The Wealth of Nations

Book 4, Chapter 1

The Principle of the Commercial or Mercantile System

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Chapter 1 Summary

The popular notion that wealth means money (gold and silver) arises from the fact that money is used both as an instrument of commerce and as a measure of value, in the sense that if we have money, we can readily obtain whatever we need.

A rich country abounds in money. A nation's consumable goods, on the other hand, may exist in abundance one year and be lacking the next year, due to waste and extravagance.

The governments of Spain and Portugal, the principal exporters of gold and silver throughout Europe, prohibited the export of gold and silver. When these two countries became commercial, merchants found this prohibition to be damaging to trade. They argued that export of these precious metals could only be prevented by addressing the balance of trade: when a country exports a greater value than it imports, a balance is owed by the foreign nations, which is paid in gold and silver, thereby increasing the quantity of these precious metals in the kingdom. On the other hand, when a country imports a greater value than it exports, a balance is owed to the foreign nations, which when paid will diminish the quantity of these precious metals in the kingdom. Furthermore, government prohibition was unable to hinder the exportation of gold and silver since it is easily smuggled.

Government attention was also focused on another, equally fruitless, notion. Home industry and trade, which creates many jobs, was viewed as secondary to foreign trade, since it neither brought money into a country nor sent any out, and as such it was felt that home trade would not increase a country's wealth.

A country that has the means to buy gold and silver will never have a shortage of these precious metals. The quantity of commodities purchased or produced is always regulated by market demand. But no commodities are more easily regulated by this demand than gold and silver, since its small size and high value mean it is easily transported from one place to another—from a place where it is cheap to a market where it is expensive. The ease with which gold and silver can be transported from locations in which it is plentiful to those in which it is in high demand mean that their price does not fluctuate continually, as is the case with most other commodities.

When money is scarce, traders will barter, though this is not without its inconveniences. Buying and selling on credit is more secure—but the best situation is always a well-regulated supply of money. A lack of money in a country does not necessarily mean a lack of gold and silver pieces in circulation, but rather that many people want those pieces but have nothing to give for them. It is not a lack of gold and silver, but rather the problems people face trying to get loans or reimbursing those loans that lead to complaints about lack of money.

Wealth is not represented by money, gold or silver, but rather what money can purchase, and as such is valuable only for purchasing. Money constitutes part of the national capital, but generally only a small—and the most unprofitable—part. Wealth is not constituted by money, but money is the established instrument of commerce, used to obtain commodities or labor. Furthermore, most commodities are more perishable than money and therefore frequently incur losses. A merchant’s capital sometimes consists entirely of perishable goods intended for trade against money.

Goods can serve many other purposes besides being traded for money, but money can serve no other purpose besides purchasing goods. Men do not desire money for money’s sake, but for what they can purchase with it.

Importing gold and silver is not the sole benefit a nation derives from its foreign trade. Foreign trade also moves out the surplus part of a country’s produce for which there is no demand at home, and brings back something else for which there is a demand. Foreign trade also extends the home market, which enables the division of labor to be carried out to the highest perfection. Broadening the market encourages the country to improve its productive power and to increase its annual produce, thus growing its real revenue and wealth.

In light of this belief that wealth was constituted by gold and silver, and that only balance of trade could bring these into a country which lacked mines, many governments felt it made sense economically to restrain the importation of foreign goods and to increase the exportation of domestic produce. These restraints on foreign imports were placed on goods that could be produced at home, and especially on goods imported from countries with which trade was thought to be disadvantageous. The restraints included high duties and in some cases total prohibition.

Exportation was encouraged through a number of measures including bounties, trade agreements with foreign states, and the establishment of colonies. Bounties encouraged start-up businesses and specialized industries. Under the trade agreements, the country would be granted specific privileges by a foreign state for its commodities. The establishment of colonies created a monopoly of the market for the merchants of the country which established them.

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