Of American Money Dror Goldberg Department of Economics Bar Ilan University

Abstract During David Hume’s life, imports of gold and silver from Latin America reached new heights. Unbacked paper money spread throughout British America and was about to infect Europe. In Political Discourses Hume wrote far more about America’s metal than its paper. Why was that the case? I track the development of his thought on both types of American money throughout his life, and I try to explain it by the purpose of his writing, his attitudes towards laws, debts, and British America, and the low quality of his information about British American money. The latter resulted in a missed opportunity to further criticize British regulation.

* [email protected]. This paper was prepared for the conference “David Hume and the Scottish Enlightenment: Economic and Philosophical Studies,” held at Ben Gurion University in December 2011 in celebration of 300 years of Hume’s birth. I thank Nathan Sussman for discussion and other conference participants for comments.

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1. Introduction In the three centuries following its discovery by Columbus, America revolutionized the global monetary order in two ways that had similar inflationary consequences. Latin America sent enormous quantities of silver and gold to Europe and created there unprecedented rates of inflation (‘the price revolution’). British America topped that later by inventing unbacked paper money – an idea which would soon spread to Europe and create even higher rates of inflation. David Hume observed throughout his life the second phase of the former revolution and the incubation of the latter revolution (Figure 1).

Figure 1: American Money and Hume’s Life

Note: “Gold” and “Silver” are imports of pesos from Latin America (Garner, “Replication Data”). “Paper” is the number of American colonies which had (or had had) paper money (Brock, Currency). David Hume (1711-1776) published Political Discourses in 1752.

What did Hume know about these two processes? How did he know it? How did he evaluate these changes and why? How was his monetary theory affected by America? How did he compare with Adam Smith in this aspect of his work? Why did he write so little about American paper money in his main economic publication? Recently some writers on Hume’s economic thought argued that he implicitly advocated a non-metallic

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theory of money.1 If true, this makes the puzzle even more intriguing: Why did he nearly ignore the best contemporary example of non-metallic money? This aspect of Hume’s intellectual history is especially interesting due to the striking similarities and contrasts between Scotland and British America. Following the 1707 Union, the Scots were still learning to become British, and not all of them were sure about their new identity. The North Americans, on the other hand, were slowly on their way out of the British Empire. While in the 17th century all the elites in the colonies had at least cousins, if not closer relatives, in England, the 18th century brought an inevitable biological change and new generations had only a remote affinity for England. These two peripheries of the first British empire were therefore going in opposite directions while having a similar confusion about their identities at the same time. Scotland shared with New England – the origin of American paper money and the center of its abuse – another key feature: A very barren rocky soil and bad weather which were not good for agriculture.2 In both places the result was shortage of coin as it was sent to England to balance the excess of imports over exports. In both places it led to paper money of various types.3 Scotsmen founded two of the most influential foreign public banks: William Paterson founded the Bank of England while John Law founded the Banque Royale. While English banking was strangled by the Bank of England, fairly unregulated banking flourished in the less sophisticated Scottish periphery. It was also distance from the empire’s core which allowed British America to get away with a very different monetary experiment: Unbacked government-issued paper money. In one place markets took over thanks to Imperial inattention and the elimination of local government;4 in the other place local governments completely took over – they issued paper money, backed it with legal tender laws and their taxes, and even ran the land banks. Each colonial government did it a bit differently, creating what a modern leading monetary historian calls a “monetary experimentation on a grand scale.”5 A triple contrast enters the picture when Latin America is taken into account. Scottish banking intermediated between specie and paper. America had none of that 1

For a brief critical review and references see Arnon, Monetary Theory, p. 12. For Scotland see Cameron, “Scotland,” pp. 60-1. For New England see Nettels, Money Supply. 3 For Scotland see Kerr, History, pp. 67, 72-3. For New England see Section 2 below. 44 Cameron, “Scotland,” p. 61. 5 Grubb, “Creating Maryland’s Paper Money Economy,” p. 1. 2

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intermediation but it provided both extremes. Latin America provided the specie which was sent to Europe while British America invented and used unbacked paper money. Paper money in America was created wholly by law and was perceived in Britain as a debtors’ fraud. In order to understand Hume’s view I collect all the evidence from publications, memoranda and correspondence on his attitude towards each of these elements: America, laws, and debts. I also examine contemporary events and the goal of Hume’s writings. I conclude that his dislike of both America and laws, coupled with the 1751 Currency Act and the political goal of his essays, are the probable reasons for the little attention he gave to American paper money in 1752. By comparing his statements with facts, I find that Hume was badly informed about money and banking in British America. He was misled into thinking that American paper money has always been a fraud. At times marveling and at times cautious about the free banking around him in Scotland, Hume had no idea that America almost had such banking as early as 1688. Late in life, his friend Benjamin Franklin tried to correct his impressions about America, with significant success. His ignorance was a missed opportunity to further criticize the British regulatory state. It was first and foremost British regulation – of coin and banking, but also of trade, industry, land and religion – which pushed North America into using unbacked government-issued paper money. Not knowing about it, the famous historian Hume ended up criticizing the American victims for the cunning ways they found around regulation, instead of criticizing the regulators as he usually did. In the literature on Hume, Robert W. Dimand already collected Hume’s few references to American paper money, in a recent article which reveals Hume’s involvement with terminating Canada’s paper money in the 1760s.6 The current paper tries to explain why Hume had such views, why they changed, why he cared so little, his knowledge base and its origins, and how that knowledge base conflicted with reality. The current paper also deals with the metal brought from Latin America. I begin in Section 2 with some facts and hypotheses about money and banking in British America throughout the colonial period. In Section 3 I examine probable primary sources on American money which were available in Scotland. I then review and evaluate 6

Dimand, “David Hume,” pp. 172-4.

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the relevant evidence, on the background of his life story, before writing Political Discourses (Section 4), and in the Discourses (Section 5). The main analysis is in Section 6. In Section 7 I continue with his life from 1752 till his last words on American money in 1769. I conclude in Section 8. 2. Money and Banking in British America From the earliest days of colonization there seem to have been a shortage of currency.7 In all colonies initial large payments were made in land and later in agricultural produce: Tobacco in Virginia, Maryland and some Caribbean islands, Sugar in other islands, rice in South Carolina, and grains of various types north of Maryland. These simplest products were recognized by colonial laws as legal tender for paying debts and taxes. The colonies blamed an adverse balance of payments with England. They imported too many English manufactured goods and exported too little agricultural products. The imbalance had to be settled with coin, leading supposedly to a constant flow of coin from the colonies to England. This was fine with the mercantilists in England who prohibited coin exportation from England. The colonies obtained most of their coin from Spanish America through trading or piracy, but it kept flowing into England. In their desperation the colonists adopted Native American seashell money and even used bullets, fur and fish as money. The problem was most severe in Massachusetts. Its climate and soil did not yield super staples like the tobacco and sugar of the southern colonies. Its middle class families imported a large variety of English household manufactures to maintain their English standard of living. Thus imports exceeded exports considerably. In fact, this was also an indirect effect of English regulation. What were these middle class families doing in a freezing, barren land in the first place? Most immigrants to colonial America were young poor men who went to the warm, fertile south. The answer is regulation of religion.8 Persecution drove the Puritans to America. Virginia was officially Anglican and Maryland was Catholic so they settled in the north. These unlikely immigrants came as entire communities and extended families. With unbounded land, a balanced sex ratio, and no tropical diseases, they reproduced in

7 8

Nettels, Money Supply. Goldberg, “How Americans Invented.”

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extraordinary rates, perhaps the highest in the world at the time. This could have been another reason why they needed more and more money, of whatever type: A constant money supply would have resulted in a declining price level, which was seen as bringing recession.9 Hence another, indirect effect of regulation of religion in England. Some colonial charters allowed coinage but the only lasting effort was the Massachusetts mint that was established in 1652, when there was no king in England whose coinage prerogative was violated. After the Restoration the mint was doomed. Since Charles II had more important things on his mind, the mint was closed only in the early 1680s. The shortage of coin was augmented by the Navigation Acts which just then begun to be enforced and prevented direct trade with Spanish America. So desperate was the currency shortage that in 1687 one town paid its taxes by delivering its main product – (empty) buckets. Lagging behind Europe, the idea of banking as an alternative to money finally made progress in England from 1650.10 Land confiscations after the Civil Wars of the 1640s created a vibrant market for land and for the soldiers’ debentures which were used in land purchases. This was the beginning of a land banking literature, effectively extending the ideas of a pawn shop (the Italian Lombard) to depositing of land titles. Implementation was a problem as England was traumatized by royal confiscation of coin in the mint (1640) and would soon be traumatized again by a Treasury default (1672). Far away from the Stuarts’ grabbing hand, America had a prominent role in the implementation of English land banking ideas.11 Immediately after the Restoration one bank promoter was allowed by the king to experiment with land banking in Barbados, for the explicit purpose of seeing if that thing could actually work. Nothing came out of it, probably because the king had little control on Barbados at such an early stage of his reign. Connecticut sent its governor John Winthrop Jr. to obtain a charter from the king. As America’s leading scientist Winthrop became a member of the Royal Society of London and presented there a bank plan in 1663, the details of which have not survived. He did mention in a letter that this bank was not to be based on land. Obviously he would not have said so on a bank of coin. He probably thought of a bank based on produce, 9

Sylla, “Monetary Innovation.” Horsefield, British Monetary Experiments. 11 Davis, Currency, vol. II is the standard account of early American bank schemes. 10

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given the practice of payments in his colony. Six years later the first produce bank was opened in the English colony of Antigua, where his brother Stephen was the leading planter and deputy governor. It was a public tobacco bank, meant to solve currency problems and not credit problems. The inconvenient tobacco leaves were to be exchanged for more convenient paper money. The experiment was terminated in 1675 due to fraud. Two clearinghouses were tried in Boston in the 1670s and early 1680s, but the big break came with the 1685 arrival of John Blackwell, Cromwell’s former Treasurer-atWar, who escaped renewed persecution of Puritans. Blackwell had recently tried to implement a land bank plan in London. Wisely collaborating with the local leaders of the new royal government established in New England (the Dominion of New England), his planned paper-issuing bank of land and produce was endorsed by the government which even promised to make the bank’s notes legal tender for debts and taxes. The bank was aborted at an advanced stage in 1688 when an English royal governor invalidated all the land titles in New England.12 While these banking experiments were going on, the neighbors in French Quebec started issuing paper money made of playing cards to their soldiers in 1685.13 It was at first a temporary substitute due to a delay in the annual coin shipment from France. The notes were forced on all sellers and were redeemable in coin upon the coin’s arrival a few months later. Their character was similar therefore to the paper money which circulated in China for most of the first half of the millennium and also similar to European “siege moneys” – episodes of short-term substitution of paper for coin in besieged cities. However, while the siege moneys were eradicated when the wars ended, the Canadian money continued on and off until 1719, and in 1729 it was resumed on a permanent basis until the British occupation. A few months after Blackwell’s bank was aborted, the Glorious Revolution was imitated in English America and a local government in Massachusetts rose to power. While waiting for a new or renewed charter to be obtained in England, this government had to issue paper money for soldiers who returned empty-handed from an attempt to occupy Quebec. Due to the limitations on coin and on backing paper with land, the

12 13

Goldberg, “Why was America’s First Bank Aborted?” Goldberg, “Inventions.”

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government supported its new money only with a legal tender status.14 The money was accepted in payments of taxes at first and later in the payment of private debts as well. Counting on a coin shipment from England was out of the question. The government realized that it was playing with fire – politically and economically. To England it presented the notes as IOUs, mere “bills of credit” and not sovereign-like money. To avoid inflation, Massachusetts used strict quantity restrictions, destruction of the plates, and public burning of some notes received for taxes. The taxes themselves were high enough to absorb the printed money, and had been legislated shortly before the paper money was created. They were originally to be paid in grain. After re-issuing these colonial notes on occasion, came another war in 1702. Now a royal province, Massachusetts issued a new generation of paper money while South Carolina issued the first paper money outside Massachusetts. From there it was a slippery slope. Eventually all colonies issued paper money, usually because of wars. In Massachusetts and elsewhere the taxes required to absorb the paper money were postponed further and further, leading to chronic inflation throughout English America. Blackwell’s bank was revived in the 18th century as a ‘colonial office’ in a few colonies, injecting the government’s money in return for mortgaged land titles. British merchants who received a continually depreciating paper money in payment for their goods were not happy about the inflation. They pushed Parliament to eliminate paper money. The issue was debated on and off since 1739. In early 1749 it seemed like all paper money would be eliminated by statute but the colonies prevailed. New England agreed to use British coin that it was owed to redeem its paper money. Two years later the merchants got a partial victory after Rhode Island wanted to print more money. The Currency Act of June 1751 forbade the New England colonies from imposing their paper money on creditors in times of peace. They kept accepting it in tax payments and issued more when the French and Indian War broke. This war induced the remaining colonies to print money and thus in 1755 all the 13 colonies had paper money (Figure 1). In 1764 a new Currency Act extended the prohibition to the rest of British America, perhaps pushing Americans towards the idea of political independence.15

14 15

Goldberg, “The Massachusetts Paper Money.” Davis, Currency, vol. I.

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Paper money, however, was far from dead. In fact, its long incubation period in the New World was just beginning to bear new fruits in both the New World and the Old World. In 1768 Russia started issuing paper money on a permanent basis to pay for wars and from 1787 it was issued without metal backing.16 In 1775-1780 the United States proved to the British that they could easily dwarf the inflation of colonial times. In 1789 France started issuing the assignat bond, which became a pure fiat money in 1792 and evaporated in 1796. In 1797 came the long suspension of convertibility in England. These thirty years revolutionized the global monetary order, and perhaps more than that.17 After the 18th century, called by a German historian ‘the paper money century,’18 countries all over the world resorted to paper money as a matter of course as soon as wars broke. Becoming peace-time luxuries, gold and silver could not survive the exceedingly violent 20th century. 3. British Eyewitness Accounts of American Paper Money Hume never visited America. Neither did he visit the Iberian peninsula which received the gold and silver of Latin America. He never revealed his sources on America and its money. It would be useful to see what evidence he could have had access to in the libraries and bookstores of Scotland. I examine here only two authors who wrote extensively about American paper money. They are not only notable in their own right, but there is also some circumstantial evidence, even if slight, that Hume might have been aware of their writings.19 3.1. George Berkeley In the 1720s, Irish philosopher, dean and future bishop George Berkeley became interested in founding a religious college in Bermuda.20 He had high hopes for America to lead the world following Europe’s decay. His Prophecy in Six Verses ended with calling America “Time’s noblest offspring.”21 In 1729 he moved to Rhode Island and

16 17

In addition to these four countries the only sovereign state which had experienced a prolonged use of paper money was China. Is it a coincidence that these five countries became the permanent members of the United Nations Security Council a century and a half later? Of course the causality could run not from paper money to empire but from low risk aversion to both paper money and empire. 18 McCusker, Money, p. 119. 19 Two other second-hand sources he might have used are speculated by Ross, “Emergence,” p. 44. 20 A biography is in Fraser, Works, vol. I. 21 Fraser, vol. IV, pp. 365-6. For this, Berkeley, California was named after him.

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waited for the Bermuda funds to arrive. As son of English colonists in Ireland, he had natural sympathy for America’s colonists who also faced hostile natives and British restrictions on coinage and manufactures.22 Of all the colonies, his hosting colony held the record for inflation and promiscuous monetary policy. Berkeley was wise enough to distinguish between the different lessons of this American experiment. In 1731 he despaired of receiving the Bermuda funds he was promised and returned to Ireland. In 1735 he published The Querist – hundreds of repetitive short statements annoyingly phrased as rhetorical questions. In many of them he discussed money: 25. ... whether gold, silver, and paper are not tickets or counters for reckoning, recording, and transferring thereof? ... 37. ... whether money be not in truth tickets or tokens for conveying and recording ... whether it be of great consequence what materials the tickets are made of?

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We might expect this insight from the inventor of the philosophical theory of immaterialism, but Berkeley hints where he learned that: 296. Whether in New England all trade and business are not as much at a stand, upon a scarcity of paper-money, as with us from the want of specie? ... 314. Whether there are not to be seen in America fair towns, wherein the people are well lodged, fed and clothed, without a beggar in their streets, although there be not one grain of gold or silver current among them?

While the Americans have made a great discovery about the nature of money, they abused it and Ireland would do well to learn from their mistakes: 238. Whether we may not easily avoid the inconveniences attending the paper-money of New England, which were incurred by their issuing too great a quantity of notes, by their having no silver in bank to exchange for notes, by their not insisting upon repayment of the loans at the time prefixed, and specially by their want of manufactures to answer their imports from Europe? ... 305. Whether the great evils attending paper money in the British Plantations of America have not sprung from the over-rating their lands, and issuing paper without discretion, and from the legislators breaking their own rules in favour of themselves, thus sacrificing the public for their own private benefit? And whether a little sense and honesty might not easily prevent all such inconveniences?

Paper money was so beneficial that it yielded a net gain even with the American abuse:

22 23

Berkeley, Querist, Part I, #79, 87, 100, 318. See also #21, 23, 26, 42, 49.

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316. Whether, whatever inconveniences those people may have incurred from not observing either rules or bounds in their paper-money, yet it be not certain that they are in a more flourishing condition, have larger and better built towns, more plenty, more industry, more arts and civility, and a more extensive commerce, than when they had gold and silver current among them?

Berkeley’s last line is mostly imaginary. There was never a time before paper money when gold and silver were common in America. Silver was always short and gold was irrelevant before the Brazilian discovery in the 1690s, which happened after American paper money was born. Berkeley also described and advocated a land bank without mentioning its existence in America.24 In 1736 Berkeley published a second batch of queries, this one focused on the history of European banks. He advocated “paper-money under an honest and thrifty regulation” which, if issued by a national bank, would be “more beneficial than even a mine of gold”.25 He kept advocating a land bank without mentioning America: 151. Whether we are sufficiently sensible of the peculiar security there is in having a bank that consists of land and paper, one of which cannot be exported, and the other is in no danger of being exported?

The final batch was published in 1737, dealing in part with the same issues. 109. Whether, although the prepossessions about gold and silver have taken deep root, yet the example of our colonies in America does not make it as plain as daylight that they are not so necessary to the wealth of a nation as the vulgar of all ranks imagine?

All the three batches were published anonymously in Dublin. In 1750 a revised edition with his name was published in London and an identical one was published in Glasgow in 1751.26 In the preface he notes omitting all the banking queries, recognizing that the time was not ripe for that (following his defeat in the Irish public debate).27 3.2. William Douglass A Scottish immigrant, William Douglass, M.D., settled in Boston in 1712. He published an anonymous pamphlet in 1740 in which he documented the inflation and severely criticized paper money as fraud. While his criticism of chronic inflation was justified, and some of his facts accurate, he misled his readers about the 17th century: 24

Ibid, #261-279 Ibid, Part II, #23, 24. 26 Fraser, vol. IV, p. 418. 27 Ibid, p. 421. 25

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At the first settling of the New England colonies, their medium was sterling coin at sterling value, and barter; some part of their taxes was paid in provisions and other produce, called stock in the treasury. ... Anno 1652, they proceeded to coin silver shillings, six pences, and three pences ... Silver continued current at this rate by sundry subsequent Acts of Assembly 28

till Anno 1705.

A reader of that paragraph is led to conclude that since 1652 Massachusetts had silver coinage like any other economy and all was well. Douglass’s research was sloppy. When produce was used in tax payments it was never called “stock in the treasury” as he claimed. It was called “country pay.” The first notes of 1690 carried a dishonest promise to redeem the notes in whatever produce was gathered at the treasury. This was the first time that the phrase “stock in the treasury” was used. Of course there was no stock in the treasury after 1690 because the taxes were paid in paper money instead of grain. But the promise, much like the “Silver Certificate” promise of later times, was retained on the notes. Douglass saw this and jumped to a conclusion. While this error is not very important per se, it does show that Douglass’s account was apparently based on the most easily accessible primary sources: Laws and the paper money itself. He makes no notice of the closure of the mint, perhaps because no law passed about it and the date is unknown to this day. The contract with the mint master was simply not renewed in the 1680s. Douglass proceeded in misleading his readers: Before paper-money took place in New England, silver abounded in currency as much, and perhaps more, than in many of our colonies ... Silver began to be generally shipped off as paper became the currency.

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Douglass was furious about paper money: To make a bill or note bearing no interest, and not payable till after a dozen or score of years, a legal ready money tender in payment of debts is the highest of despotic and arbitrary government: France never made their state bills a common tender.

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He was even more angry because of the dishonest motivation for inflation: The mystery of the infatuation of our colonies running headlong into a depreciating paper currency may be this: In many of our plantations of late years, by bad management, and extravagancies, the majority of the people are become debtors, hence, their elected representation in the legislature, have a great chance to be generally of the debtors’ side: ...

28

Douglass, “Discourse,” p. 8. Ibid, pp. 29-30. 30 Ibid, p. 17. 29

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by large emissions ... their debts become really less, and the creditor is defrauded in part of his debt. Thus our colonies have defrauded more in a few years, than bad administrations in Europe have formerly done in some centuries. The great damage done to the generous merchants at home, and to the industrious fair dealers amongst our selves, call aloud for some speedy and effectual relief from the supreme legislature, the Parliament of Great Britain.

This pamphlet was published in London in 1751, probably in relation to the final petitions and debates that preceded the Currency Act of that year. In 1748 Douglass published a comprehensive book on the colonies, which included more of the same content and spirit of his pamphlet. Douglass died in 1752. His book was published in London in 1755. 4. David Hume before Political Discourses Hume was surrounded by lawyers most of his life.31 He was born to a family of lawyers, including his father and his maternal grandfather. Many of his friends, young and old, were lawyers. The University of Edinburgh, where he studied, was dominated by studies in law. Hume was thought by his family to be fit for law, and after leaving the university he tried to pursue this course for three years. He realized, however, that this was not his calling. Philosophy seemed far more exciting.32 His biographer Burton, himself a lawyer, had the impression that Hume had “antipathy to the study” of law and that “acts of Parliament, journals, writs, legal documents” were “all things which his soul abhorred.”33 The relevance of this will be noted later. After studying Hume thought that health problems required him to seek an active career in commerce. He went to work for a sugar merchant in Bristol, which was the second largest city in England and one of its top ports.34 He seems to have hoped to serve as the merchant’s agent and thus “to toss about the world, from the one pole to the other.” This merchant was importing from Jamaica but Hume worked only as a clerk and left on bad terms after four months without going to America. At least later in life he was prone to seasickness and this could have been the reason for being grounded.35

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Mossner, Life, ch. 2, pp. 26-7, 44, ch. 5, pp. 138, 181-2. Hume, “My own Life,” p. xv. 33 Burton, Life, vol. I, pp. 28, 363. 34 Ross, “Emergence,” pp. 34-6. 35 Ibid, p. 38. Mossner, Life, pp. 88-91. In one case he noted that shortness of a voyage is the only good thing that can be in a voyage (Mossner, Life, p. 207). Another hint may be in ibid, p. 209. 32

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Berkeley had a very significant influence on Hume’s first book, Treatise of Human Nature (1739). Berkeley had close contacts with Hume’s professors in Edinburgh before going to America. Hume himself acknowledged that it was advised to read Berkeley before reading his own book.36 It is therefore not surprising that Hume followed Berkeley’s other writings, including The Querist.37 Hume owned a copy of the 1751 Glasgow edition that had queries on paper money but not on banking.38 About 1737-1741 Hume wrote some memoranda, documenting various facts he read on many issues.39 His first documented thoughts on America display jealousy of trade and of politics: The charter governments in America, almost entirely independent of England. Those north of Virginia interfere most with us in manufactures, which proceeds from the resemblance of soil 40

and climate. ...

But referring implicitly to the tobacco and sugar southern and island colonies: The plantations employ about the half of our navigation. Every Englishman in the plantations employs three at home.41

Of these, South Carolina and Maryland had paper money. Virginian tobacco was the major commodity imported into Scotland and exported from it.42 Hume also noted a curious feature of the Roman Empire, that its colonies had the right to vote.43 Here was a seed for a favorable view of the American colonies in the contentious future. In the memoranda he showed first interests in economics in general and monetary economics in particular. He noted the interest rates, money supply, and inflation rates in the classical and modern world, and mentioned bills of exchange and Dutch and Swedish banking. Some facts came from John Law.44 Latin America itself was mentioned once, for having a much higher price level than Europe.45 Hume noted quantities of metal and

36

Mossner, Life, pp. 48-9, 51, 97, 104. Grose, “History,” pp. 15, 23, 36. Schabas (2008), p. 133, and Dimand (2008), p. 174, already suggested that Hume was perhaps influenced by Berkeley, but did not mention that he was an eyewitness to the American paper money system. 38 Ross, “Emergence,” p. 38. 39 Burton, p. 124-6; Mossner, “Hume’s Early Memoranda,” p. 495; Ross, “Emergence,” p. 41. 40 Mossner, p. 504, #14. 41 Ibid, p. 505, #33, 34. 42 Cameron, “Scotland,” pp. 60, 62. 43 Ibid, p. 509, #115. 44 Mossner, Passim. 45 Ibid, #9. 37

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coin coming from there, and how much England got out of that.46 He was curious about a peculiar, Pareto-improving possibility of inflation: Solon is the first person mentioned in history to have raised the value of money, which says Plutarch was a benefit to the poor in paying their debts & no loss to the rich.

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In 1740 Hume was probably introduced to Adam Smith through Smith’s teacher Francis Hutcheson.48 By 1752 their acquaintance was so much established that Smith wrote then: “I should prefer David Hume to any man for a colleague.” The relevance of this is that Smith relied on the abovementioned William Douglass for key facts about American paper money and owned his book.49 Since Hume and Smith helped each other’s research and shared information on money and other matters,50 this circumstantial evidence increases the likelihood that Hume was familiar with Douglass’s pamphlet or book at some point in his life, even if not before 1752 – the year in which Douglass died and the Discourses were born. Hume never got an academic job and had to make a living by taking odd positions for a philosopher. In 1745 he became a tutor for the insane Marquis of Annandale. He was fired after a year without getting full payment. He chased after this debt at least until 1761, with considerable legal skill. Whether on practical or moral grounds – debts were not taken lightly by him.51 Moving quickly from one bizarre scene to another, a month after getting fired he joined the military as secretary to General St. Clair who had just been ordered to attack Canada as part of the War of the Austrian Succession.52 Hume wrote to a friend: A letter you have good reason to expect from me, before my departure for America; but a long one you cannot look for, if you consider that I knew not a word of this matter till Sunday last at night, that we shall begin to embark from hence in two or three days ... Such a 53

romantic adventure, and such a hurry I have not heard of before.

The expedition was delayed throughout the summer, so Hume had time to contemplate fantasies about America: 46

Ibid, p. 505, #30, 32, p. 510, #128. Ibid, p. 512, #180. 48 Burton, p. 116. 49 Smith, Inquiry, pp. 223, 433; Bonar, Catalogue, p. 31. 50 Burton, p. 126; Dimand, “David Hume,” p. 179, n1. 51 Burton, pp. 206-7, Mossner, Life, pp. 170, 172. 52 Mossner, Life, p. 188. 53 Burton, p. 208. 47

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I have been asked, whether I would incline to enter into the service? My answer was, that at my years I could not decently accept of a lower commission than a company. The only prospect of working this point would be, to procure at first a company in an American regiment, by the choice of the colonies. But this I build not on, nor indeed am I very fond of it.

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The expedition never reached America. After too many delays it was realized that the season was too late. This was the only wisest choice made with regard to that sorry expedition. When Massachusetts ignored the elements 56 years earlier in identical circumstances and did attack Canada too late in the season, it fell into such an enormous financial crisis that it had to invent modern paper money to bail itself out. Hume, however, would shortly get a chance to personally experience a wartime debt. Thus was gone Hume’s closest call for visiting America. With all the excitement he showed initially about this “romantic adventure” and his pondering about career options there, he seems to have never shown any regret that he never saw America. He mentioned the episode in his deathbed autobiography with no hint of sorrow. His mind was elsewhere, as we shall see below. Not wanting to waste a good expeditionary force, the general and his troops were ordered to land on the French coast and occupy the town of Port L’Orient, the home port of the French East India Company. The future economist found himself raiding this major trade center not only as secretary but also as judge advocate. As his biographer lawyer notes, this fit him perfectly as requiring “a general knowledge of the great principles of law and justice, with a freedom from that technical thralldom of the practical lawyer which would be unsuitable to the rapidity of military operations.”55 The expedition was a miserable failure, and the only important thing it produced to us is another debt owed to Hume. Here too he would not easily give up and spent a few months trying to get it paid. He chased the debt at least until 1763,56 getting a first-hand experience with wartime debt to troops – the leading reason for the creation of paper money by governments until the 20th century. Hume was not sure what to do next. Contemplating career options, he ruled out law as being “too late.” He was not shy about his opinions on other options – “the Church 54

Burton, p. 209. Burton, pp. 210-3. 56 Burton, p. 222, Mossner, Life, p. 204, 206-7. 55

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is my Aversion” – indicating that he would have really considered law had he been younger.57 Eventually he went back home for a year, where among other things he wrote a pamphlet arguing in lawyerly terms the defence of a friend on trial related to the Jacobite rebellion of 1745.58 Hume then joined St. Clair again as a secretary for a diplomatic mission to Austria and Italy. Letters before leaving indicate for the first time Hume’s attention to public events. He did not yet begin writing on economics.59 The travel journal that this seemingly detached philosopher sent his brother has remarkable insights on politics and economics. He foresaw the coming peace with the tired French and predicted by the way they treated Flanders that they would give it up.60 He predicted that a united Germany “would be the greatest power that ever was in the world.”61 He hinted disapproval regarding the heavy war taxes that Britain spent on Austria.62 The stark differences between the Austrian states of Styria and Tyrol amazed him and stimulated his mind: “it would puzzle a naturalist or politician to find the reason of so great and remarkable a difference.”63 Having boldly stated some universal truths about human nature in his first book, the cross-country differences he observed in Europe probably provided the immediate motivation for the Political Discourses he wrote immediately upon returning.64 If human nature is the same everywhere, then perhaps institutions, such as laws, explain the vast differences in the wealth of nations. His true passions and dislikes became apparent in this travel. Upon entering Italy “I have kissed the earth that produced Virgil.” On the other hand he managed to do something nearly impossible: Describe Cologne without referring to its gigantic Gothic cathedral. This, together with his dismissal of the Rhine fortresses as mere “palaces,” is revealing. According to Burton, “his thorough neglect of both the baronial and ecclesiastical architecture of the Middle Ages, is characteristic of a mind which could

57

Mossner, Life, p. 206. Mossner, p. 182-3. 59 Burton, p. 239. 60 Burton, pp. 246-7. “They squeeze, and oppress, and tax and abuse the Flemings so much, that it is evident they consider them not as subjects.” It would take later political economists almost two and a half centuries to re-invent this idea as the model of stationary and roving bandits (Olson, “Dictatorship”). 61 Burton, p. 257. 62 Burton, p. 261. 63 Burton, pp. 264-5. 64 See also Ross, “Emergence,” pp. 42-3. Caffenzis, “Hume,” and Emerson, “Scottish Contexts,” argue that the Discourses were motivated by the forced modernization of the Highlanders after the 1745 rebellion. 58

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find nothing worthy of admiration, in the time which elapsed between the extinction of ancient classical literature, and the rise of the arts and sciences in modern Europe.”65 Early in his life he already despised Medieval architecture and customs.66 A possible analogy between the Middle Ages and America is explored below. 4. Political Discourses Hume returned from Italy in late 1748 and in 1749 moved to his family estate. There he wrote the Political Discourses.67 While doing that, in April 1749 he wrote to Montesquieu on the latter’s Spirit of Laws (1748): Banks are convenient, but it may be questioned whether they are of very much value. Before 1706, there was a sufficient quantity of gold and silver in all our colonies for ordinary purposes; paper credit or current paper was introduced in them, which caused all the silver to depart and had such pernicious consequences that Parliament is resolved to abolish it at this session. The same thing was undertaken, at about the same time, in your colony of Canada, but it was wisely given up in the very beginning. These banks were, indeed, very different from the banks in Europe: they issued paper without silver to make it circulate. ... The abundance of gold and silver in a state is very advantageous to it, if one considers the neighboring states, because these foreigners will exchange for it their goods and labour; but, in respect to domestic commerce, this abundance of gold and silver is of no advantage whatever; on the contrary, it raises the cost of labour and hinders exportation; paper has the same inconveniences as coined money, and none of its advantages.

68

This is his earliest documented view on American money. His ‘facts’ about the prevalence of gold and silver, about the significance of 1706, and about Canada are wrong (see Section 2). The source of the first ‘fact’ could have been Berkeley. The source of the other ‘facts’ is unknown. His confidence in Parliament’s resolve was a bit premature. 4.1. “Of Commerce” In the first Discourse America is mentioned once. Hume argues that imitation in arts of manufacturing can make processed “steel and iron ... equal to the gold and rubies of the Indies.”69 The gold refers to the West Indies while the rubies refer to the East Indies. Like 65

Burton, pp. 265-9. See also his ignoring of the famous cathedrala in Rheims (France) where he lived for a year and Milan where he spent a day (Mossner, Life, p. 96, 212-3). 66 Mossner, Life, p. 47. 67 Hume, “My Own Life,” p. xvii. 68 Rotwein, David Hume, p. 188. 69 Essays, p. 296.

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others, Hume enjoyed playing on the similarities and contrasts between the two Indies.70 On the other hand, he missed an obvious opportunity to use America when he discussed the positive correlation between distance from the equator and the progress of society.71 Instead of using Europe as an example, he could have compared New England to the

southern and island British colonies. These were natural experiments because the inhabitants were all British subjects. 4.2. “Of Luxury” In this essay again he missed an obvious opportunity to use America’s natural experiment of north vs. south when discussing the advantages of luxury.72 A bigger miss is that he did not mention that luxuries from America were the backbone of the first British Empire. America was economically based on luxuries: fur for hats in the north, tobacco and sugar in the south. Hume noted elsewhere in the Discourses “the discovery of new worlds, by which commerce has been so much enlarged.”73 This commerce enriched Britain and maintained a fleet that was critical in times of war. 4.3. “Of Money” The main essay on money is dedicated mostly to specie. Only one paragraph is about paper money and the reference there is to convertible banknotes.74 Here Hume expands and explains the comments he sent to Montesquieu. Banks should have a 100% reserve ratio, otherwise they would only increase the price level and diminish exports. Application of this to American paper money would imply complete objection to it. But of this subject of paper-credit we shall treat more largely hereafter. And I shall finish this essay on money, by proposing and explaining two observations.

75

The first observation is the famous explanation of the short-run non-neutrality of money. He begins it in a detour through his favorite place – the classical world: It was a shrewd observation of Anacharsis the Scythian, who had never seen money in his own country, that gold and silver seemed to him of no use to the Greeks but to assist them in numeration and arithmetic. It is indeed evident that money is nothing but the representation

70

E.g., Harris, Essay, vol. I, p. 78: “one of the Indies drains away a great part of the superfluous bullion of the other.” 71 Essays, pp. 298-9. 72 Essays, p. 301. 73 Essays, p. 413. 74 Essays, pp. 311-2. 75 Essays, p. 312.

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of labour and commodities, and serves only as a method of rating or estimating them. Where coin is in greater plenty, as a greater quantity of it is required to represent the same quantity of goods, it can have no effect, either good or bad, taking a nation within itself; no more than it would make any alteration on a merchant’s books if, instead of the Arabian method of notation, which requires few characters, he should make use of the Roman, which requires a great many. Nay, the greater quantity of money, like the Roman characters, is rather inconvenient, and requires greater trouble both to keep and transport it.

76

A reader of Berkeley might expect Hume at this point to argue that not only is it the case that a little amount of coin can function just like a large amount of coin, but that all coin can be fully substituted by paper, as proved beyond doubt by contemporary British America. But this opportunity for a slam dunk is not used. Hume figures that he has already made that point sufficiently with the ancient wise Scythian,77 and he immediately gives an opposite role to America: since the discovery of mines in America industry has increased in all the nations of Europe, except in the possessors of those mines.

78

His famous thought experiment is about to begin: Here are a set of manufacturers or merchants, we shall suppose, who have received returns of gold and silver for goods which they sent to Cadiz.

79

Cadiz is a Spanish port which received silver from America.80 Using America in his example seems obvious at first because it was the major source of metal. But America involved a complication. This was not the once-and-for-all change in the quantity of money that modern monetary theorists prefer to analyze. Rather, the Latin American story was a story of a continuous flow of metal. Hume analyzed a change in the periodic increases in the quantity of money, as was the case in reality (Figures 1, 2). He was aware of the difference between the two scenarios. He analyzed the case in which “in every kingdom into which money begins to flow in greater abundance than formerly.”81 The flow itself is changing. Hume did not even have the privilege of observing the process

76

Essays, pp. 312-3. According to Emerson, “Scottish Contexts,” Hume generally preferred older examples to contemporary ones in order to show that his arguments were general (p. 10). 78 Essays, p. 313. 79 Essays, p. 313. 80 It has the same role in Vanderlint, Money, pp. 132-3. 81 Essays, p. 313. 77

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when it began. He had to disentangle the extra flow from the regular flow. His great analysis is therefore all the more impressive. Hume does not inform us whether his analysis was based on a specific episode he witnessed, such as a specific year which had an unusual inflow of metal. He could very well have observed such episodes first-hand since silver production in the Spanish colonies was very volatile during his life (Figure 2), probably contributing to the observed volatility of inflation (Figure 3). The 1740s were particularly volatile. Hume’s second observation is not nearly as famous but is relevant here. There are some kingdoms, and many provinces in Europe, (and all of them were once in the same condition) where money is so scarce, that the landlord can get none at all from his tenants; but is obliged to take his rent in kind.

82

The problem “really arises from the manners and customs of the people.”83 Specifically, in the first and more uncultivated ages of any state, ere fancy has confounded her wants with those of nature, men, content with the produce of their own fields, or with those rude improvements which they themselves can work upon them, have little occasion for exchange, at least for money ... The wool of the farmer's own flock, spun in his own family, and wrought by a neighbouring weaver, who receives his payment in corn or wool, suffices for furniture and clothing. The carpenter, the smith, the mason, the tailor, are retained by wages of a like nature... But after men begin to refine on all these enjoyments, and live not always at home, nor are content with what can be raised in their neighbourhood, there is more exchange and commerce of all kinds, and more money enters into that exchange. The tradesmen will not be paid in corn; because they want something more than barely to eat. The farmer goes beyond his own parish for the commodities he purchases, and cannot always carry his commodities to the merchant who supplies him.

84

The more refined society has more output in the monetary economy and therefore prices fall. Their fall enables the same quantity of money, which previously seemed scarce as it could buy very little quantities of goods, to suffice for all transactions.85 One could expect the British colonies to appear here as an example of societies that still used produce for money (tobacco in Virginia and Maryland) or had used it less than a century ago (grain in the northern colonies). Instead, Hume looks at Europe of three centuries ago for this purpose, and again looks at America only in its usual role: 82

Essays, p. 315. Essays, p. 316. 84 Essays, p. 317. 85 Essays, pp. 317-9. 83

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the prices of all things have only risen three, or at most, four times, since the discovery of the West Indies. But will any one assert, that there is not much more than four times the coin in Europe, that was in the fifteenth century, and the centuries preceding it? The Spaniards and Portuguese from their mines, the English, French, and Dutch, by their African trade, and by their interlopers in the West Indies, bring home about seven millions a year, of which not above a tenth part goes to the East Indies. This sum alone, in ten years, would probably double the ancient stock of money in Europe. And no other satisfactory reason can be given, why all prices have not risen to a much more exorbitant height, except that which is derived from a change of customs and manners.

86

In fact, ignoring British America was more than a missed opportunity for another example of a produce-paying society. Had Hume considered British America he might have given up his argument entirely. The British subjects who had left to settle in America did not go there with an ideology of living a rude, simple life. The colonists of the south may have been content with that, being mostly young, poor, single, male servants. But nobody could say that about the hard-working Puritan middle class families that settled in New England. They got into chronic trade deficits and thus suffered from chronic coin shortages exactly because of the abundance of fine manufactures they insisted on importing from Britain. Their internal trade and taxes were mostly done with produce for decades, until they invented government-issued, unbacked paper money. It should be noted that his own family received at least some of the rent on its large estate in produce as late as 1713.87 Perhaps this changed by the time he grew up or he was embarrassed to mention it. 4.4. “Of Interest” Hume continues drawing the parallels between the riches of the two Indies: Interest in Batavia [Jakarta] and Jamaica is at 10 per cent, in Portugal at 6; though these places, as we may learn from the prices of everything, abound much more in gold and silver than either London or Amsterdam.

88

Right after mentioning the price increase since the discovery of the (West) “Indies,” Hume clarifies what he thinks even of metallic money: Money having merely a fictitious value, arising from the agreement and convention of men ... these metals are considered merely as representations. 86

Essays, p. 318. Mossner, Life, pp. 23-4, 27. 88 Essays, pp. 320-1. 87

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89

In his effort to praise the economic function of merchants as intermediaries, he trashed lawyers, many of whom were among his friends. They 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.

90

American metal again serves as the ultimate example for a monetary experiment: 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 in Spain fell nearly a half immediately after the discovery of the West Indies, ... and it has been ever since sinking in every kingdom of Europe. ... if interest in Spain has not risen to its old pitch, this can be ascribed to nothing but the continuance of the same cause that sunk it viz., the large fortunes continually made in the Indies, which come over to Spain from time to time and supply the demand of the borrowers. By this accidental and extraneous cause more money is to be lent in Spain.

91

4.5. “Of the Balance of Trade” The only appearance of American paper money in the Discourses is in this essay. There is a correspondence about the draft of this essay. In 1750 Hume sent the draft to his friend James Oswald, Member of Parliament and former commissioner of the Navy who had taught Hume “the whole economy of the navy, [and] the source of the navy debt.” Hume saw in Oswald an authority on finance, and indeed Oswald would become member of the Board of Trade and Plantations, Lord of the Treasury and Treasurer of Ireland.92 Oswald’s long comment on the draft partly mentioned specific parts in the draft before commenting on them:93 As to the paper money of the colonies, it is all a cheat, and, like all other cheats, has been attended with very bad consequences. Paper there is made to represent so many pounds, and to pass in payment accordingly. But as it is attended with no term of payment, and no fund to pay either principal or interest, according to any standard value, those nominal pounds have altered in their value, and diminished in proportion as the paper increased. According as such nominal pounds procure labour and commodities in the country, the relation between them

89

Essays, pp. 321-2. Essays, p. 326. In 1768 he would write “cheating like an attorney” (Burton, vol. II, p. 416). 91 Essays, pp. 329-330. 92 Burton, Life, pp. 156, 168. 93 Selections, Part II, Vol. I, pp. 93-107. Rotwein, p. 196, misdates it as 1749. 90

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and sterling alters – the rate of exchange against them increases; as it always will do in proportion to this uncertainty.

94

This is the very last point in Oswald’s letter. Hume replied quickly: Besides the bad effect of the paper credit in our colonies, as it was a cheat, it must also be allowed that it banished gold and silver, by supplying their place.

95

Replying in November 1750, Hume corrects Oswald: Paper money was a cheat. This was shortly before Parliament resumed deliberations on colonial currency and passed the Currency Act. Hume concluded from the events of 1649 that abolition of all colonial paper money – at least as legal tender for debts – was a done deal. When Hume writes “it must also be allowed,” he indicates that this was not written in the draft he sent to Oswald. To the false belief that English America used to have enough silver before paper money he now added gold. In the published essay Hume writes only this about American paper money: Before the introduction of paper-money into our colonies, they had gold and silver sufficient for their circulation. Since the introduction of that commodity, the least inconveniency that has followed is the total banishment of the precious metals. And after the abolition of paper, can it be doubted but money will return, while these colonies possess manufactures and commodities, the only thing valuable in commerce, and for whose sake alone all men desire money.

96

He then immediately goes back to his favorite classics and mocks America: What pity Lycurgus did not think of paper-credit when he wanted to banish gold and silver from Sparta! It would have served his purpose better than the lumps of iron he made use of as money, and would also have prevented more effectually all commerce with strangers, as being of so much less real and intrinsic value.

97

What was in Hume’s draft? Oswald’s reply indicates that there was something there and Hume’s reply indicates that it wasn’t much. Perhaps all that Hume had was the Spartan story, similar to the Scythian story he used in “Of Money.” In both cases he is more comfortable in the classical world than in America. Since the 1751 Currency Act did not abolish paper money but only restricted that of New England, in 1752 Hume speaks of the abolition as a future possibility and predicts the consequences. He was right 94

Selections, p. 107. Rotwein, p. 199. 96 Hume, Essays, p. 338. 97 The iron was dipped in vinegar when red-hot, and supposedly this ruined it by making it permanently too brittle to use (Einzig, Primitive Money, pp. 223-5). 95

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about that, since the United States did abolish paper money, returned to coin in 1792, and lived happily without government paper for many years. Whether this would have been possible without Independence from British restrictions on trade and manufactures is another question. Hume notes that trade and manufactures are the real issue but, surprisingly, he fails to denounce British regulation on them as likely to prevent coin from returning to America. Hume only hints at the problem of chronic inflation in the colonies, by writing that the supposed disappearance of metal was “the least inconveniency” that came out of paper money. Perhaps after his own recommendation to inflate money in the essay “Of Money” he does not want to press that point too much against the colonies. It is telling that the only reference to American paper money appears not in “Of Money” but in “Of the Balance of Trade.” It is mentioned only as a way of explaining why America does not have coin. American paper money is not interesting enough in its own right. Eliminating it would have reduced the price level and stimulated exports. This essay also deals with Latin American coin and was so already in the draft sent to Oswald. Oswald comments about it in length but does not change Hume’s opinion.98 In the published essay Hume mentions “all the money in Spain which the galleons have brought from the Indies.” and “the continual recruits [of money] which we receive from America” and the “West Indian treasures.”99 Otherwise America is mentioned only once: “a tax on brandy increases the sale of rum, and supports our southern colonies.”100 4.6. “Of Public Credit” In 1752 Hume was still a creditor of the government, not having been fully paid for the 1746 expedition to France. Perhaps this is why the essay on public credit has a very different tone from the others. It is not just a learned critique. Hume is furious, rabid and apocalyptic.101 He mentions the various debt-reduction schemes in Rome, France and Holland: Debasement, reduction of interest ex post, and taxation of interest payments. He predicts that in Britain 98

Rotwein, p. 199. Essays, p. 334. 100 Essays, p. 344. 101 See also Ross, “Emergence,” p. 33. 99

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such a practice will deceive nobody; and public credit will probably tumble at once, by so dangerous a trial.102

By 1752 there were 11 British American colonies which had or had had paper money. Eight of them issued it to pay for war expenses ex ante or ex post and called the money ‘bills of credit.’ Hume does not mention this at all in his essay on public credit. 5. Analysis Twenty four years later, Hume’s good friend – Adam Smith – would write much more about American paper money. Twelve times as much.103 Smith would go into the details of the laws supporting paper money: Legal tender for debts and taxes, or forced on all spot transactions with the threat of criminal penalties. Smith would argue about the efficiency and justice of these laws and how they make American paper money circulate and would review the performance of the money and the Currency Acts. So why did Hume write so little about American paper money in comparison? Hume was not lacking in foresight, as we saw his short-term prediction about France and his long-term prediction about Germany. In the single paragraph he wrote of American paper money he correctly predicted that America would return to coin after banishing paper. He apparently did not see government-issued paper money spreading to Europe. With all his apocalyptic analysis of British public credit, he could not imagine Britain taking the unbacked paper money route. One possibility for the difference between Hume and Smith is time. In 1752 the trauma of John Law was still unforgettable and may have convinced Europeans of that time that nobody would try anything like that again any time soon. The 1749 New England redemption and the 1751 Currency Act seemed like they were beginning to solve the problem of American paper money. Between 1752 and 1776, however, the following events happened, which may have provoked Smith’s interest in paper money: Virginia, the main trading partner of Glasgow, started issuing paper money in 1755; a second Currency Act in 1764 provoked thoughts of American independence; Russia started printing paper money in 1768; and New England started printing massive amounts of paper money in 1775 to finance its revolt against Britain. The importance of 1755, 102

Essays, p. 371. Counting only words written explicitly about American paper money, Hume wrote 73 words while Smith wrote 886 words – in Book II, towards the end of Chapter II, which is his second chapter on money (Smith, Inquiry, pp. 433-5). 103

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even if limited, is evident in Smith’s 1760s lecture notes. In spite of a lengthy analysis of John Law, there is only one brief reference there to American paper money and it has to do with how its depreciation affects the exchanges between Glasgow and Virginia.104 Hume’s lifelong hostility towards law could be another factor. His economic writings were mostly about how laws impeded trade and economic activity. This natural philosopher was interested in the “natural” flows in the economy, with notable explicit allusions to physics of fluids and a general inspiration from Newton.105 Hume showed that all would be well and all things would balance in equilibrium if only the interrupting laws were removed.106 Man-made laws had another annoying feature: Unlike the universal laws of physics, they differed widely between Scotland (civil law) and England and its colonies (common law). Given the theme of his critique – laws interfering with “nature” – government-issued paper money did not belong there. It was in some sense an opposite case. It was a piece of paper that without government intervention would have been worthless and used by nobody. That would have been the natural equilibrium of paper money which was not supported by the government in any way. This was no more interesting than an observation that leaves that fall from trees are not picked up by people. American paper money was wholly created by law, not interrupted by it as were Hume’s other subjects. The only thing he could write about paper money that was similar to his comments on other topics was that if government support for paper was gone, then the natural flow of metal would bring metal back to British America. And of course, he did write exactly that and nothing more. Smith, in contrast, took laws much more seriously. He was also a son of a lawyer (who died before his birth). Smith’s LL.D from the University of Glasgow was an honorary degree, but was related to his law lectures.107 These lectures were about actual laws while Hume’s writings on laws were abstract and general.108 Smith carefully gave references to the laws on all the topics he discussed. It may be relevant that Hume was a bitter creditor in 1752, not having received proper pay from two employers in 1746. His support for an increasing money supply was 104

Smith, Lectures. Law is discussed in pp. 515-9, Virginia in pp. 520-1. Schabas, “Temporal Dimensions,” p. 131. On Newton see Mossner, Life, pp. 43, 51, 73-5. 106 Schabas, “Temporal Dimensions,” pp. 130-1 quotes his skepticism on the effectiveness of laws but he apparently thought some of them effective enough to harm the economy. 107 Smith, Lectures. 108 Hume, Treatise, Book III: Of Morals, Part II: Of Justice and Injustice. 105

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indeed not based on eroding debts but on a money “illusion.”109 That is how he could support inflation and at the same time agree with Oswald that colonial paper money – blamed mostly for eroding debts – was a cheat. Hume’s general attitude towards America may have been more important. He did not like British America at that point in his life. He was excited about the classical times and great powers in past and present. He called France “the most potent nation in the universe.”110 He admired Europe’s great cities – Paris more than anything.111 America was no Greece or Rome. It was not as sophisticated as Europe. It may have been analogous in his mind to the Medieval buildings he strikingly ignored in Germany. While America tried to catch up with Europe on so many fronts, he perhaps saw America as the Middle Ages reincarnated. In 1751 Hume referred to the colony of New York: “their Cities (which deserve only the Names of Villages)”.112 Some of America’s most important features were simply embarrassing. It was a place infamous for having slaves (which Hume strongly denounced)113 and fraudulent paper money. It served as Britain’s waste basket, reluctantly absorbing many of Britain’s convicts, and its uncivilized, potentially rebellious Highlander troops – considered by Hume as “the most worthless” Britons.114 If America held any promise of modern republicanism, this would not have excited Hume, as indicated by his contemporary analysis of the United Provinces.115 British America thus drew little of his affection, and hence little of his attention. He learned from his German trip that travelling was the best way to remove prejudices as the ones he had about Germans, but he simply didn’t happen to travel in America.116 Hume did not yet share the excitement that Berkeley and many other adventurous and openminded people in the Old World had about America. That all this is not wild speculation 109

He uses the word in Essays, p. 314, footnote 1. Mossner, Life, p. 194. 111 Hume, “My own Life”, p. xx; Mossner, Life, p. 96. There were strong cultural ties at many levels between Scotland and France (Mossner, Life, p. 92). 112 Mossner, Life, p. 266. 113 “The remains which are found of domestic slavery, in the American colonies, and among some European nations, would never surely create a desire of rendering it more universal. The little humanity, commonly observed in persons, accustomed, from their infancy, to exercise so great authority over their fellow creatures, and to trample upon human nature, were sufficient alone to disgust us with that unbounded dominion” (Essays, p. 385). 114 Berkeley, Querist, p. 29, #57; Emerson, “Scottish Contexts,” p. 23; Mossner, Life, p. 177. 115 Burton, pp. 242-3. On his mixed views of republicanism see Pocock, Virtue, ch. 7. 116 Burton, p. 257. 110

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is apparent from the fact that some in the European elites have maintained this elitist attitude to this day. Hume might not have had a better attitude towards Latin America, but there were two differences. First, Latin America was colonized by other nations. The various questionable practices in America were all the more embarrassing when they were done by fellow Britons. Second, he could and mostly did ignore Latin America per se, but he could not ignore the metal it sent to Europe. Presumably, most of the coin Hume handled throughout his life was made from Latin American metal. The Canadian expedition he joined had only original Mexican coin.117 The paper money of British America was received by some British merchants but it did not circulate in Great Britain. Hume may have never seen an American note. The issue of America leads to another point, which could be the decisive one and is related to some of the above points: The purpose of the Discourses. While Smith wrote a comprehensive and systematic treatise about economics, Hume only wrote economic essays.118 It is the difference between what today we would call a monograph and papers. Hume’s focus on essays stemmed from the failure of his first publication – the 3-volume Treatise of Human Nature (1739-40). He thought that it failed because it was in the form of a systematic treatise rather than in the form of essays which were at that time the most popular literary form. In 1741-42 he made a successful transition to the essay form and stuck with it for the next decade.119 Hume therefore had no pretensions to cover everything in economics, but only selected topics which seemed most interesting and relevant to him. In 1752 American paper money was not a top issue in Britain. It was certainly not a controversial issue. Other than the colonists’ lobbyists there was probably not a single person in Britain who supported colonial paper money. Hume wrote about “problems of vast interest” and controversial issues and took sides against regulation of the economy.120 In “Of Money” he wrote about politicians: “For to these only I all along

117

Mossner, Life, p. 193. Mossner, Life, p. 269. 119 Mossner, Life, pp. 141-2. 120 Rotwein, David Hume, “Editor’s Introduction,” Chapter III, Emerson, “Scottish Contexts,” p. 26; Mossner, Life, p. 269. 118

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address myself.”121 Controversy, of course, was good for sales also to the general educated public. The topic of American paper money was out of sight for most Britons, seemed nearly settled by the 1749 New England redemption and the 1751 Currency Act, and involved no controversy at home. There was almost no reason for Hume to write about it. In fact, of all his writings, in the Discourses Hume perfected his ability to write popular literature: “the only work of mine that was successful on the first publication,” he recalled at the end of his life.122 Hume’s focus on American coin rather than American paper was not very different from that of other British authors of the time. Jacob Vanderlint’s 1734 book which advocated paper money mentioned America only as a source of metal.123 Josiah Tucker’s book on trade (1750) had two lines on precious metals arriving from America.124 He later repeated Berkeley’s claims, in their query format and without citing America, that money was only a tally, counter, ticket or sign (1752, 1755).125 North America was not far from his mind: In 1755 he wrote a pamphlet advocating importation of North America’s only abundant metal – iron.126 Only his later essays on the political problem of British America (from 1766 onwards) mention its paper money and denounce it as a method of eliminating debt.127 Francis Hutcheson, Smith’s teacher and a correspondent of Hume, had two pages on money in his book on natural law (1753). The last sentence was on convertible paper money.128 Joseph Harris (1757-8) gave American paper money a paragraph and a footnote in his book on money, and otherwise mentioned America only as a source of metal.129 James Steuart ignored American paper money altogether in his 1767 book, even though he devoted hundreds of his 1285 pages to money, including metal-backed and land-backed paper money.130 He mentioned

121

Hume, Essays, p. 312. Emerson, “Scottish Contexts,” argues that it was the goal of all his writings throughout his life (p. 10). 122 Hume, “My Own Life,” p. xvii. 123 Vanderlint, Money, pp. 58, 131-4. 124 Tucker, Brief Essay, p. 19. 125 Clark, Josiah Tucker, pp. 179, 194. 126 Tucker, Case. 127 Tucker, Four Tracts, pp. 150-1; Tucker, Tract V, pp. ix-x; Tucker, Answers, p. 88. 128 Hutcheson, Short Introduction, Book II, Ch. XII. 129 Harris, Essay, Part I, pp. 42-3 (paper), Part I, pp. 73, 76, 79, Part II, p. 58 (metal). 130 Land banks are described in Steuart, Inquiry, vol. I, p. 379.

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American metal briefly only to rule out its quantitative effect on circulating European coin.131 This clear trend of ignoring American paper money does not mean that all the Hume-specific explanations given above are redundant. Some of them, such as a general dislike of America and focus on current domestic British problems, surely hold for some other Britons and are therefore generalizable. In this sense, the investigation of Hume serves as a case study of the spirit of the times – indicating why everyone in Britain before Smith missed the coming paper money storm. More importantly, there is a reason why Hume is more famous than all these other authors combined, and therefore we could expect more from this “cosmopolitan economic theorist.”132 One final point is that Smith may have written about American paper money exactly because nobody else did. 6. After Political Discourses As the Discourses were published Hume became librarian of the Faculty of Advocates in Edinburgh, to which his father belonged nearly half a century beforehand. It was not for a sudden love of law, but because it “gave me the command of a large library.” Burton explains that in those times lawyers often invoked history and philosophy in their arguments rather than pure legal matter. Hume only used this position to write his bestselling History of England.133 While working on his History he kept revising the Discourses for further editions, paying attention to new information. In the 1753-54 edition he already corrected his numbers on metal flows, writing that Europeans “bring home about six millions a year, of which not above a third goes to the East Indies.” His History, published 1754-62, covered the period from Caesar to the 1688 Glorious Revolution. On coin he wrote the obvious things, including the metal discoveries in Spanish America and its plunders by Francis Drake and Walter Raleigh.134 After citing an author on regulation of corn exports during Elizabeth’s time, he is led almost by accident to say something about his own time: From the same author we learn, that the complaints renewed in our time, were then very common, concerning the high prices of every thing. There seems, indeed, to have been two 131

Steuart, Inquiry, vol. I, pp. 177, 441, 532. Ross, “Emergence,” p. 47; also Wennerlind and Schabas, “Introduction,” p. 8. His biographer Mossner calls him “man of the world” (p. 212). 133 Mossner, Life, p. 251-2. 134 Hume, History, vol. V, pp. 274-5, 331, 377, vol. VI, pp. 93-4, vol. VII, p. 379. 132

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periods in which prices rose remarkably in England, namely, that in queen Elizabeth’s reign, when they are computed to have doubled, and that in the present age. Between the two, there seems to have been a stagnation. It would appear that industry, during that intermediate period, increased as fast as gold and silver, and kept commodities nearly at a par with money.135

Although prices declined by 12% during his life up to that point, they had increased by 25% since 1743.136 Figure 1 shows that price stability in the 17th century was caused by a stagnation of metal inflow from Latin America. He thought the inflow was constant. Although he did not mention Latin America explicitly in this paragraph, in the very next paragraph he just happens to mention the British colonies in America for the first time. He duly notes the establishment of colonies as it fits the progression of his story in this volume and others.137 Otherwise he mentioned the colonies only in their minor role in the Civil Wars.138 In a separate paragraph he notes the role of religious regulation in England in the creation and growth of New England and Maryland.139 He also mentions “a proclamation that forbade the exportation of gold,” but not in the colonial context.140 As hypothesized in Section 2, the combined regulation of both religion and coin exports was probably the main driving force behind the evolution of money in America in the 17th century, including the invention of government-issued, unbacked paper money. However, we saw that Hume did not believe that the colonies had had shortage of coin, and in any case he would have blamed their own rude habits. That is why he could not put the pieces together and blame English regulation for the creation of American paper money. The 1758 edition of the Discourses had a new essay “Of the Jealousy of Trade” but there was nothing there about American money.141 Hume’s information and views on America and its money soon began to change by his friendship with Benjamin Franklin. In one of the dinners with the highest IQ per capita in history, the two are reported in 1759 to have dined with Adam Smith and four or five more guests.142 Their friendship 135

History, vol. V, p. 485. http://www.measuringworth.com/ukearncpi/ 137 History, vol. VI, pp. 186-8, 308-9, vol. VII, pp. 399-400, vol. VIII, p. 328. 138 History, vol. VII, pp. 205, 222. 139 History, vol. VII, pp. 340-1. 140 History, vol. VI, p. 306. 141 Hume, Essays, p. 345. 142 Hill, Letters, p. 30. 136

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and correspondence lasted until Hume’s death.143 In 1760 Franklin already had books on America, and especially on Pennsylvania, shipped to Hume. Franklin writes: I am not a little pleased to hear of your change of sentiments in some particulars relating to America; because I think it of importance to our general welfare, that the people of this nation should have right notions of us, and I know no one, that has it more in his power to rectify their notions than Mr. Hume. I have lately read with great pleasure, as I do every thing of yours, the excellent Essay on the “Jealousy of Commerce.” ... I hope, particularly from that Essay, an abatement of the jealousy, that reigns here [Britain], of the commerce of the colonies, at least so far as such abatement may be reasonable.

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In the same letter he adds: I hope with you, that we shall always in America make the best English of this Island our standard, and I believe it will be so. I assure you it often gives me pleasure to reflect, how greatly the audience (if I may so term it) of a good English writer will, in another century or two, be increased by the increase of English people in our colonies.

It was perhaps here that Hume finally understood the real potential of America. He used Franklin’s argument to convince Edward Gibbon to write his Decline and Fall of the Roman Empire in English.145 In 1762, as Franklin prepared to return to America, Hume wrote: I am very sorry, that you intend soon to leave our hemisphere. America has sent us many good things, gold, silver, sugar, tobacco, indigo, etc.; but you are the first philosopher, and indeed the first great man of letters, for whom we are beholden to her. It is our own fault, that we have not kept him; whence it appears, that we do not agree with Solomon, that wisdom is above gold; for we take care never to send back an ounce of the latter, which we once lay our fingers upon.

146

America first and foremost provided metal. That is, Latin America did. The islands gave sugar, and the southern mainland gave tobacco and indigo. The northern mainland gave nothing. Hume ends with a hint of the balance of payments problem of the mainland colonies. Franklin’s witty response – that he goes where he faces less competitors147 – may indicate that Hume was not opening a new issue. They probably already talked about the coin problem in North America and that was the background for joking about it. As

143

Hill, Letters, pp. 49, 225, Bigelow, Life, vol. II, p. 109. Bigelow, Life, vol. I, p. 410-3. 145 Ibid, p. 413, footnote *. 146 Greig, Letters, pp. 357-8. 147 Bigelow, Life, vol. I, p. 431. 144

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Hume’s opinion of America improved, a personal case of anti-Scottish discrimination at the highest ranks of government, and general contempt of Londoners to Scotsmen, made him refer in 1763 to “the factious barbarians of London.”148 Scottish banking spread in Edinburgh and the rest of Scotland in the 1750s and 1760s. It resulted in bank wars of redemption and political struggles to prohibit small notes and “optional clause” notes that postponed redemption.149 This drew Hume’s attention to banking and its potential benefits more than in 1752. The 1764 edition of the Discourses had two additional long paragraphs in “Of the Balance of Trade,” right after his mocking American paper money.150 They began with a wholly uncharacteristic confession: “It must, however, be confessed that, as all these questions of trade and money are extremely complicated ...”. Hume marvels at a supposedly new type of banking: There was an invention of this kind which was fallen upon some years ago by the banks of Edinburgh, and which, as it is one of the most ingenious ideas that has been executed in commerce, has also been found very advantageous to Scotland. It is there called a bankcredit, and is of this nature: A man goes to the bank and finds surety to the amount, we shall suppose, of five thousand pounds. This money, or any part of it, he has the liberty of drawing out whenever he pleases, and he pays only the ordinary interest for it while it is in his hands. ... As a man may find surety nearly to the amount of his substance, and his bank-credit is equivalent to ready money, a merchant does hereby in a manner coin his houses, his household furniture, the goods in his warehouse, the foreign debts due to him, his ships at sea; and can, upon occasion, employ them in all payments as if they were the current money of the country.

Already a famous historian by then, Hume did not know that this type of banking was developed in England, almost executed in Massachusetts in the previous century but killed by English regulation, and managed in his days by some American governments. Apparently he still did not discuss this with Franklin, who advocated land banking as early as 1729.151 After 1764 Hume learned three things. First, apparently he did discuss land banking with the returning Franklin, or he read Franklin’s proposals in London for a 148

Hill, Letters, pp. 56-7. Mossner, Life, p. 106. Cameron, “Scotland,” pp. 66-70; Dimand, “David Hume,” p. 180, n10. 150 Hume, Essays, pp. 338-40. Dimand, “David Hume,” p. 173, argues that the main reason for this addition was his diplomatic role in terminating the Canadian card money after Canada’s occupation (1763-65). 151 Franklin, “Modest Enquiry.” 149

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Parliament-controlled colonial bank (1764-66).152 Second, as a senior diplomat in Paris he was negotiating in 1765 the redemption by France of Canadian paper money that was bought by British speculators after the British occupation of Canada. He learned the exact details of how that monetary system worked.153 Third, he learned to love America and hate the empire. To begin with the latter, at the end of his diplomatic service in 1768 he wrote from London: There are fine doings in America. Oh! How I long to see America and the East Indies revolted, totally and finally, the revenue reduced to half, public credit fully discredited by bankruptcy, the third of London in ruins, and the rascally mob subdued! I think I am not too old to despair of being witness to all these blessings.

154

In 1769 he further wished “the diminution of London to less than a half” but wisely did so only after leaving it.155 Back to economics, in 1769 the French economist André Morellet asked Hume, Franklin, Smith and others for comments on the manuscript of his Dictionary of Commerce. Hume replied: You have overlooked that, in our colony of Pennsylvania, the land itself, which is the chief commodity, is coined, and passes in circulation. ... A planter, immediately after he purchases any land, can go to a public office and receive notes to the amount of half the value of his land; which notes he employs in all payments, and they circulate through the whole colony, by convention. To prevent the public from being overwhelmed by this fictitious money, there are two means employed ... An account of this curious operation would enrich your dictionary; and you may have a more particular detail of it, if you please, from Dr. Franklin, who will be in Paris about this time, and will be glad to see you. I conveyed to him your prospectus, and he expressed to me a great esteem of it.

156

The same letter indicates that Franklin succeeded in changing Hume’s views on the origin of American paper money. Our colonies in America, for want of specie, used to coin a paper currency; which were not bank notes, because there was no place appointed to give money in exchange; yet this paper currency passed in all payments, by convention; and might have gone on, had it not been

152

Dimand, “David Hume,” p. 174. Dimand, “David Hume;” Klibansky and Mossner, New Letters, pp. 93-5, 100-5, 111, 122-5. 154 Burton, vol. II, p. 417. 155 Greig, Letters, p. 210. 156 Rotwein, p. 215. Ross, “Emergence,” pp. 44-6, argues that he was already familiar by then with financier Isaac de Pinto who changed his view on paper money in general. 153

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abused by the several assemblies, who issued paper without end, and thereby discredited the currency.

157

Franklin perhaps told Hume how his hard-working father Josiah, who immigrated from England to Boston in 1682, paid taxes in grain until paper money was invented in 1690. Hume did not bother, however, to change the parts of his essays where he claims British Americans had enough metal before paper money and where he blames people’s rude habits for their coin shortage. It should be noted that when Hume wrote “Our colonies” in this letter to a Frenchman, he might have meant both British and French colonies. In his reference to American money Hume writes “by convention” in both paragraphs. This was in reply to Morellet’s “endeavour to prove that there enters nothing of human convention in the establishment of money.”158 Hume also writes about worn British coins that they pass at face value by “tacit convention.”159 From his philosophical writings three decades earlier we know that “convention” is a social custom like language, with no part for the law.160 Adam Smith would not have ignored laws such as legal tender. Hume’s indifference to the law of money did survive intact in modern monetary theory.161 From the American experiment Hume learned another general lesson – of practical metallism – expressed in the same letter: It is true, money must always be made of some materials, which have intrinsic value, otherwise it would be multiplied without end, and would sink to nothing. But, when I take a shilling, I consider it not as a useful metal, but as something another will take from me.

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What really sank “to nothing” by 1769 was not so much the inflated unbacked paper money of the British colonies but the paper money of Canada which was supposed to be redeemed in bills of exchange. It was issued excessively during Canada’s last war and Hume the diplomat failed to get it redeemed at anything close to face value.163

157

Rotwein, p. 215. Ibid. 159 Ibid. 160 Arnon, Monetary Theory, p. 11. 161 The term “fiat money” means in law money which has no intrinsic value, is not convertible, but is legal tender. Most monetary theorists use this term to denote any money which has no intrinsic value and is not convertible. By default, its legal status is deemed irrelevant and the term can therefore refer to legal tender money, money forced by criminal law, paper money of the game Monopoly, and any other useless object. 162 Ibid, p. 214. 163 Dimand, “David Hume,” pp. 176-7. 158

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In the 1770s Hume drifted further in favor of America and against the empire.164 He continued thinking on monetary economics to his last days, as seen in his comment on Smith’s book.165 The comments which survived had no direct relation to America. 7. Conclusion David Hume had very little credible information about American money and banking. In the current Information Age it is important to realize how severe was the problem of information in past centuries and how it could mislead the greatest minds. The analyses of earlier scholars should be examined and evaluated not only against reality as we know it to have been, but especially against the reality they imagined from the limited reliable information they could possess. It is debatable whether the Scottish Enlightenment was an outcome of the distance from an overbearing London and a defunct Oxbridge. What is clear is that this distance damaged the knowledge base that great thinkers could use in their distant periphery. Especially when it came to another periphery – the American colonies – information usually had to go through London before reaching Scotland. Some of it got stuck in London, mostly as official documents, and some was transmitted to Scotland with lags and distortions. One intriguing possibility is that this problem of information contributed to the rift between Britain and its colonies. Even though Hume was in favor of the Americans in 1776, his 1752 Discourses which roundly denounced American paper money may have negatively influenced British politicians’ view of America. Had Hume known the truth – that British regulation caused American paper money – his Discourses could have brought reconciliation instead. Franklin realized that and told him so in the 1760 letter quoted earlier, but whatever he told Hume of American money was apparently not enough for Hume to change this negative view in later editions as opposed to his lettters. Finally, it should be kept in mind that Hume had more pressing problems, desires, and biases on his mind. The only American money he regularly handled was the Latin American metal, there were much larger debates about British mercantilism and

164

Pocock, Virtue, ch. 7, argues that Hume saw American independence as the only way to reduce the empire’s public debt which so enraged Hume. But Hume also sought intellectual refuge in America from his critiques at home, as he told Franklin in 1772 (Greig, Letters, p. 258). 165 Rotwein, p. 217.

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regulation in which the relevance of American paper money was not easily apparent, and in general he had no sympathy for either America (in 1752), or laws, or cheating debtors.

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Figure 2: Colonial Silver Production

Note: This is adapted from Garner, “Long Run Silver Mining Trends,” Figure 1. He does not provide a list of the data so I use his logarithmic plot. In Garner, “Replication Data” he lists only decennial data. Garner’s original plot:

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Figure 3: Annual Inflation Rates in Great Britain

15 10 5

-5

1711 1713 1715 1717 1719 1721 1723 1725 1727 1729 1731 1733 1735 1737 1739 1741 1743 1745 1747 1749 1751

0

-10 -15 -20

Note: The source is http://www.measuringworth.com/ukearncpi/

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