The Hoard — The Stock, Plate ii

A treasury is an unusually persuasive picture of wealth. The doors open, the chests are counted, and the state appears to possess something solid enough to survive the year that earned it. The harvest has been eaten; the wages have been spent; the gold remains. A minister can put a number on it, compare that number with the rival kingdom's, and call the difference strength. Yet outside the counting room stand the things the treasure would have to purchase: grain, ships, tools, shelter, and the work of people who know how to make them. A country might fill its treasury while neglecting these; another might spend coin to enlarge them. To decide which had grown richer would require a reckoning the chests alone could not supply. The first danger in putting the stock at the center of economics is to choose too narrow a stock — to discover that wealth is something held, and then to identify everything worth holding with money.

Adam Smith began his account of the mercantile system with the ease of that substitution. Money measures the price of other things and serves as the instrument with which they are bought. A rich person is therefore described as having much money even when most of his fortune consists of land, buildings, or merchandise; the expression slips from a way of stating wealth into an account of what wealth is. Extend the usage to a country, and increasing its gold and silver seems to become the purpose of economic policy. Smith's objection was directed at this governing measure. Coin had uses, and its absence could inconvenience trade. But the metal was one part of the country's resources, while the produce it could command and the capacity to furnish that produce were much larger subjects. A policy could increase the first at the expense of the second. The monetary instrument was valuable because it helped people obtain what they wanted; its abundance could not by itself establish that they had more to enjoy.¹

1. Adam Smith, The Wealth of Nations, IV.i, especially the opening account of money as instrument and measure, and the later discussion of consumable goods and monetary utensils. The text is Edwin Cannan's 1904 edition, based on Smith's fifth edition of 1789; the work first appeared in 1776.

The writers whom this criticism addressed were capable of a more intricate argument than locking every coin away. Thomas Mun's England's Treasure by Forraign Trade, published in 1664, made the annual balance of trade the means of increasing treasure. His example sent abroad goods worth £2,200,000 and brought home goods for consumption worth £2,000,000; he assigned the remaining £200,000 to an inflow of treasure. Yet Mun expressly defended exporting money when it financed a trade that would bring back a greater return. A merchant could send coin abroad, buy goods, and sell them onward, using the initial outflow to enlarge the eventual balance. He also described bills and banks that allowed commerce without passing metal at every transaction. Mun understood that money might have to leave before more could arrive. The important disagreement concerned the end by which the movement was judged: whether an increase in treasure supplied the decisive account of the country's enrichment.²

2. Thomas Mun, England's Treasure by Forraign Trade (1664), chapter II, gives the £2.2 million and £2 million example; chapter IV defends money exports, re-export trade, bills, and banks. His stated settlement in treasure belongs to that argument; it is not a rule that every modern trade balance must be settled in bullion.

⁂

A purchase can reduce the money stock while changing only the composition of wealth. A community holds 10,000 coins and buys an imported vessel for 100. Suppose, for the purpose of the comparison, that the vessel is worth its purchase price, no debt is incurred, and there are no other changes. Its money stock falls to 9,900; it also acquires a vessel worth 100. The purchase has changed the composition of its holdings without reducing their total value on these assumptions. Whether it proves wise depends on what the vessel can do, its costs, and the alternatives forgone. The departure of the coins settles none of those questions. Nor would an export receipt settle the converse question. Selling an existing vessel for 100 adds money while surrendering an asset; the receipt is not 100 of newly created wealth. Production, consumption, exchanges of assets, and changes in their value must be distinguished if the account is to describe what happened. A balance that watches only the money will count the first transaction as impoverishment and the second as enrichment, though each may merely exchange one form of wealth for another.³

3. The vessel example holds its valuation fixed and excludes liabilities, fees, and other changes: 10,000 = 9,900 + 100. It illustrates an asset exchange, not a forecast of the vessel's return. Smith, IV.i, locates the benefit of foreign trade in the uses of the goods obtained and the enlargement of productive opportunities, rather than in bullion receipts alone.

The same distinction holds when the number printed on the monetary stock changes. Imagine two otherwise identical accounts, each with one hundred loaves available. In the first, one hundred coins circulate and a loaf costs one coin. In the second, two hundred coins circulate and a loaf costs two. The second account contains twice the nominal money, but the aggregate money buys the same hundred loaves. This is a comparison with the prices specified, not a claim that doubling money instantly doubles every price. Distribution, credit, employment, and the course of adjustment require their own account. Its smaller point is exact: a larger monetary number need not represent command over a larger quantity of goods. Equally, a country can acquire more useful equipment without accumulating more coin. The measure in which the stock is expressed must be kept apart from the stock's composition and from the purchasing power of that measure. Counting more units answers one question; establishing greater real resources answers another.⁴

4. In the specified comparison, monetary purchasing power is 100 ÷ 1 = 200 ÷ 2 = 100 loaves. Holding the price at one while increasing money to 200 would change that arithmetic; the example supplies no theory of how prices adjust. Smith's IV.i distinguishes the availability of money from the goods for which it is sought.

There remains a practical reason to care about the treasury. A payment falls due on a particular day, to a creditor who may accept coin and refuse a promise or an unsold cargo. A country can possess valuable resources and still face difficulty converting them into the means of a foreign payment in time. The liquidity of a reserve and the security it provides are services; preserving them may justify holding an asset that produces little ordinary income. Smith himself considered the financing of armies abroad and the different resources available to commercial and less commercial states. His answer turned on the ability to obtain provisions and remittances from annual production, rather than on an inexhaustible stock of metal. That leaves a discriminating inquiry. A reserve should be judged by the obligations and interruptions it enables its holder to meet, together with the resources forgone to obtain it. Beyond that purpose, enlarging the chest is no independent guarantee of strength. A state may have a full treasury and a failing capacity to supply the people and enterprises on which its future receipts depend.⁵

5. Smith, IV.i, examines three sources for maintaining forces abroad — accumulated metals, manufactures, and agricultural produce — and the different fiscal circumstances of sovereigns. The distinction here between liquidity and total resources is an application of that inquiry, not a claim that every reserve is unnecessary or every payment can be made without money.

The inquiry therefore survives the passing of the treasure chest. Whenever a single visible asset is made to stand for the whole of prosperity, the same incomplete reckoning returns. Gold is durable, countable, and transferable; those are advantages, not a definition of national wealth. The wider account asks what a society owns, what it owes, what its assets can furnish, and what its people can obtain from them. It also asks how those holdings are replenished. A store of provisions can be consumed only once unless a new harvest replaces it; a stock of equipment supports a stream of production but does not abolish the work that production requires. Escaping the hoard thus widens the account of the stock. It restores the other things that belong in it, and sets beside it the flow that maintains and changes them. The next plate turns to that flow account: the reckoning of a nation's income.