This is why bank-notes—the circulation of which diminishes the quantity of money needed—have proved such a precious invention. What they do is to set free a certain quantity of gold and silver which may be sent abroad to pay for machinery and other instruments of production, and which will in turn increase the true revenue of the country. Smith’s parable in which he illustrates these advantages, has long since become classic: “The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air; enable the country to convert, as it were, a great part of its highways into good pastures and cornfields, and thereby to increase very considerably the annual produce of its land and labour.”[193]
The conclusion is that every policy—the Mercantilist, for example—which aims at increasing the quantity of money within the country, whether by direct or indirect methods, is absurd, for money, far from being indispensable, is really an encumbrance.
It is not only absurd, but also useless. Have we not seen already that money is a mere commodity designed to facilitate circulation and that the demand for it is entirely determined by that object? But the supply of any commodity usually adapts itself spontaneously to the demand for it. No one concerns himself with supplying the nation with wine or with crockery. Why trouble about money?[194] If the quantity of goods diminishes, exchange slackens and a part of the money becomes useless. But “the interest of whoever possesses it requires that it should be employed.”[195] Accordingly “it will, in spite of all laws and prohibitions, be sent abroad, and employed in purchasing consumable goods which may be of some use at home.”
On the other hand, as the prosperity of a nation grows it necessarily attracts the precious metals because a multiplication of exchanges leads to a growing demand for money. These exportations and importations will depend, as Hume[196] had already shown, upon the relative cheapness or dearness of money. What is true of metallic money is also true of a special kind of money known as bank-notes. Smith has given us a vivid description of the functions of banks, and especially of the fortunes of the most famous bank of this period, the Bank of Amsterdam. This afforded him another opportunity of demonstrating how the quantity of notes offered spontaneously adapts itself to the quantity demanded. If banks issue more notes than the circulation warrants prices will rise. Buying from foreign countries will be resorted to and the notes will be returned to the banks to be exchanged for gold and silver—the only international money. The banks clearly have no interest in issuing too many notes, because it involves a greater metallic reserve as the result of the more frequent demands for payment which they will have to face. Of course, “every particular banking company has not always understood or attended to its own particular interest, and the circulation has frequently been over-stocked with paper money.”[197] But this does not affect the main principle, and we have one further proof of the spontaneous activity of the economic mechanism.
We have now reviewed some of Smith’s principal themes, and we have seen how every phenomenon impresses him in the same fashion. Had space permitted we might have cited other examples all pointing to the same conclusion.[198] This conception of spontaneity and wise beneficence is by no means the product of mere a priori thinking. It was no abstract theory that needed the backing of a rigid demonstration. It was a belief gradually borne in upon him in the course of his review of the economic field. This is characteristic of all his thought, and with every new vista we are reminded of it. The conclusion is hinted at again and again, and the impression left upon the reader’s mind is that no other conclusion could ever be possible. Smith thought of the economic order as an organism—the creation of a thousand human wills unconscious of the end whither they are tending, but all of them obedient to the impulse of one instinctive, powerful force. This force, the root of all economic activity, its constancy and uniformity triumphant over every artificial obstacle and giving unity to the whole system, what is it?
We have already encountered it on more than one occasion. It is personal interest, or, as Smith prefers to call it, “the natural effort of every individual to better his own condition.”[199] Hidden deep in the heart of every individual lies this essential spring of human life and social progress.
Doubtless it is not the only one. Smith is never exclusive. He knew that there were other passions[200] besides self-interest, and he is not afraid of naming them, as when he attributes an economic revolution which had such beneficial effects as the emancipation of the rural classes to “the most childish vanity of proprietors.”[201] Neither did he omit to point out that personal interest is not equally strong in the breast of every one, and that there is the greatest diversity in human motives. All this he had forgotten, according to some of his critics, while others charge him with the creation of the homo œconomicus, a poor representation of reality and a mere automaton exclusively guided by material interests. Someone has remarked that if you add to this figure a tinge of patriotism you have a faithful picture of the Englishman and Scotsman of his day. Had he been acquainted with Germans or Frenchmen, with their less sordid attachment to material gain, he might have judged differently. It may be that our reading of him is incorrect. He seems to have taken care to note that his remarks do not apply to all, but only to the generality of men. He continually recalls the fact that he is speaking of men of common understanding,[202] or of those gifted with common prudence.[203] He knew well enough that the principles of common prudence do not always govern the conduct of every individual, but he was of opinion that they always influenced that of the majority of every class and order.[204] His reasoning is applicable to men en masse, and not to individuals in particular. Moreover, he does not deny that man may be unacquainted with or may even entirely ignore his own interest. We have just quoted a passage wherein he remarks that bankers who temporarily issue too many notes are at that moment ignorant of their own interests.
These reservations notwithstanding, and full account being taken of all the exceptions to the principle as laid down by Smith, it is still true to say that as a general thesis he considers “the natural effort of every individual to better his own condition”—that is, personal interest—as the fundamental psychological motive in political economy. Any reference to the case of business men who are really actuated by a desire to take general welfare as their guide in matters of conduct is treated with a measure of scepticism which it is difficult not to share. “I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”[205] Not that sentiment does not play a part, and a very important part, in the philosophy of Smith; but