Chapter 1b of Book 4

Effective Demand and the Demand Motive Icon

March 30, 2020

12 The amount of commodities human industry can buy or produce is naturally regulated by the effective demand in every country.

The effective demand is the demand of the people who are willing to pay the rent, labour, and profits needed to make them and bring them to market.

Gold and silver are the commodities which best regulate themselves most exactly to this effective demand. They are most easily transported from where they are cheap, to where they are dear.

For example, if there were an effective demand for more gold in England, a packet-boat could bring 50 tons of gold from Lisbon. The 50 tons could be coined into more than 5 million guineas.

But if there were an effective demand for grain worth 5 million guineas, importing it at 5 guineas a ton would require 1 million tons of shipping or 1,000 ships of 1,000 tons each. The navy of England would be insufficient.

13 When the amount of gold and silver imported into any country exceeds the effective demand, no government vigilance can prevent their exportation.

All the sanguinary laws of Spain and Portugal are unable to keep their gold and silver at home. The continual importations from Peru and Brazil exceed Spain and Portugal’s effective demand. The importations sink the price of those metals in Spain and Portugal below those of neighbouring countries. On the contrary, if their amount fell short of the effective demand that its price rose above the price of the neighbouring countries, the government would not need to import them. If the government prevented their importation, it would be unable to prevent it effectively. When the Spartans gained the means to buy gold and silver, they broke through all the prohibitions which Lycurgus imposed to prevent their entrance into Sparta. All the sanguinary laws of the customs are unable to prevent the importation of the teas of the Dutch and Gottenburgh East India Companies because they are cheaper than the teas of the British company. A pound of tea at its highest price of 192 pence, is 100 times bulkier than the silver paid for it. It is more than 2,000 times bulkier that the same price in gold Consequently, it is so many times more difficult to smuggle.

14 It is partly due to the easy transportation of gold and silver that their price does not fluctuate like the price of other commodities.

Other commodities are hindered by their bulk from shifting when the market becomes overstocked or understocked with them. The price of those metals also varies. But the changes in their price are generally slow, gradual and uniform. For example, it is supposed that during the past and present centuries, gold and silver in Europe were constantly and gradually sinking in value due to the continual importation from the Spanish West Indies. But to make any sudden change in the price of gold and silver requires such a revolution in commerce as that of the discovery of America.

15 If gold and silver should fall short in a country which can buy them, there would be more expedients for supplying them than almost any other commodity.

  • If the materials of manufacture are wanted, industry must stop.
  • If provisions are wanted, the people must starve.

But if metal money is wanted, barter will supply its place, though with much inconvenience. Credit can replace money with less inconvenience. A well-regulated paper money can replace it without any inconvenience and with some advantages. Therefore, it is unnecessary for government to watch over the metal money supply in any country.

The Scarcity of Money

16 The scarcity of money is the most common complaint.

Money, like wine, must always be scarce with those who do not have the means to buy it nor credit to borrow it. Those who have the means or credit will seldom be short of the money or wine that they need. This complaint of the scarcity of money is not always confined to wasteful people. It is sometimes general throughout a whole mercantile town and the country. Over-trading is the common cause of it. Sober men, whose projects cost more than their capitals, will likely have no means to buy money nor credit to borrow money. They are like prodigals whose expence has exceeded to their revenue. Before their projects can be brought to bear, their stock is gone, and their credit with it. They run everywhere to borrow money. Everybody tells them they have none to lend. Such complaints do not always prove that gold and silver are not circulating in the country. It only proves that the many people who want money have nothing to give for them.

When profits are greater than usual, over-trading becomes a general error among big and small dealers.

They buy an unusual amount of goods on credit at home and abroad. They send those goods to some distant market hoping that the returns will come before the demand for payment. The demand comes before the returns, and they have nothing to buy money with, or give security for borrowing money. The scarcity of money is caused by= the difficulty which such people find in borrowing and the difficulty which their creditors find in getting payment. The scarcity of money is not caused by any scarcity of money.

17 It would be too ridiculous to prove that wealth only consists in goods and not in money.

Money always makes a part of the national capital. But it generally makes but a small of it. It is always the most unprofitable part of the national capital.

Selling Vs. Buying

18 Merchants can buy goods more easily with money than buy money with goods. This is not because money is wealth, but because=

money is the known and established instrument of commerce

All goods are readily given to get money, but money is not readily given to get all goods. Merchants might not be able to answer demands for money from his customers if he only has goods.

most goods are more perishable than money and incur storage costs

The merchant’s profits come more directly from selling than from buying. A merchant might be ruined by not being able to sell his goods in time. But a nation can not.

A merchant’s capital frequently consists in perishable goods destined for sale as the purchase of money. But only a very small part of a nation’s produce can ever buy gold and silver from overseas. Most of it is circulated and consumed among themselves. The exported part is used to buy other foreign goods.

This is why the country cannot be ruined if those exports were not exchanged for money. The country might suffer some loss and inconveniency by not having money. But its produce would be the same because the same consumable capitals maintain it.

In the long run, goods draw money more than money draws goods.

Goods has many other purposes than buying money, but money’s only purpose is to buy goods.

Money runs after goods, but goods do not always run after money.

The man who buys does not always mean to sell again, but frequently to use or to consume. At that point, he would have finished his whole business.

But a seller always means to buy again. At that point, he can never have finished more than half of his business.

It is not for its own sake that men desire money, but for the sake of what they can buy with it.

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