The English authorities’ attitude of wilful indifference in the face of currency shortage was more than mere recalcitrance. The mindset of the age was shifting away from the mercantilism of the age of coinage, toward the philosophy of classical economics, with its emphasis on market forces. The new system of money, based as it was on commodities, was one that depended upon those forces. Therefore, money shortages were simply viewed as market phenomena, beyond the reach of monetary authorities even if they should desire to intervene. And intervention itself was now called into question too.
The new theory provided the ideology to pass judgment on the people whose lives were rendered desperate by the lack of a functioning medium of exchange. “The doctrine that we have been inculcating is so contrary to the common notions, that a want of money is a common cry,” wrote one of the new apologists, William Harris, in 1757 – at the height of the scarcity of coin. “All the scramble is for money; few think they have enough, and many complain. This probably will be ever the case, nor would setting the mint to work cure the evil; and perhaps there is no where more want, than where there is most money.” (1)
For according to the new economic doctrine, the fault lay not with the lack of provision of a functioning money supply but with those people whose lives were rendered economically unworkable. “The complaints of particular persons arise, not from a deficiency of money or counters in circulation; but from their own want of property, want of skill, address, or opportunity of getting more money; or perhaps only for want of frugality, in spending more than their income or proper share.” (2) So easy to write <104>from behind the desk! And the provision of a more ample money supply would do nothing to cure the ills of the complainants; for it is their own lack of industry or want of customers that is the root of the problem. Therefore Mr. Harris offers this well-meaning advice:
A greater plenty of money would not mend or better their condition; those who have it, will not be persuaded to purchase more of this or that commodity, than what their own wants, conveniency, or fancy prompt them to; and those who cannot make so much profit in their respective professions as formerly, must either turn themselves some other way, or be content to live more frugally. But all will not be wise in time; emulation in show is a powerful incentive; few can bear the thoughts of retrenching while it is yet time, and many finding themselves upon the decline, will grow desperate and precipitate themselves the faster. In all great towns, bankruptcies will happen, and perhaps no where more frequent, than where wealth and money most abound. These evils, if upon the whole they be evils, are what the mines cannot cure, but are rather what have been introduced and fostered by them. (3)
These evils were introduced by the mines? Hard currency is the problem then? If Harris really meant this, perhaps he could have offered an alternative, instead of a perfunctory “deal with it.” Harris thought he was cleverly dismissing the mercantilist “preoccupation” with metal. In fact, this was the beginning of an unholy alliance between doctrinaire theory, purporting to be the epitome of natural justice, and nefarious, class-oriented practice. For the new monetary system fostered the primacy of one class above all others – the “capitalist,” i.e., specie-possessing class. In the following century, the unfortunate consequences of this approach would prompt the reaction of the labor movement, socialism, and communism. Free-market theory had allowed itself to become the champion of this bullion-based system, so that it could gain primacy over its antagonist, mercantilism. The result would be a fatal association with that system and the discrimination and oppression inherent to it.
<105>A new age had dawned. The Enlightenment brought with it newfound understanding regarding law and the state. Mercantilism gave way to Natural Law and Natural Rights. And according to the new school, all that was needed to promote the Wealth of Nations – the title of one of the key texts to come out of this period, indicating the change in priorities from the mercantilist conflict of interests to a natural harmony of interests among the nations (4) – is for market forces to be left unrestrained. This would result in a harmony of interests and an equilibrium of supply and demand, of producer and consumer, of nation and nation. Adam Smith’s “invisible hand” would lead otherwise self-centered individuals to promote the common good, even if unbeknownst to themselves. (5)
Because there is a great deal of truth in Smith’s reasoning, it is all the more important properly to understand the flaw in it. And that flaw is this: there are no market forces operating in a state of nature, in the way that Smith and the other proponents of the Natural Law school of economics viewed it. Economies function within the parameters set by particular societies, comprising a range of institutions that condition and act upon those market forces. These institutions are not just there; they rise and fall, they change over time, they become better and become worse. They condition market forces, and they must be accounted for by market forces. Market forces do not operate within an institutional vacuum, and the use of the word “nature” is a fig leaf obscuring this reality.
<106>Chief among these institutions are the legal system (or lack thereof) and, closely connected with this, the monetary system. The Smithian system assumes a pre-legal situation in which “truck, barter, and exchange” between individuals simply happens, the result of a “certain propensity in human nature;” supposedly, our modern economic system is the direct descendant of this state of affairs. (6) But there is much more to the evolution of economic systems than that. (7)
The argument to this point has repeatedly shown the importance of the monetary system to the economy at large. But the natural-law economists (who have since become known as the classical economists), reacting against the received mercantilist emphasis on metallic currency, threw out the baby with the bath water. Against the one-sided emphasis on the retention of precious metal within the economy, they swung, as if on a pendulum, completely to the other side of the argument, stating categorically that the currency was irrelevant to wealth creation, that in fact wealth consisted not in money but in the goods and services produced and ultimately consumed, and that when money was treated as wealth, it only served to hide this ultimate truth. Economists call this “the veil of money,” and consider it their duty to remove that veil so as to discover the “true” or “natural” economy.
But money – the kind of it, the quality of it, the manipulation of it – is not so easily dismissed. Granted, classical economics understood this enough to be able to argue that money could pose a problem. What was needed was simply to leave the market to determine what kind of money should be used. Over time, the precious metals had been chosen; they were the “most marketable commodity,” as the phrase goes. The use of commodity money was thus the solution to all monetary problems.
In this manner, classical economics – the bastion of freedom-loving patriots, intensely suspicious of the activities both of the state and of private bankers (who would come to be known as the Money Power) argued just <107>the case that the Money Power wished to have argued. It ensured the hammerlock of the merchant bankers over the economies of the nations for more than a century.
[from chapter 11, Follow the Money]
5. “As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” Smith, The Wealth of Nations, Book 4, Chapter 2.