much or too little of them. The prices of these metals do change, but generally slowly, gradually and evenly. Some believe, perhaps without much basis, that their value in Europe has fallen steadily but gradually throughout the present and previous century because of constant imports from the Spanish West Indies. But suddenly raising or lowering their price enough to cause a large, noticeable, immediate change in the money prices of all other goods would take a change in commerce as great as the discovery of America caused.

If, despite all this, a country that could afford gold and silver did run short of them, more substitutes would be available than for almost any other good. If manufacturing materials are lacking, work must stop. If food is lacking, people must starve. But if money is lacking, people can barter, though it is quite inconvenient. They can buy and sell on credit, with different dealers settling their mutual accounts once a-month or once a-year. This is less inconvenient. Well-managed paper money can replace it without inconvenience and, in some cases, with benefits. From every point of view, then, governments have never spent their attention less usefully than when they have tried to preserve or increase a country’s money supply.

Yet no complaint is more common than a shortage of money. Money, like wine, is always scarce for people who cannot afford to buy it and cannot get credit to borrow it. People with either means or credit rarely lack the money or wine they need. But complaints about a shortage of money do not come only from reckless spenders. Sometimes the complaint spreads throughout a trading town and the surrounding countryside. The usual cause is trading beyond one’s means. Prudent people whose plans exceed their capital can be just as unable to buy or borrow money as spendthrifts whose spending exceeds their revenue. Before their plans produce returns, their stock runs out, along with their credit. They go everywhere seeking loans, and everyone tells them there is no money to lend. Even such widespread complaints do not always mean that fewer gold and silver coins than usual are circulating. They may mean that many people want those coins but have nothing to exchange for them. When trading profits are unusually high, dealers large and small commonly trade beyond their means. They do not necessarily send more money abroad than usual. Instead, they buy unusually large amounts of goods on credit at home and abroad and send them to distant markets. They hope to receive the proceeds before their payments fall due. But the payments come due before the proceeds arrive, and they have nothing available with which to buy money or offer good security for a loan. It is not a shortage of gold and silver that produces the general complaint about a shortage of money. The cause is the difficulty these people have in borrowing and their creditors have in getting paid.

It would be ridiculous to try to prove seriously that wealth is not money, gold or silver. Wealth consists of what money buys, and money has value only because it buys things. Money certainly always forms part of a nation’s capital. But, as already shown, it is generally a small part and always its least profitable part.

A merchant usually finds it easier to buy goods with money than to buy money with goods. This does not mean money is more essential to wealth than goods. It means that money is the accepted tool of trade. People readily give everything in exchange for it, but they are not always equally ready to give it in exchange for everything. Most goods also spoil more easily than money, so a merchant can often lose much more by keeping them. While his goods remain unsold, he is also more likely to face demands for money that he cannot meet than when their sale price is in his cash box. Besides, he earns his profit more directly by selling than by buying. For all these reasons he is generally far keener to exchange goods for money than money for goods. An individual merchant with a warehouse full of goods may be ruined if he cannot sell them in time. A country cannot be ruined in the same way. A merchant’s entire capital may consist of perishable goods intended to be sold for money. But only a very small part of the annual output of a country’s land and labor can ever be intended to buy gold and silver from its neighbors. Most is traded and consumed within the country. Even of the surplus sent abroad, most is generally intended to buy other foreign goods. So a nation would not be ruined if the goods intended to buy gold and silver could not be exchanged for them. It might suffer some loss and inconvenience, and might have to use some of the substitutes for money. Yet the yearly output of its land and labor would stay the same, or nearly so, because the same, or nearly the same, consumable capital would continue to support that production. Goods do not always obtain money as readily as money obtains goods. Over time, though, goods attract money even more inevitably than money attracts goods. Goods have many uses besides buying money; money has no use except buying goods. So money necessarily seeks out goods, but goods do not always or necessarily seek out money. A buyer does not always mean to sell again: often he means to use or consume what he buys. A seller, however, always means to buy again. The buyer may already have completed his business, while the seller has at most completed half of his. People want money not for its own sake but for what they can buy with it.

People say that goods meant to be consumed are soon used up, while gold and silver last much longer. Without the constant export of those metals, they say, a country could pile them up for centuries and increase its real wealth enormously. They therefore claim that no trade can harm a country more than exchanging these lasting metals for perishable goods. But we do not consider it harmful to exchange English hardware for French wine. Hardware, too, lasts a long time. Without its constant export, it could pile up for centuries and vastly increase the country’s supply of pots and pans. Yet clearly a country needs only as many utensils as it can use. It would be absurd to own more pots and pans than needed to cook the food normally eaten there. If the amount of food increased, the supply of pots and pans would readily grow with it. Some of the extra food would be used to buy them or to support more people making them. We should see just as readily that a country’s need for gold and silver limits its supply of those metals. People use them as coins to circulate goods and as household furnishings in the form of silverware and other plate. The amount of coin a country needs depends on the value of the goods to be circulated. Increase that value, and some of it will immediately be sent abroad to buy the extra coin needed, wherever that coin can be found. The amount of plate depends on the number and wealth of families who choose to spend money on that kind of display. Increase their number and wealth, and they will most likely spend some of their added wealth on additional plate, wherever they can find it. Trying to enrich a country by bringing in or keeping more gold and silver than it needs is as absurd as trying to give families better meals by requiring them to keep more kitchen utensils than they need. Buying unnecessary utensils would reduce, not increase, either the quantity or quality of the family’s food. Likewise, buying unnecessary gold and silver must reduce the wealth that feeds, clothes and houses people, supports them and gives them work. Gold and silver, whether coins or plate, are tools just as kitchen equipment is. Increase the need for them by increasing the goods to be circulated, handled and prepared with their help, and their supply will certainly rise. But try to increase the supply by extraordinary measures, and you will just as surely reduce their usefulness and even their supply. Their supply can never be greater than what their use requires. If they ever did pile up beyond that amount, they would be so easy to transport, and keeping them idle would cost so much, that no law could prevent them from being sent abroad immediately.