Book IV, Chapter I, 3

A country need not always accumulate gold and silver to wage wars abroad and maintain fleets and armies in distant lands. Fleets and armies are sustained not by gold and silver but by consumable goods. A nation whose annual domestic production—the annual revenue from its land, labor, and consumable stock—gives it the means to buy those goods in distant countries can sustain wars there.

A nation can buy the pay and provisions of an army in a distant country in three ways: by sending abroad, first, some of its accumulated gold and silver; second, some of the annual output of its manufactures; or, finally, some of the year's raw produce.

The gold and silver properly regarded as accumulated or stored in a country fall into three categories: first, its circulating money; second, the plate owned by private families; and, finally, the money gathered through years of thrift and stored in the sovereign's treasury.

Seldom can much be spared from the country's circulating money, for it seldom contains much excess. The value of the goods bought and sold there each year requires a certain quantity of money to carry them through circulation to their consumers, and has no use for more. The channel of circulation necessarily draws in enough to fill it and admits no more. In a foreign war, however, some money is generally withdrawn from this channel. With large numbers maintained abroad, fewer are maintained at home; fewer goods circulate there, and less money is needed to circulate them. On such occasions, too, an unusual quantity of paper money—exchequer notes, navy bills, and bank bills, for instance, in England—is generally issued. By taking the place of circulating gold and silver, it allows more of those metals to be sent abroad. Yet all this would offer only a meager resource for sustaining a costly foreign war lasting several years.

Melting down the plate of private households has always proved an even less significant resource. At the beginning of the last war, the French gained less by this expedient than the value of the plate's workmanship they destroyed.

In earlier times, the sovereign's accumulated treasure furnished a much larger and more lasting resource. Today, except for the king of Prussia, European princes do not seem to regard the accumulation of treasure as part of their policy.

The funds that sustained the foreign wars of this century—perhaps the costliest recorded in history—appear to have depended little on exporting circulating money, private plate, or a sovereign's treasure. The last French war cost Great Britain upwards of £90,000,000: not just the £75,000,000 of new debt contracted, but the additional 2s. in the pound land-tax and the sums borrowed annually from the sinking fund. More than two-thirds of this expense was incurred abroad: in Germany, Portugal, America, the Mediterranean ports, and the East and West Indies. The kings of England had no accumulated treasure. We heard of no extraordinary amount of plate being melted down. The country's circulating gold and silver had been estimated at no more than £18,000,000, though since the recent recoinage of gold that estimate is thought to have been considerably too low. Let us therefore adopt the most inflated estimate I recall seeing or hearing: £30,000,000 in gold and silver together. If our money had financed the war, all of it, even on this estimate, would have had to leave and return at least twice over a period of between six and seven years. Such a supposition would provide the most conclusive proof that government need not watch over the preservation of money: the country's entire supply would have left and returned twice in so short a time without anyone noticing. Yet at no point in this period did the channel of circulation seem emptier than usual. Few who could pay for money lacked it. The profits of foreign trade were indeed higher than usual throughout the war, particularly toward its end. That produced the general overtrading it always produces in all the ports of Great Britain; and overtrading brought its customary complaint, a scarcity of money. Many needed money without either the means to buy it or the credit to borrow it. Because debtors struggled to borrow, creditors struggled to collect. Gold and silver, however, were generally available to those who could give their value in exchange.

The enormous cost of the recent war must therefore have been met chiefly by exports of British goods of one kind or another, not by exports of gold and silver. When the government or its agents contracted with a merchant to remit funds to a foreign country, he would naturally try to pay the foreign correspondent on whom he drew a bill by exporting goods rather than gold and silver. If British goods were not wanted in that country, he would send them somewhere else where he could purchase a bill payable there. Shipping goods suited to a market generally yields a substantial profit; shipping gold and silver scarcely ever does. When those metals go abroad to buy foreign goods, the merchant profits not on the purchase but on selling what comes back. When they go abroad solely to settle a debt, nothing comes back and he makes no profit. He therefore naturally uses his ingenuity to settle foreign debts by exporting goods instead of gold and silver. Accordingly, the author of the Present State of the Nation remarks upon the great quantity of British goods exported during the recent war without bringing any returns home.

Besides the three kinds of gold and silver mentioned above, all great trading countries have considerable quantities of bullion alternately imported and exported for foreign trade. Because this bullion circulates among trading countries much as national coin circulates within each country, it may be considered the money of the great mercantile republic. National coin takes its movement and direction from goods circulating within a particular country; the republic's money takes its movement and direction from goods passing between countries. Both facilitate exchange, one between people of the same nation, the other between people of different nations. Some of the money of the great mercantile republic may have been—and probably was—used to carry on the recent war. In a general war it is natural to suppose that its movement and direction differ from those of deep peace: it circulates more around the theater of war and is used more extensively to buy the pay and provisions of the various armies there and in neighboring countries. But whatever portion of this money Great Britain employed each year in this way had to be bought each year with British goods, or with something itself bought with those goods. We return, then, to goods—to the annual produce of the country's land and labor—as the ultimate resources that enabled us to wage the war. Indeed, it is only natural that so great an annual expense should have been met from a great annual output. The expense in 1761, for example, exceeded £19,000,000. No accumulated store could have supported such annual extravagance. Not even an annual output of gold and silver could have supported it. By the best accounts, all the gold and silver imported annually into Spain and Portugal together does not ordinarily much exceed £6,000,000 sterling—scarcely enough, in some years, to pay four months' expenses of the recent war.

The goods best suited for transport to distant countries to buy an army's pay and provisions there—or to buy some of the money of the mercantile republic for that purpose—appear to be the finer, more advanced manufactures. They contain great value in little bulk and can therefore be shipped far at low cost. A country whose industry produces a large annual surplus of such manufactures, normally exported abroad, can fight a very expensive foreign war for many years without exporting any considerable quantity of gold and silver, or even possessing such a quantity to export. In this case, a substantial part of its annual manufacturing surplus must indeed go abroad without any goods returning to the country, though the merchant does receive a return: the government buys his bills payable abroad to purchase the army's pay and provisions there. Yet some of the surplus may still bring goods back. During the war manufacturers will face a double demand. They will be called on, first, to make goods for export to settle bills drawn abroad for the army's pay and provisions; and second, to make goods with which to purchase the usual imports consumed at home. Thus, amid the most destructive foreign war, most branches of manufacture may flourish greatly, only to decline when peace returns. They may thrive as their country falls into ruin and begin to decay when its prosperity returns. The condition of many branches of British manufacture during the recent war and for some time after the peace illustrates the point.

No costly or prolonged foreign war could conveniently be financed by exporting the raw produce of the soil. Shipping enough of it abroad to buy an army's pay and provisions would cost too much. Few countries, moreover, grow much more raw produce than their own people need to live on. To export much of it would therefore be to export some of the people's necessary subsistence. Manufactured goods are different: the means of supporting the people who make them remain at home, while only the surplus of their work is exported. Mr Hume often notes that the ancient kings of England could not sustain a long foreign war without interruption. The English of that time had nothing with which to buy their armies' pay and provisions abroad except the raw produce of the soil, little of which could be spared from domestic consumption, or a few coarse manufactures whose transport, like that of the raw produce, was too costly. Their incapacity arose not from a shortage of money but from a shortage of finer, more advanced manufactures. Money was used to buy and sell in England then, as it is now. Circulating money must have borne at least the same proportion to the number and value of purchases and sales then as it does now—indeed, a greater proportion, since paper money had not yet taken over much of the work now performed by gold and silver. Among peoples with little commerce or manufacturing, a sovereign can rarely obtain substantial help from his subjects in an emergency, for reasons to be explained later. In such countries, therefore, he commonly tries to accumulate a treasure as his only resource against emergencies. Apart from this necessity, his circumstances naturally dispose him to the thrift needed to build a reserve. In that simple condition, even a sovereign spends not on the vanity of a gaudily adorned court, but on generosity to tenants and hospitality to retainers. Generosity and hospitality seldom lead to extravagance; vanity almost always does. Accordingly, every Tartar chief has a treasure. The treasures of Mazepa, chief of the Cossacks in the Ukraine and famous ally of Charles XII., are said to have been very great. The French kings of the Merovingian dynasty all had treasures; when they divided their kingdom among their children, they divided the treasures too. The Saxon princes, and the first kings after the Conquest, likewise seem to have stored up treasures. The first act of every new reign was commonly to seize the previous king's treasure, as the measure most essential to securing the succession. Sovereigns of developed trading countries have no comparable need to accumulate treasure, since they can generally call on their subjects for extraordinary assistance in extraordinary circumstances. Nor are they as inclined to do so. Naturally, perhaps inevitably, they follow the fashion of their age, and their spending comes to be governed by the same extravagant vanity that governs the spending of every other great landowner in their dominions. The empty pageantry of their courts grows more brilliant by the day; its cost not only prevents accumulation but often consumes funds set aside for more necessary purposes. What Dercyllidas said of the Persian court could be said of several European princes: he saw there much splendor but little strength, and many servants but few soldiers.

A country does not always need to build up gold and silver reserves to fight wars abroad and support fleets and armies far from home. Fleets and armies are supplied with goods people can use, not with gold and silver themselves. A nation can support a war overseas if its yearly domestic production, and the yearly revenue from its land, labor, and consumable stock, allow it to buy those goods in distant countries.

A nation can buy an army's pay and provisions in a distant country in three ways. It can send abroad some of its stored gold and silver, some of the year's manufactured goods, or some of the year's unprocessed produce.

The gold and silver stored up in a country falls into three groups: money in circulation, household silverware and other plate, and money saved over many years and kept in the ruler's treasury.

Usually, little can be spared from the country's circulating money, because there is seldom much more of it than needed. The value of the goods bought and sold each year requires a certain amount of money to move them to their consumers, and cannot keep any more money in use. Circulation draws in enough money to fill that need and no more. During a foreign war, though, some money is usually withdrawn. Many people are supported abroad, so fewer are supported at home. Fewer goods circulate at home, and less money is needed to circulate them. On such occasions England also generally issues an unusual amount of paper money, such as exchequer notes, navy bills, and bank bills. These replace circulating gold and silver, allowing more of the metals to be sent abroad. Even so, these sources could provide only a small part of the cost of a long, expensive foreign war.

Melting down household plate has always yielded even less. At the beginning of the last war, the French gained so little from doing this that it did not make up for the loss of fashionable objects.

In earlier times, the ruler's stored treasure provided a much larger and more lasting source of funds. Today, apart from the king of Prussia, European rulers do not seem to make storing treasure part of their policy.

The foreign wars of this century, perhaps the costliest in history, seem to have depended very little on sending abroad circulating money, household plate, or a ruler's treasure. The last French war cost Great Britain upwards of £90,000,000. That includes the £75,000,000 of new debt, the additional 2s. in the pound land-tax, and the annual borrowing from the sinking fund. More than two-thirds of the expense was spent far away: in Germany, Portugal, America, Mediterranean ports, and the East and West Indies. England's kings had no stored treasure. We heard of no unusual amount of plate being melted down. The country's circulating gold and silver was thought to amount to no more than £18,000,000, though the recent recoinage of gold suggests that estimate was much too low. So let us use the highest estimate I remember hearing or reading: £30,000,000 in gold and silver combined. If we had paid for the war with our money, then even on that estimate all of it would have had to leave the country and come back at least twice in between six and seven years. If that happened, it would be decisive proof that government need not guard the country's supply of money. All its money would have left and returned twice in such a short time without anyone even noticing. Yet circulation never seemed unusually short of money during that period. Few people who could pay for money had trouble getting it. Profits from foreign trade were higher than usual throughout the war, especially near its end. As always, that led to widespread over-trading in Great Britain's ports. Over-trading then produced the usual complaints that money was scarce. Many people wanted money but had neither the means to buy it nor the credit to borrow it. Because debtors had trouble borrowing, creditors had trouble getting paid. Yet people who had the means to pay could generally obtain gold and silver at their value.

So the huge expense of the last war must have been paid mainly by exporting British goods of some kind, not gold and silver. When the government or its agents contracted with a merchant to send funds abroad, the merchant would naturally try to pay the foreign correspondent on whom he drew a bill by exporting goods instead of metals. If British goods were not wanted in that country, he would send them to another country where he could buy a bill payable in the first. Shipping goods suited to a market brings a substantial profit; shipping gold and silver rarely does. When the metals go abroad to buy foreign goods, the merchant profits from selling the goods brought back, not from buying them. But when the metals go abroad merely to pay a debt, he receives no goods in return and earns no profit. He therefore uses his ingenuity to pay foreign debts by exporting goods instead of gold and silver. The author of the Present State of the Nation accordingly notes the large quantity of British goods exported during the last war without any goods returning to the country in exchange.

Besides those three kinds of gold and silver, every major trading country has a considerable amount of bullion moving in and out for foreign trade. As this bullion moves among trading countries much as a country's coins move within it, we can think of it as the money of the great mercantile republic. Goods moving within a country determine the movement and direction of its coins; goods moving between countries determine those of the mercantile republic's money. Both kinds of money make exchange easier, one among people of the same nation and the other among people of different nations. Some of this international money may have helped fund the last war, and probably did. In a general war, it would naturally move differently than in deep peace. More of it would circulate near the fighting and pay for the armies' wages and provisions there and in neighboring countries. But whatever amount Great Britain used for this purpose each year had to be bought each year with British goods, or with something bought with those goods. This brings us back to goods—the yearly produce of the country's land and labor—as the ultimate resources that allowed us to fight the war. Such a large yearly expense must surely have come from a large yearly output. Spending in 1761, for example, was more than £19,000,000. No savings could have supported annual spending on that scale. Not even the annual production of gold and silver could have supported it. According to the best accounts, all the gold and silver imported each year into Spain and Portugal combined does not usually amount to much more than £6,000,000 sterling. In some years, that would scarcely have paid for four months of the last war.

The goods best suited to shipping long distances to buy an army's pay and provisions, or to buy the international money used for that purpose, seem to be highly finished manufactures. They pack great value into little space and can therefore be shipped far at low cost. A country that produces a large annual surplus of these goods, normally exported, can fight a very expensive war abroad for years without exporting much gold and silver—or even having much to export. In that case, a substantial share of its yearly manufacturing surplus must leave without bringing goods back to the country, though the merchant receives payment. The government buys the merchant's bills payable abroad to fund the army there. Some of the surplus may still bring goods back. During the war, manufacturers face two sources of demand. They must make goods for export to cover the foreign bills drawn to pay and supply the army. They must also make goods to buy the usual imports consumed at home. Thus much manufacturing can thrive even in a terribly destructive foreign war, and decline when peace returns. It can thrive while the country is being ruined and start to weaken when the country becomes prosperous again. The different fortunes of many British manufacturing industries during the last war and for some time after peace illustrate this point.

A long or expensive foreign war could not easily be funded by exporting unprocessed farm produce. Shipping enough of it abroad to buy an army's pay and provisions would cost too much. Few countries produce much more raw produce than their people need to live on. Exporting a large amount would therefore export some of their necessary food. Manufactured goods are different: the workers' support stays at home, and only the surplus of their work goes abroad. Mr Hume often points out that England's early kings could not sustain a long foreign war without interruption. In those days the English had nothing with which to buy their armies' pay and provisions abroad except raw farm produce, little of which could be spared from domestic use, and a few coarse manufactures. Both cost too much to transport. The problem was not a lack of money but a lack of more highly finished manufactured goods. People bought and sold with money in England then, as they do now. The amount of circulating money must have stood in the same proportion to the number and value of transactions then as it does now. In fact, it must have been a larger proportion, since paper money did not yet perform much of the work now done in place of gold and silver. In nations with little trade or manufacturing, a ruler can seldom get much extraordinary help from his subjects, for reasons I will explain later. In these countries, he therefore generally tries to save up treasure as his only resource in an emergency. Even apart from that need, his circumstances incline him to the thrift that saving requires. In that simpler society, even a ruler's spending goes not on the flashy finery of a court, but on generosity to his tenants and hospitality to his followers. Generosity and hospitality seldom lead to extravagance, while vanity almost always does. Every Tartar chief accordingly has treasure. Mazepa, chief of the Cossacks in the Ukraine and famous ally of Charles XII., was said to have vast treasure. All the French kings of the Merovingian race had treasures; when they divided their kingdom among their children, they divided the treasures as well. Saxon rulers and the first kings after the Conquest also seem to have saved treasure. The first act of a new reign was commonly to seize the preceding king's treasure, an essential step in securing succession. Rulers of developed trading countries need not save treasure in the same way: they can generally get extraordinary contributions from their subjects when needed. They are also less inclined to save. Naturally, perhaps unavoidably, they follow the fashion of their time. Their spending is governed by the same extravagant vanity as the spending of other great landowners in their lands. The pointless show of their courts grows brighter every day. Its cost not only prevents saving but often takes money meant for more necessary expenses. What Dercyllidas said of the Persian court could describe several European rulers' courts: he saw much splendor but little strength, and many servants but few soldiers.