Hume's Political Discourses

by David Hume

For suppose that, by miracle, every man in Britain should have five pounds slipped into his pocket in one night: this would much more than double the whole money that is at present in the kingdom; and yet there would not next day, nor for some time, be any more lenders, nor any variation on the interest. And were there nothing but landlords and peasants in the state, this money, however abundant, could never gather into sums; and would only serve to increase the prices of everything, without any further consequence. The prodigal landlord dissipates it as fast as he receives it; and the beggarly peasant has no means, nor view, nor ambition of obtaining above a bare livelihood. The overplus of borrowers above that of lenders continuing still the same, there will follow no reduction of interest. That depends upon another principle, and must proceed from an increase of industry and frugality, of arts and commerce.

Everything useful to the life of man arises from the ground; but few things arise in that condition which is requisite to render them useful. There must, therefore, besides the peasants and the proprietors of land, be another rank of men, who, receiving from the former the rude materials, work them into their proper form, and retain part for their own use and subsistence. In the infancy of society, these contracts betwixt the artisans and the peasants, and betwixt one species of artisans and another, are commonly entered into immediately by the persons themselves, who, being neighbours, are easily acquainted with each other’s necessities, and can lend their mutual assistance to supply them. But when men’s industry increases, and their views enlarge, it is found that the most remote parts of the state can assist each other as well as the more contiguous, and that this intercourse of good offices may be carried on to the greatest extent and intricacy. Hence the origin of merchants, the most useful race of men in the {p44} whole society, who serve as agents between those parts of the state that are wholly unacquainted and are ignorant of each other’s necessities. Here are in a city fifty workmen in silk and linen, and a thousand customers; and these two ranks of men, so necessary to each other, can never rightly meet till one man erects a shop, to which all the workmen and all the customers repair. In this province grass rises in abundance: the inhabitants abound in cheese, and butter, and cattle; but want bread and corn, which, in a neighbouring province, are in too great abundance for the use of the inhabitants. One man discovers this. He brings corn from the one province, and returns with cattle; and supplying the wants of both, he is, so far, a common benefactor. As the people increase in numbers and industry, the difficulty of their intercourse increases: the business of the agency or merchandise becomes more intricate, and divides, subdivides, compounds, and mixes to a greater variety. In all these transactions it is necessary, and reasonable, that a considerable part of the commodities and labour should belong to the merchant, to whom, in a great measure, they are owing. And these commodities he will sometimes preserve in kind, or more commonly convert into money, which is their common representation. If gold and silver have increased in the state together with the industry, it will require a great quantity of these metals to represent a great quantity of commodities and labour; if industry alone has increased, the prices of everything must sink, and a very small quantity of specie will serve as a representation.

There is no craving or demand of the human mind more constant and insatiable than that for exercise and employment, and this desire seems the foundation of most of our passions and pursuits. Deprive a man of all business and serious occupation, he runs restless from one amusement to another; and the weight and oppression which he feels from idleness is so great that he forgets the ruin which must follow from his immoderate expenses. Give him a more harmless way of employing his mind or body, he is satisfied, and feels no longer that insatiable thirst after pleasure. {p45} But if the employment you give him be profitable, especially if the profit be attached to every particular exertion of industry, he has gain so often in his eye that he acquires, by degrees, a passion for it, and knows no such pleasure as that of seeing the daily increase of his fortune. And this is the reason why trade increases frugality, and why, among merchants, there is the same overplus of misers above prodigals as, among the possessors of land, there is the contrary.

Commerce increases industry, by conveying it readily from one member of the state to another, and allowing none of it to perish or become useless. It increases frugality, by giving occupation to men, and employing them in the arts of gain, which soon engage their affection and remove all relish for pleasure and expense. It is an infallible consequence of all industrious professions to beget frugality, and make the love of gain prevail over the love of pleasure. Among lawyers and physicians who have any practice there are many more who live within their income than who exceed it, or even live up to it. But lawyers and physicians beget no industry, and it is even at the expense of others they acquire their riches; so that they are sure to diminish the possessions of some of their fellow-citizens as fast as they increase their own. Merchants, on the contrary, beget industry, by serving as canals to convey it through every corner of the state; and at the same time, by their frugality, they acquire great power over that industry, and collect a large property in the labour and commodities which they are the chief instruments in producing. There is no other profession, therefore, except merchandise, which can make the moneyed interest considerable, or, in other words, can increase industry, and, by also increasing frugality, give a great command of that industry to particular members of the society. Without commerce, the state must consist chiefly of landed gentry, whose prodigality and expense make a continual demand for borrowing, and of peasants, who have no sums to supply that demand. The money never gathers into large stocks or sums which can be lent at {p46} interest. It is dispersed into numberless hands, who either squander it in idle show and magnificence, or employ it in the purchase of the common necessaries of life. Commerce alone assembles it into considerable sums; and this effect it has merely from the industry which it begets and the frugality which it inspires, independent of that particular quantity of precious metal which may circulate in the state.

Thus an increase of commerce, by a necessary consequence, raises a great number of lenders, and by that means produces a lowness of interest. We must now consider how far this increase of commerce diminishes the profits arising from that profession, and gives rise to the third circumstance requisite to produce a lowness of interest.

It may be proper to observe on this head that low interest and low profits of merchandise are two events that mutually forward each other, and are both originally derived from that extensive commerce which produces opulent merchants and renders the moneyed interest considerable. Where merchants possess great stocks, whether represented by few or many pieces of metal, it must frequently happen that when they either become tired of business or have heirs unwilling or unfit to engage in commerce, a great deal of these riches will seek an annual and secure revenue. The plenty diminishes the price, and makes the lenders accept of a low interest. This consideration obliges many to keep their stocks in trade, and rather be content with low profits than dispose of their money at an under value. On the other hand, when commerce has become very extensive, and employs very large stocks, there must arise rivalships among the merchants, which diminish the profits of trade, at the same time that they increase the trade itself. The low profits of merchandise induce the merchants to accept more willingly of a low interest, when they leave off business and begin to indulge themselves in ease and indolence. It is needless, therefore, to inquire which of these circumstances—viz., low interest or low profits, is the cause, and which the effect. They both arise from an {p47} extensive commerce, and mutually forward each other. No man will accept of low profits where he can have high interest, and no man will accept of low interest where he can have high profits. An extensive commerce, by producing large stocks, diminishes both interest and profits; and is always assisted in its diminution of the one by the proportional sinking of the other. I may add, that as low profits arise from the increase of commerce and industry, they serve in their turn to the further increase of commerce, by rendering the commodities cheaper, encouraging the consumption, and heightening the industry. And thus, if we consider the whole connection of causes and effects, interest is the true barometer of the state, and its lowness is a sign almost infallible of the flourishing of a people. It proves the increase of industry, and its prompt circulation through the whole state, little inferior to a demonstration. And though, perhaps, it may not be impossible but a sudden and a great check to commerce may have a momentary effect of the same kind, by throwing so many stocks out of trade, it must be attended with such misery and want of employment in the poor that, besides its short duration, it will not be possible to mistake the one case for the other.

Those who have asserted that the plenty of money was the cause of low interest seem to have taken a collateral effect for a cause, since the same industry which sinks the interest does commonly acquire great abundance of the precious metals. A variety of fine manufactures, with vigilant, enterprising merchants, will soon draw money to a state if it be anywhere to be found in the world. The same cause, by multiplying the conveniences of life and increasing industry, collects great riches into the hands of persons who are not proprietors of land, and produces by that means a lowness of interest. But though both these effects—plenty of money and low interest—naturally arise from commerce and industry, they are altogether independent of each other. For suppose a nation removed into the Pacific Ocean, without any foreign commerce, or any knowledge of {p48} navigation: suppose that this nation possesses always the same stock of coin, but is continually increasing in its numbers and industry: it is evident that the price of every commodity must gradually diminish in that kingdom, since it is the proportion between money and any species of goods which fixes their mutual value; and, under the present supposition, the conveniences of life become every day more abundant, without any alteration on the current specie. A less quantity of money, therefore, amongst this people will make a rich man, during the times of industry, than would serve to that purpose in ignorant and slothful ages. Less money will build a house, portion a daughter, buy an estate, support a manufactory, or maintain a family and equipage. These are the uses for which men borrow money, and therefore the greater or less quantity of it in a state has no influence on the interest. But it is evident that the greater or less stock of labour and commodities must have a great influence, since we really and in effect borrow these when we take money upon interest. It is true, when commerce is extended all over the globe the most industrious nations always abound most with the precious metals; so that low interest and plenty of money are in fact almost inseparable. But still it is of consequence to know the principle whence any phenomenon arises, and to distinguish between a cause and a concomitant effect. Besides that the speculation is curious, it may frequently be of use in the conduct of public affairs. At least, it must be owned that nothing can be of more use than to improve, by practice, the method of reasoning on these subjects, which of all others are the most important; though they are commonly treated in the loosest and most careless manner.

Another reason of this popular mistake with regard to the cause of low interest seems to be the instance of some nations, where, after a sudden acquisition of money or the precious metals by means of foreign conquest, the interest has fallen not only among them but in all the neighbouring states as soon as that money was dispersed and had insinuated itself into every corner. Thus, interest {p49} in Spain fell nearly a half immediately after the discovery of the West Indies, as we are informed by Garcilasso de la Vega; and it has been ever since sinking in every kingdom of Europe. Interest in Rome, after the conquest of Egypt, fell from 6 to 4 per cent., as we learn from Dion.

The causes of the sinking of interest upon such an event seem different in the conquering country and in the neighbouring states, but in neither of them can we justly ascribe that effect merely to the increase of gold and silver.

In the conquering country it is natural to imagine that this new acquisition of money will fall into a few hands, and be gathered into large sums which seek a secure revenue, either by the purchase of land or by interest; and consequently the same effect follows, for a little time, as if there had been a great accession of industry and commerce. The increase of lenders above the borrowers sinks the interest, and so much the faster if those who have acquired those large sums find no industry or commerce in the state, and no method of employing their money but by lending it at interest. But after this new mass of gold and silver has been digested, and has circulated through the whole state, affairs will soon return to their former situation, while the landlords and new money-holders, living idly, squander above their income, and the former daily contract debt, and the latter encroach on their stock till its final extinction. The whole money may still be in the state, and make itself be felt by the increase of prices, but not being now collected into any large masses or stocks, the disproportion between the borrowers and lenders is the same as formerly, and consequently the high interest returns.