The Money Trap: Why Nations Chase Gold — The Wealth of Nations

Smith opens Book IV by attacking the popular equation of wealth with money, gold, and silver. Because money buys goods and measures value, common speech treats riches and cash as synonymous: a rich man is worth a great deal, a frugal man loves money, and to grow rich is to get money. Nations fall into the same trap. After America was discovered, Spaniards asked first whether a coast held gold; Tartars asked whether France had sheep and oxen. Cattle measured Tartar wealth; bullion measured Spanish wealth, and Smith thinks the Tartar notion was nearer the truth.

Locke distinguished money from other movable goods because consumables perish while coin, if kept from leaving the country, seems a steady friend. Others admitted that in an isolated nation only consumable abundance matters, yet argued that connected states must hoard metal to pay distant wars and fleets. Europe therefore studied every means of accumulating gold and silver at home. Spain and Portugal prohibited export under severe penalties; old Scotch acts forbade carrying specie abroad; France and England once did the same.

When commerce grew, merchants found export bans inconvenient because gold often bought foreign goods more advantageously than barter. They remonstrated that exporting coin to purchase goods need not diminish domestic stock: unsold imports might be re-exported at profit and return more treasure than went out, as Mun compared foreign trade to seed-time and harvest. They added that prohibitions could not stop smuggling and that only a favourable balance of trade could keep bullion in; when exchange turned against a debtor country, dear bills would worsen the supposed unfavourable balance.

Smith grants their arguments were partly solid: trade export of bullion can help, and private export cannot be stopped by law. They were sophistical, however, in treating gold as needing more government attention than any other commodity that free trade supplies in proper quantity, and in claiming that high exchange necessarily increased the unfavourable balance. High exchange taxed merchants paying abroad and encouraged balancing exports with imports; it tended to diminish, not increase, bullion drain. The expense of smuggling might fall on domestic bankers without necessarily sending an extra sixpence abroad beyond the sum drawn for.

Still, merchants addressed parliaments and princes who knew trade enriched them but not how. The merchants knew perfectly in what manner trade enriched themselves; it was their business to know. But to know in what manner it enriched the country was no part of their business until they needed a law changed. The judges accepted that foreign trade brought money in and that laws blocked it.

Prohibitions on domestic coin were relaxed while bullion export was freed; vigilance shifted from guarding specie to watching the balance of trade, a care more intricate and equally fruitless. From one fruitless care government was turned to another. Mun's England's Treasure in Foreign Trade became doctrine everywhere, and inland trade, the trade in which equal capital affords the greatest revenue, was treated as subsidiary because it neither brought money in nor carried it out. The country, it was said, could never become richer or poorer by home trade except as its prosperity might indirectly influence foreign commerce.