Mercantilist Ideas About Money

The Mercantilist Ideas About Money

The period of growing commercial activity, falling roughly between the Thirteenth and Sixteenth Centuries, was more a period of economic action than of economic thought. At least, it is difficult to find a figure whose ideas seem at all representative of the economic developments of that time. However, the influx of gold from America and the problems associated with it seemed to foster extensive efforts to understand and appraise the rapidly changing economic scene. The literature of the Fifteenth Century is filled with observations on the necessity of increasing exports in order to increase the stock of money within a nation. For those nations which lacked mines, a favorable balance of trade was thought to be the only means whereby coin might be secured. Those who accepted the fact of an important interrelation be­tween wealth, an abundance of money, and foreign trade were the Mercantilists, whose theories of money and wealth were dis­cussed in an earlier chapter. A few of the Mercantilists such as Mun, Davenant, Petty, and Steuart clearly distinguished between wealth and money, but by and large the mercantilist writers either considered the two identical or avoided a clear statement of their relationship. It seems fair to say, however, that the com­plete identification of money with wealth was an extreme posi­tion of mercantilist thought, exaggerated by critics of Mercan­tilism.

Although the assumption that wealth consisted in an abun­dance of money may now appear unreasonable, strong arguments were offered to support it. The financial stability of the state in those days depended largely upon a ready supply of precious metals. Since public borrowing was still undeveloped, and taxa­tion was not as flexible as it is today, the security of a government was naturally assumed to lie in an accumulated reserve of coin and bullion. Thomas Mun, in writing on this subject, admitted the necessity of such a reserve but urged the heads of state to restrict their accumulations annually to the excess of exports over imports, so that the people would have sufficient money for commercial transactions. Characteristically, however, Mun also advised that ships, stores of grain, war supplies, and loans to the people for use in production should be considered desirable employment for the state's reserve.

Not a little of the desirability of a store of money was directly traceable to the use of mercenaries in warfare. Even more than today money was considered the sinews of war. Only a ready supply of cash could provide armies, ships, and munitions. An empty state treasury was frank admission of military impotence.

There was some force in the argument, too, that more money in circulation brought higher prices, and stimulated trade. The beneficial influence of a large quantity of money on trade was quite widely accepted. Although none of the Mercantilists could explain clearly the relationship between the quantity of money in circulation and the price level, a few of them at least were aware that such a relationship existed and openly subscribed to an in­crease in the money supply in order to increase trade. The value of the circulation of money was usually derived from and frequently explained in terms of William Harvey's discovery of the circu­lation of the blood which had taken place in the early Seven­teenth Century. John Law (1671-1729), perhaps better than any other, serves as the exponent of these ideas. He supported the belief that the wealth of the state depended upon a large supply of money, and that business activity was increased by the in­creased quantity and circulation of money. But the variation he offered to mercantilist theory was that the state, instead of de­pending upon a favorable balance of trade to maintain its supply of money, might keep the supply of bullion intact and issue paper money for domestic transactions. However, when Law gave prac­tical expression to his theories by the creation in France of a bank which would issue paper money, he was instrumental in bringing on one of the greatest inflationary periods of modem times. Others beside Law supported increased circulation.

Edward Misselden, an early Seventeenth Century English writer of note, was a staunch advocate of the idea that to increase money was to increase trade. Misselden's two works, the short titles of which are Free Trade and The Circle of Commerce were published during the severe depression in English industry during the years 1620-1624. He believed firmly that money was the "vital spirit of trade." His suggestion that the state should in­crease the money in circulation by depreciating the value of the coins is quite out of line with the sound money ideas of classical economics, but recent events give the plan a very modern cast. He saw no danger in the rising prices such tactics would bring on, indeed he felt that the stimulation of trade and the increase of money resulting therefrom would more than compensate for the high prices.

Jacob Vanderlint believed that plenty of money made trade nourish since people were enabled to consume more goods. Wil­liam Potter, a writer whose contribution to economic thought has been largely overlooked, said in his Key to Wealth that money had value only as it stimulated the production of more goods, since a nation's wealth consisted of all the goods it pos­sessed. But he added that an increased quantity of money would result in greater sales and hence in greater trade. To make avail­able a larger quantity of money he advocated the issuance of paper currency backed by land and other property. He argued convincingly that the only necessity for foreign trade was an arti­ficial dependence upon gold and silver for money; therefore if some purely domestic standard of currency were established, con­cern over foreign trade and export restrictions upon gold could be
abolished.

The issues aroused by the Mercantilists were numerous. Not a few of them continued in one form or another to engage the at­tention of eminent economists of later years even down to the present day. Such questions as a nation's supply of gold, the use of paper money, the relation of money to prices, and the ex­tension and control of credit have not been solved to the satis­faction of all; and not a little of present day public policy ema­nates from the careless interpretation of these key points in eco­nomic thought.