4.1 The Commercial or Mercantile System
In a commercial system, money is a method of storing value in a manner that can readily be exchanged for any other good. The measure of the wealth of an individual lies in the amount of money he has, the measure of power is the way in which he puts it to use, and the measure of success is the facility with which he gains it and the frugality with which it is spent. In short, money and wealth are synonymous.
Wealth of Countries
A wealthy country is measured by the amount of money that is collectively had by its citizens - but "money" is not always gold or silver coin, as it is in Europe. Ambassadors from the Tartars frequently inquire as to the number of goats in France, and those of Africa are intently curious about the size of herds of cattle. In these nations, livestock serves as the method of storing and exchanging value - it is, in effect, their money.
Smith offers some defense of the European preference of metals, which are largely self-evident: it is not consumed, does not rot or perish, is unaffected by disease or drought, etc.
However, comparison among nations yields only the notion that one is wealthier than another, but the citizens of the wealthier nation may not be substantially better off. The more realistic assessment of the prosperity of a people is not comparative to other nations, nor is the amount of money particularly indicative, as money is of value only for the sake of what it is capable of buying.
The prosperity of a people is determined by the amount of goods that are consumed - the necessities and conveniences of life that money has the power to obtain. The primitive tribesmen of the South America had an abundance of gold, far more than Europeans on the same strata of their own society - but for all the precious metal they had, theirs remained a comparatively squalid existence. Aztec gold was used as a decoration, and having it in relative abundance profited the people nothing.
Restrictions of the Export of Gold
In Smith's time, Spain and Portugal had implemented prohibition against the exportation of gold, to retain their loot from the New World. Similar prohibitions existed in England, Scotland, and France in the past to prohibit carrying gold or silver "forth from the kingdom," but have since abandoned the practice. It was generally found such prohibitions to be damaging to trade, which is a greater source of wealth to a nation than the mere hoarding of metal.
Smith asserts that the mistake lies in fear that exporting gold from a nation decreased its wealth, especially in instances where the domestic product of a country was insufficient to achieve a balance of trade - gold was sent forth to import goods, but less flowed back to the exporters of goods.
However, the hoarding of gold does not create any additional prosperity in a nation, and may in fact decrease it. An abundance of gold in a market merely increases the prices of all things, making them more costly to consumers.
This is of little importance to those who are engaged in present production, who regularly produce in trade, as the cost of both their production and consumption are raised in equal measure. It is of value to merchants who have a store of nonperishable goods, that fetch ever-increasing quantities of gold in exchange for goods already produced. It is detrimental to those who have stored wealth in gold, who must give more of it in exchange for goods they presently buy.
It is harmful, however, to foreign trade, the goods in a market being more expensive in terms of gold, they cannot fetch the same prices abroad as they can at home. This, in turn, is harmful to domestic production, as domestic goods are more expensive as compared to foreign ones, there is no foreign demand for local goods, and no need to produce more than can be consumed in the local economy.
Meanwhile, the prohibition against the export of good is the equivalent of the prohibition against importing goods from other countries, however cheaply they may be had, as their price must be paid in gold. Aside of love for metal, this may be the chief incentive for such prohibitions, the belief that preventing those in need from buying goods at a cheaper price might compel them to buy the same goods domestically at a higher price, increasing the welfare of producers.
But the wealth of a nation and the prosperity of people is measured in their welfare, through the consumption of goods, not through their possession. The possession of gold profits a man nothing, it is only the means to acquire the necessities and conveniences of life. The net result of such laws, perfectly enforced, would be a nation of men "rich" in their stores of a metal that has no practical use, but meanwhile deprived of the ability to trade it for the myriad of goods that might be of benefit to them.
Smith also asserts that a country that has no mines of its own must draw its gold and silver from abroad, in the same way that a country with no vineyards must acquire wines from foreign trade. Moreover, that the country that has such a shortage of some good will always attempt to find the means to fulfill its wants - if a good cannot be had by legal means, it will be obtained covertly. And precious metals, having high value in small quantities, can very easily be concealed and smuggled abroad.
(EN: I think Smith misses a significant point, in the substitution of goods. A country without vineyards is not necessarily compelled to import wine, but to drink water in its stead. A country in which there is a shortage of metal and no means to acquire more will simply make do without it - trade has been conducted using other goods as a means of currency in countries without metal, and gold and silver have no necessary use aside of tokens of commerce.)
The concern for the possession is mistakenly taken as meaning a scarcity of money - the two are not the same. Precious metal is a commodity, like any other, though of less practical use. Any good is had by an individual who has the capability of producing it, or the ability to trade the product of his labor for the goods he wants of others. A person's lack of purchasing power is therefore not the consequence of the existence of goods in his environment, but of his own purchasing power - the man who has nothing of value to offer in exchange for the things he wishes to have can be impoverished, even in a land of plenty.
In that way, gold is accumulated in the hands of those capable of producing it - in essence, those who own mining facilities - and to get it from them, one must be able to offer something they value enough to offer their gold in exchange. Gold having little practical value, except as ornamentation, there is no benefit of its mere ownership. Recall the earlier passage about the welfare of the Aztec peasants in the new world when the Spanish discovered them: even the most meager of peasants had some quantity of gold, but it was merely ornamentation and not a means to prosperity.
The Accumulation of Gold
The gold or silver within any country is divided into three parts: the amount that is in circulation as money, the treasury of the state, and the stores of private citizens.
The amount that is in circulation in a country is largely determined by the amount of commerce, rather than the amount of metal currency. Where there is little trade, little gold is used in commerce and it instead accumulates in private storage. Where there is great trade, larger amounts are needed to facilitate the indirect exchanges of goods, though as previously discussed, paper money is often employed in substitution for coinage in commercial trade, decreasing the demand for money.
The accumulation of gold in the treasury of the state is generally considered "insignificant," and virtually every prince of Europe, with the exception of the king of Prussia, seems to have discontinued the pursuit of building a large treasury of metals. As with any consumer of goods, the state has use of specific resources for specific purposes: a nation at war needs baser metals for armaments, food for its troops, and timber of ships and the machines of war. Gold may be the means to obtain such things, but only if they are available. Having a great horde of gold does not enable the prince who would engage in warfare to obtain any more supplies than are available to purchase with it, and he would be better served not by amassing a store of state wealth, but by improving the productivity of his nation - which his itself prevented or discouraged by the extraction of wealth from the citizens to amass a war-chest of gold.
The accumulation of gold in private stores is likewise insignificant to the wealth of a nation. A person produces for their own consumption, and when their basest needs are met, their tendency is to spend the surplus on the other necessities and conveniences of life. Once a person has every convenience and luxury he desires, he then has surplus wealth, to be stored - metals, being nonperishable, are the means to store wealth. The wealth in store is used to obtain things without the necessity of production - in a time of misfortune, wealth that has been amassed is spent.
(EN: It stands to note that men differ in their desire for security or luxury. Some spend in a manner that seems wasteful to accommodate their desires, others live in a manner that seems frugal to amass wealth to have security against misfortune. Arguments can be made either way, but ultimately, it is a matter of personal choice and preference, and those who choose either extreme are subject to criticism by those whose preferences are otherwise.)
Smith remarks, somewhat apologetically, that he found it necessary "at the hazard of being tedious" to examine the notion that wealth consists of gold, silver, or money of any kind. Those who consider economic are so often fixated on those very things that things such as land, houses, clothing, and food are often entirely ignored in their consideration - and as the prosperity of the people depends entirely on these things, the focus on gold in economic discourse gives undue emphasis on the tokens of exchange rather than on the items that genuinely contribute to the economic progress of a nation - and acts of government accordingly focus on matters that are of little consequence, to the detriment to those that matter far more.
Trade of Goods
The commodities most suited to trade of goods, especially with distant locations, are those that are nonperishable and high in value in consideration of their bulk. This enables quantities of goods to be transported cheaply (due to their small mass) and avoid loss due to spoilage during the time between manufacture and consumption. A nation whose product is concentrated in such goods will amass considerable wealth from foreign trade.
Goods that are perishable, and have low value-to-bulk, are generally best suited to local consumption and trade. Most foodstuffs fall into this category, as they must be consumed quickly after their manufacture or harvest or they will perish (rot), and their transportation would constitute a massive undertaking.
Hence the welfare of a people rests principally on their ability to produce and manufacture goods for local consumption, and their prosperity rests on their ability to manufacture goods for foreign trade. The two factors must remain at all times in balance, though favor given to the former, as no nation of citizens who have the finer wares of foreign trade may be considered prosperous if they have not enough food.
In a fundamental sense, there are two benefits to foreign trade:
- It carries out the surplus part of domestic production, for which there is no domestic demand, and thus reduces or eliminates waste
- It brings back in return for it other things for which there is no domestic demand, but for which there is insufficient domestic production, and thus reduces or eliminates want
By means of foreign trade, a nation increases the production of its citizens and enables them to enjoy greater prosperity. (EN: The same could be said of domestic trade between two towns in the same nation, or even of local trade between two inhabitants of the same town - the notion of "foreign" and "domestic" being arbitrary. The phenomenon of trade is no different between two parties if a national boundary happens to lie between their adjacent properties.)
The benefit of trade between England and North America lies not in the movement of gold across the ocean, but the movement of goods. Americans enjoy a greater quantity of goods they have not the capability of manufacturing domestically, and England enjoys a greater quantity of materials they have not the capability of producing domestically, each in exchange for the other in equal measure. And a s a result, the productive powers of both nations are enriched beyond what would be possible given the resources of their domestic markets.
Government Methods to Influence Trade
While most nations favor the exportation of domestic goods as a means of increasing the wealth of their citizens, there have often been concerns about the importation of goods from foreign markets, primarily based on two underlying concerns:
- That importation of foreign goods is detrimental to domestic producers by way of competition.
- That the importation of goods drains the wealth of a nation, sending its goods or money abroad, decreasing the wealth of the nation.
The means by which importation has been discouraged have chiefly been by placing taxes and duties upon imported goods to raise their prices in the market, thereby making domestic goods more competitive and encouraging consumers to purchase locally, or do without, foreign goods and this keep the product of their own work in the local market.
Though in some instances, treaties and trade agreements ere entered into, facilitating the import of certain goods, this was done primarily with the interest of increasing the export of domestic goods. This attempt to balance trade among nations occurred with each seeking to gain an advantage to itself ad the disadvantage of the other, and negotiating toward an acceptable compromise.
Smith also lists a number of encouragements given to domestic production, such as the abatement or refund of import taxes on goods that would be exported again, grants or tax breaks to encourage certain types of manufactures, the prohibition on import of goods that would compete with those produced in colonies, and advantageous treaties of commerce for certain goods and merchants.
Each of these topics will be explored in further detail in the following chapters.