II. THE MERCANTILE THEORY.

5. Few reasoners were so perplexed as consciously to adopt the doctrine, generally stated as the pith of the Mercantile Theory, that wealth consists exclusively in gold and silver. The doctrine, indeed, is more or less assumed in the theories about the Balance of Trade which exercised a great influence upon the earlier commercial theorists. The origin of the fallacy is not far to seek. Sir William Petty, a singularly ingenious writer, gave to the infant science the significant name of Political Arithmetic. By political arithmetic,' says his disciple, Davenant, 'we mean the art of reasoning by figures upon things relating to government.'1 Political economy, in fact, existed only as a branch of statistics. To determine from such materials as then existed, the population of the country, the amount of its rents, of its exports and imports, of the revenues of the State, and of private persons, was a problem of real interest to the statesman; and it was taken for granted that the task of drawing conclusions from these data needed only a skilful accountant, and not a scientific enquirer. Difficulties, indeed, had to be surmounted and fallacies exposed before an accurate balance-sheet could be presented but it was hardly perceived that the statement would still be unintelligible without a clear conception of those complex social processes, of which the mercantile transactions might be taken as, in some sense, the outward and visible symbol. If we could add up all the accounts of all the individuals of whom the nation was composed, we could deduce a fair statement of the accounts of that aggregate of individuals which we call the nation. And as each individual desires to see a pecuniary balance in his favour, the same test should be satisfactory on the larger scale.

6. Adam Smith refers to Locke as an exponent of the doctrine thus reached; and the form which it takes in Locke's writings shows how it presented itself to a mind of unusual power. His view is given in two treatises upon certain plans for lowering the rate of interest, and raising the value of money.' The obnoxious doctrine is there explicitly stated in Davenant, Works, i. 128.

VOL. II.

1

U

these words: Gold and silver, though they serve for few, yet command all the conveniencies of life, and therefore in a plenty of them consist riches.' Smith is so far justified in attributing to Locke a doctrine which scarcely requires any other refutation than a clear statement; a doctrine, indeed, which has become notorious because later economists have found the refutation so easy, that they are fond of imputing it rather too unreservedly to their antagonists. And yet the statement is not only made by a man of Locke's intellectual force, but is associated in his treatise with the vigorous demolition of certain contemporary fallacies not more foolish, though less dexterously concealed, than many modern devices for making something out of nothing by a piece of currency legerdemain. Locke shows excellently that the stamp upon metal has no magical efficacy; and that you do not cheat your creditor the less when you give him half the silver you promised, but call your sixpence a shilling. He explains too, very clearly, the futility of various quack devices by which the legislator has often tried to fix prices and rates of interest without altering the social conditions of which the transactions in question are the natural product. He partly anticipates Bentham's assault upon the usury laws; and, though he grasps very imperfectly the mode in which economical forces operate, he speaks of the laws of supply and demand, though not in the modern phaseology, yet with a conviction of the certainty of their operation equal to that of a modern declaimer of economical platitudes. Even whilst sanctioning the confusion between wealth and money, he sees that the absolute quantity of the bullion possessed by a nation does not matter, so long as there is enough for purposes of circulation, though he argues that, as between nations, that will be the richest which has the greatest share of bullion; and, therefore, as he infers, the greatest amount of purchasing power. The heaviest purse will incline the balance of wealth towards its proprietor, though the absolute weight in all the purses is a matter of indifference.

'A

7. The source of his error is given in a single phrase. kingdom,' he says, 'grows rich or poor just as a farmer does, and no other way.' 4 The phrase admits of two interpretations;

and Locke's error consists in unconsciously identifying them. It is a truth, and a most important truth, that a farmer and a nation both thrive by frugality, industry, and honesty; and, in the long run, thrive in no other way. Locke enforces the doctrine with his usual vigorous sense. All the rigorous laws of Spain, as he observes, could never retain the precious metals in the country; and his reason is, that riches stay only with 'the industrious and frugal.' The moral is admirable, though the test by which it is confirmed is fallacious; and he applies it for the best purpose in assailing the quacks who proposed to enrich the nation by cheating its creditors and playing tricks with its currency instead of stimulating industrious habits. But, unluckily, the doctrine admits of another interpretation. A farmer grows poor, says Locke, if he spends more than he receives; and a nation must grow poorer in the same way. Now spending generally means parting with bullion; and, therefore, a drain of bullion impoverishes a nation as a constant excess of expenses over receipts would impoverish a farmer. A certain reservoir of money, he thought, was necessary to drive the wheels of trade;' and this reservoir was unduly lowered when the stream set into foreign parts. He inverted cause and effect, and failed to perceive the law, afterwards expounded by Hume, in virtue of which the stream would spontaneously find its own level. He was, therefore, haunted by a chimerical fear, resting on the assumption that a drain of bullion implied a diminution of saving. He mistook, that is, the true nature of the phenomenon from a hasty and imperfect analogy. A closer enquiry might have suggested that, even in the farmer's case, saving did not necessarily imply hoarding; and that exchange of bullion for other goods might be a necessary incident of accumulating productive power. But, regarding all expenditure as the antithesis of saving, he took that for a diminution of natural resources which was merely an exchange of superfluous commodities. He did not see that, if the Spaniards had been the most frugal people in the world, they would still have exported the commodity, which they produced, at the greatest advantage. And, therefore, he declared that 'spending less' (that is, incurring a smaller debt in

money) 'than our own commodities will pay for is the sure and only way for a nation to grow rich.' The error of confounding wealth with money was thus inextricably associated in Locke's mind with the valuable truth which asserts that capital has its origin in saving. The weak and the sound sides of his reasoning become alternately predominant, and he might be quoted by the advocates as well as by the opponents of a sound commercial system.

2

8. Another form in which the Balance of Trade theory presented itself is given by Charles Davenant, the most conspicuous writer on economical subjects during the first years of the eighteenth century. Davenant, a writer very inferior to Locke in robust common sense, had the equivocal advantage of an official position (he was Inspector-General of exports and imports at the time of his death in 1714), which gave him much acquaintance with the details of commerce. The advantage was equivocal, because it enabled him to lose himself more systematically in statistical labyrinths. Yet Davenant sees through the simpler forms of the fallacy, though he unconsciously slips back so soon as he takes to his ledgers and his tabular returns. He protests steadily against the doctrine, expounded by his antagonist, Pollexfen, that 'gold and silver is the only, or most useful, treasure in a nation.' His view is the inverse. 'Gold and silver,' he says, are indeed the measure of trade, but the spring and original of it in all nations is the natural or artificial products of the country; that is to say, what their land or what their labour and industry produces.' Money, he adds, 'is at bottom no more than the counters with which men in their dealings have been accustomed to reckon,' 3 and he presently defines wealth in the widest phase to consist of everything which maintains the prince and the general body of his people in plenty, ease and safety.'4 Even perishable goods' form part of the national wealth if convertible, though not converted, into gold and silver.3 Industry and skill are more truly wealth than the possession of gold and silver mines. Nay, as it is not the taking in of a great deal of food,' but a 'good digestion and distribution,' that nourishes the body, so a people may have a surfeit of 3 Ib. i. 355. • Ib. i. 382. Ib. i. 381.

Locke, iv. 72.

2 Davenant's Works, i. 354.

the precious metals, if they be not properly assimilated. The nations which have the most of them, like Persia, may be the poorest; for trade and industry may produce incomparably more wealth than can be dug out of mines.' Adam Smith could hardly have denounced more pointedly the fundamental fallacy of the mercantile system. And, like Adam Smith, Davenant infers the general inutility of high duties and prohibitions. And yet we find him intermingling his sounder views with the most grotesque fallacies. He estimates, for example, that the Dutch by simply raising the price of pepper might enjoy an annual income of 2,498,8367., and infers that if they monopolised the East India trade they could drain the rest of Europe of six millions annually.' If France became their masters, this vast revenue in the hands of our natural enemies, must prove our ruin.' 3 Whatever country enjoyed that trade must give laws to the rest of Europe.' And thus the fate of the world hung upon pepper.

9. Davenant, in fact, is unable to shake off the illusions of the counting-house. The cash balances must be the barometer which shows success in trade. His essay upon the East India trade, for example, is directed against a proposal which was then very popular for excluding Indian silks from the market for the benefit of our manufacturers. Some of his reasoning is sound enough; such as the argument that we had better get our silks in exchange for the wool which is our natural product, than make worse silks by greater labour, or the argument that to prohibit Indian silk will only lead to our buying dearer silk elsewhere. But he prefers the favourite method of reasoning which amounted in substance to giving a forged discharge to a forged bond. He tries to prove not that the test of a balance of trade is fallacious, but that it tells upon his side. He admits that the East India trade is on the whole a loss to Europe at large, because we export solid bullion in return for perishable goods. But it is practically impossible, though it might be theoretically desirable, to staunch the drain; whilst, by taking part in the trade, we may contrive to divert into our own coffers some part of the stream of precious metals which flows from the Continent towards the

Davenant, i. 383.

2 Ib. i. 387.

Ib. i. 123.

1 lb. i. III.

s Ib. i. 115.

• Ib. i. 90.