Money and process analysis

A highlight of Cantillon's theory of money is his treatment of the value of money as a special case of the value of market commodities in general. As in the case of any product, the alleged ‘intrinsic value’ of gold is the cost of its production. The value of gold and silver, like other commodities, is set by the values and hence the demands of users in the market – by the ‘consent of mankind’. As in the case of other commodities, too, Cantillon has no cost of production theory of the value of gold and silver; he simply holds, as elsewhere, that these products can only be produced if costs can be covered by the value of the product.

The process of aligning costs and values in gold, however, takes a relatively long time since its annual output is a small proportion of the total stock in existence. If the nominal value of gold falls below its cost of production, it will cease being mined; and if costs fall sharply, production of gold will be stepped up, thus tending to align costs and normal values. Cantillon recognized that government paper and bank money virtually have no costs of production, and therefore no ‘intrinsic value’ in his terminology, but he pointed out that market forces keep the value of such fiduciary money at par with the value of the gold or silver in which that paper can be redeemed. As a consequence, an increase in the supply ‘of fictitious or imaginary money has the same effect as increase in the circulation of real money’. But, Cantillon noted, let confidence in the money be damaged, and monetary disorder ensues and the fictitious money collapses. He pointed out, too, that government is particularly subject to the temptation to print fictitious money – a lesson he had undoubtedly learned from or at least seen embodied in, the John Law experiment. Cantillon also provided a sound analysis of how the market determines the ratio of the values of gold and silver.

One of the superb features of Cantillon's Essai is that he was the first, in a pre-Austrian analysis, to understand that money enters the economy as a step-by-step process and hence does not simply increase or raise prices in a homogeneous aggregate.8 Hence he criticized John Locke's naive quantity theory of money – a theory still basically followed by monetarist and neoclassical economists alike – which holds that a change in the total supply of money causes only a uniform proportionate change in all prices. In short, an increased money supply is not supposed to cause changes in the relative prices of the various goods.

Thus Cantillon, asking ‘in what way and in what proportion the increase of money raises prices?’, answers in an excellent process analysis:

in general an increase of actual money causes in a State a corresponding increase of consumption which gradually brings about increased prices. If the increase of actual money comes from Mines of gold and silver in the State the Owner of these Mines, the Adventurers, the Smelters, the Refiners, and all the other workers will increase their expenses in proportion to their gains. They will consume... more... commodities. They will consequently give employment to several Mechanicks who had not so much to do before and who for the same reason will increase their expenses. All this increase of expense in Meat, Wine, Wool, etc. diminishes the share of the other inhabitants of the State who do not participate at first in the wealth of the Mines in question. The alteration of the Market, or the demand for Meat, Wine, Wool, etc., being more intense than usual, will not fail to raise their prices. These high prices will determine the Farmers to employ more land to produce them in another year; these same Farmers will profit by this rise of prices and will increase the expenditure of their Families like the others. Those then who will suffer from this dearness and increased consumption will be first of all the Landowners, during the term of their Leases, then their Domestic Servants and all the Workmen or fixed Wage-earners who support the families on their wages. All these must diminish their expenditure in proportion to the new consumption... it is thus, approximately, that a considerable increase of Money from the Mines increases consumption....

In short, the early receivers of the new money will increase spending according to their preferences, raising prices in these goods, at the expense of a lower standard of living among the late receivers of the new money, or among those on fixed incomes who don't receive the new money at all. Furthermore, relative prices will be changed in the course of the general price rise, since the increased spending is ‘directed more or less to certain kinds of products or merchandise according to the idea of those who acquire the money, [and] market prices will rise more for certain things than for others...’. Moreover, the overall price rise will not necessarily be proportionate to the increase in the supply of money. Specifically, since those who receive new money will scarcely do so in the same proportion as their previous cash balances, their demands, and hence prices, will not all rise to the same degree. Thus, ‘in England the price of Meat might be tripled while the price of Corn rises no more than a fourth’. Cantillon summed up his insight splendidly, while hinting at the important truth that economic laws are qualitative but not quantitative:

An increase of money circulating in a State always causes there an increase of consumption and a higher standard of expenses. But the dearness caused by this money does not affect equally all the kinds of products and merchandise proportionably to the quantity of money, unless what is added continues in the same circulation as the money before, that is to say unless those who offered in the Market one ounce of silver be the same and only ones who now offer two ounces when the amount of money in circulation is doubled in quantity, and that is hardly ever the case. I conceive that when a large surplus of money is brought into a State the new money gives a new turn to consumption and even a new speed to circulation. But it is not possible to say exactly to what extent.9

Not only that, but as Professor Hebert has pointed out, Cantillon also provided a remarkable proto-Austrian analysis of the different effects of the money going into consumption or investment. If the new funds are spent on consumer goods, then goods will be purchased ‘according to the inclination of those who acquire the money’, so that the prices of those goods will be driven up and relative prices necessarily changed. If, in contrast, the increased money comes first into the hands of lenders, they will increase the supply of credit and temporarily lower the rate of interest, thereby increasing investment. Repudiating the common superficial view, brought back to economics in the twentieth century by John Maynard Keynes, that interest is purely a monetary phenomenon, Cantillon held that the rate of interest is determined by the number and interactions of lenders and borrowers, just as the prices of particular goods are determined by the interaction of buyers and sellers. Thus, Cantillon pointed out that

If the abundance of money in a State comes into the hands of money-lenders it will doubtless bring down the current rate of interest by increasing the number of money-lenders: but if it comes into the hands of those who spend it will have quite the opposite effect and will raise the rate of interest by increasing the number of entrepreneurs who will find activity by this increased spending and who will need to borrow in order to extend their enterprise to every class of customers.

An increased supply of money, therefore, can either lower or raise interest rates temporarily, depending on who receives the new money – lenders, or people who will be inspired by their new-found wealth to borrow for new enterprises. In his analysis of expanding credit lowering the rate of interest, furthermore, Cantillon provides the first hints of the later Austrian theory of the business cycle.
In addition, Cantillon presented the first sophisticated analysis of how the demand for money, or rather its inverse, the speed or velocity of circulation, affects the impact of money and hence the movement of prices. As he put it, ‘an acceleration or greater rapidity in circulation of money in exchange, is equivalent to an increase of actual money up to a point’. One of the reasons why prices do not change in exact proportion to a change in the quantity of money is alterations in velocity: ‘A river which runs and winds about in its bed will not flow with double the speed when the amount of water is doubled’. Cantillon also saw that the demand for cash balances will depend on the frequency of payments made in the society. As Monroe sums up Cantillon's position: ‘the longer the interval between payments, the larger are the sums which have to accumulate in the payers’ hands, and the more money is required in the country’.10 If people save large sums, furthermore, they may have to ‘keep money locked up for considerable periods’. On the other hand, the development of more efficient clearing systems for debts, as well as of paper money, will economize on cash: ‘The rapidity of circulation is increased by the practice of offsetting accounts between merchants, and by the use of bankers’ and goldsmiths’ notes, for these men do not keep an equivalent amount of money on hand’. Cantillon summed up his analysis of the interaction of quantity and velocity: ‘According to the principles we have established the quantity of money circulating in exchange fixes and determines the price of everything in a State taking into account the rapidity or sluggishness of circulation’.

Cantillon also provided a masterful discussion of the relations between gold and silver, and advocated freely fluctuating exchange rates between gold and silver, attacking any attempts, certainly any long-lived attempts, to fix the exchange rate between them. For such a rate is soon bound to vary from the market rate. Thus Cantillon saw the problem in trying to maintain a bimetallic standard with fixed parities between two precious metals.

All in all we can understand Hayek's enthusiasm when he concludes that Cantillon's monetary theory ‘constitutes, without doubt, the supreme achievement of a man who was the greatest pre-classical figure in at least this field and whom the classical writers themselves in many instances not only failed to surpass but even failed to equal’.

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Spatial economics

Richard Cantillon was also the founder of spatial economies, of the analysis of economic activity in relation to geographic space. In a sense, of course, mercantilists, by advocating a favourable balance of geographical trade, analysed (even if badly) economic activities to the extent that they crossed national borders. Spatial analysis, as Professor Hebert has pointed out, deals with distance (transportation cost, and its relation to prices as well as to the location of economic activities), and area (the geographical development and boundaries of markets). Cantillon not only developed location theory but integrated it into his general microeconomic analysis. In particular, he saw that the prices of produce, even when money and monetary prices were in equilibrium, would always be higher in the cities than in their place of production by an amount needed to cover the costs and risks of transport. In consequence, products that are bulky and/or perishable would be too costly or impossible to transport to the cities, and hence would be far cheaper at their places of production. Such products, then, would generally be grown in border areas around the cities, where the transport costs to the urban markets are not prohibitive. In manufacturing, furthermore, Cantillon saw that in cases where plants have to use bulky, low value-per-unit-weight raw materials, they would tend to locate near the output of such materials. For in that case it would be less costly to transport the less bulky, more valuable finished products to urban markets than to ship the raw materials.

On the location of areas of urban markets, Cantillon was highly suggestive, pointing out that it is far less costly for buyers and sellers to gather at one spot than to travel around the periphery seeking each other out and finding out the various prices that buyers were willing to pay or sellers were willing to accept. In modern terms, Cantillon might say that central markets develop naturally because they enormously lower the transaction, transport, information and other costs of trade.
While Cantillon, therefore, saw how markets and the location of economic activity were able to regulate themselves harmoniously, he was not a consistent free trader internally just as he was not in the foreign trade area. Internally, he held inconsistently that manufacturers needed ‘much encouragement and capital’ to find and invest in the optimum locations.

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Population theory

Richard Cantillon's theory of wages is dependent on population in a way that was copied almost word for word by Adam Smith in the Wealth of Nations, which in turn inspired Malthus's famous anti-populationist hysteria. Cantillon's long-run wage theory depends on the supply of labour, which in turn depends on levels and growth of population. In contrast to the later Malthus, however, Cantillon engaged in a sophisticated analysis of the determinants of population growth. Natural resources, cultural factors, and the state of technology he diagnosed as particularly important. He saw prophetically that the colonization of North America would not be a simple displacement of one people by another, but that new agricultural technology would support a far larger population per acre of land. Hence the extent to which existing resources, land and labour, can be utilized depends on the existing state of technology. Thus pre-colonial North America was not ‘overpopulated’ by Indians, as some had believed; instead, the Indian population level had adjusted to the given resources and technology available. In short, Cantillon foreshadowed the modern theory of ‘optimum’ population, in which the size of population tends to adjust to the most productive level given the resources and technology available.

While Cantillon described a pre-Malthusian alleged tendency of human beings to multiply like ‘rats in a barn’, without limit, he also recognized that religious and cultural values can modify such tendencies. An increase in the demand for agricultural products that are land-intensive would tend to reduce the demand for agricultural labour and eventually cause a fall in the supply of such labour and hence of the population as a whole. (Cantillon, it must be remembered, was writing in an age when the overwhelming bulk of the population was engaged in agriculture.) An increase in the demand for labour-intensive farm products, on the other hand, would bring about an increase in the demand for labour and hence of the population. Living, once again, in a country and an era of large feudal landed estates, Cantillon observed that it was the tastes of the proprietary classes that determined the consumer tastes and values of society, and hence the demand for products.

It should be noted that in an unusually sophisticated way, Cantillon pointed out that it was outside the scope of economic analysis to decide whether it is better to have a large population of poorer people or a smaller population of people who enjoy a higher standard of living: that must be for the values of the citizenry to decide.

Professor Tarascio points out that Cantillon's population analysis was far more subtle and modern than that of Smith, Ricardo, or Malthus. Rather than worry about a future unchecked population explosion, Cantillon's theoretical framework accounted for the current cultural change to smaller families in industrialized countries, as well as the likelihood that population will adjust itself downward to any future depletion of resources. Cantillon pointed out, for example, that as ancient civilizations declined, their population size declined along with them. The number of inhabitants of the Roman state in Italy, for example, declined from 25 million to about 6 million over a period of 17 centuries.

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Uncertainty and the entrepreneur

One of Cantillon's remarkable contributions to economic thought is that he was the first to stress and analyse the entrepreneur.7 To this real-world merchant, banker and speculator, it would have been inconceivable to fall into the Ricardian, Walrasian and neoclassical trap of assuming that the market is characterized by perfect knowledge and a static world of certainty. The real-world marketplace is permeated by uncertainty, and it is the function of the businessman, the ‘undertaker’, the entrepreneur, to meet and bear that uncertainty by investing, paying expenses and then hoping for a profitable return. Profits, then, are a reward for successful forecasting, for successful uncertainty-bearing, in the process of production. The crucial Smithian–Ricardian and Walrasian (classical and neoclassical) assumption that the economy is perpetually in a state of long-run equilibrium fatally rules out the real world of uncertainty. Instead, it focuses on a never-never land of no change, and hence of perfect certainty and perfect knowledge of present and future.

Thus Cantillon divides producers in the market economy into two classes: ‘hired people’ who receive fixed wages, or fixed land rents, and entrepreneurs with non-fixed, uncertain returns. The farmer–entrepreneur bears the risk of fixed costs of production and of uncertain selling prices, while the merchant or manufacturer pays similar fixed costs and relies on an uncertain return. Except for those who only sell ‘their own labour’, business entrepreneurs must lay out monies which, after they have done so, are ‘fixed’ or given from their point of view. Since sales and selling prices are uncertain and not fixed, their business income becomes an uncertain residual.

Cantillon also sees that the pervasive uncertainty borne by the entrepreneurs is partly the consequence of a decentralized market. In a world of one monopoly owner, the owner himself decides upon prices and production, and there is little entrepreneurial uncertainty. But in the real world, the decentralized entrepreneurs face a great deal of uncertainty and must bear its risks. For Cantillon, competition and entrepreneurship go hand in hand.

As in the case of Frank Knight and the modern Austrians, Cantillon's theory of entrepreneurship focuses on his function, his role as uncertainty-bearer in the market, rather than, as in the case of Joseph Schumpeter, on facets of his personality.

Cantillon's concept also anticipates von Mises and the modern Austrians in another respect: his entrepreneur performs not a disruptive (as in Schumpeter) but an equilibrating function, that is, by successfully forecasting and investing resources in the future, the entrepreneur helps adjust and balance supply and demand in the various markets.

Professor Tarascio points out that Cantillon's pioneering insight into the pervasive uncertainty of the market was largely forgotten, and before long dropped out of economic thought until independently resurrected in the twentieth century by Knight and by such modern Austrians as Ludwig von Mises and F.A. Hayek. But, as Professor O'Mahony wryly comments: ‘To acknowledge his [Cantillon's} recognition of uncertainty when we look at him as Professor Tarascio does from a current perspective is thus more of a reflection on many modern economists whose capacity to ignore uncertainty is nothing short of bizarre than a tribute to Cantillon's prescience’.

Bizarre it may well be, but there is a method to the madness. For, as Professor O'Mahony himself understands full well, modern economics is a set of formal models and equations purporting to fully determine human behaviour, at least in the economic realm. And there is no way that uncertainty can be compressed into determinate mathematical models. As O'Mahony puts it, one might ‘ask if entrepreneurial activity can in the nature of things be made the subject of formal representations or models at all. If they could, would there be any room for uncertainty, in the true sense of the term, and, therefore, any room for entrepreneurship itself?’ Economic theory, in short, must choose between formally elegant but false and distorting mathematical models, and the ‘literary’ analysis of real human life itself.

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Methodology

Richard Cantillon's Essai has been justly called by W. Stanley Jevons ‘the first treatise on economics’, and the historian of economic thought Charles Gide referred to it as the first systematic treatment of political economy. The best overall assessment is that of F.A. Hayek, the Austrian economist who has done important work in the history of thought: ‘this gifted independent observer, enjoying an unsurpassed vantage point in the midst of the action, coordinated what he saw with the eyes of the born theoretician and was the first person who succeeded in penetrating and presenting to us almost the entire field which we now call economics.

The scholastics had written general treatises on almost all of human knowledge, in which discussions of economics or the market played a subordinate part; and in the mercantilist era the mercantilists and their critics delivered at best intelligent aperçus on particular economic – usually economic policy – topics. But Richard Cantillon was the first theorist to demarcate an independent area of investigation – economics – and to write a general treatise on all its aspects.

One reason that Cantillon was the ‘first of the moderns’ is that he emancipated economic analysis from its previous intertwining with ethical and political concerns. The mercantilists, dominant in economic thought for the preceding century or two, were special pleaders whose titbits of analysis were pressed into the service of political ends, either in subsidizing particular interests or in building up the power of the state. The medieval and renaissance scholastics, while incomparably more thoughtful and systematic, had imbedded their economic analysis in a moral and theological framework. To break out of the mercantilist morass, it was necessary to step aside, to focus on the economic features of human action and to analyse them, abstracting them from other concerns, however important. Separating out economic analysis from ethics, politics, or even concrete economic data did not mean that these matters were unimportant or should never be brought back in. For it was impossible to decide the ethics of economic life, or what government should or should not do, without finding out how the market worked, or what the effect of interventions might be. Cantillon presumably, at least dimly, saw the need for this at least temporary emancipation of economic analysis.

Furthermore, Cantillon was one of the first to use such unique tools of economic abstraction as what Ludwig von Mises would later identify as the indispensable method of economic reasoning: the Gedanken-experiment (or thought-experiment). Human life is not a laboratory, where all variables can be kept fixed by the experimenter, who can then vary one in order to determine its effects. In human life, all factors, including human action, are variable, and nothing remains constant. But the theorist can analyse cause-and-effect relations by substituting mental abstractions for laboratory experiment. He can hold variables fixed mentally (the method of assuming ‘all other things equal’) and then reason out the effects of allowing one variable to change. By starting with simple ‘models’ and introducing successive complications as the simpler ones are analysed, the economist can at last discover the nature and operations of the market economy in the real world. Thus the economist can validly conclude from his analysis that ‘All other things equal (ceteris paribus), an increase in demand will raise price’.
In the 1690s, as we have seen (Chapter 9), a leader of the emergent classical liberal opposition to the statism and mercantilism of Louis XIV, the provincial judge the Sieur de Boisguilbert, had introduced into economics the method of abstraction and successive approximations, beginning with the simplest model and proceeding in increasing complexity. In illustrating the nature and advantages of specialization and trade, Boisguilbert had begun with the simplest hypothetical exchange: two workers, one producing wool, the other wheat, and then extended his analysis to a small town, and finally to the entire world.

Richard Cantillon greatly developed this systematic method of abstractions and successive approximations. He liberally used the ceteris paribus method. Through this analytic method he uncovered ‘natural’ cause-and-effect relations in the market economy. The France of Cantillon's day was a country of great landed feudal estates, the result of the conquests of previous centuries. And so Cantillon brilliantly began the economic analysis in his Essai with the assumption that the whole world consists of one giant estate.

In that admittedly ‘unrealistic’ but illuminating construct, all production is dependent on the wishes, the desires, of the monopoly owner, who simply tells everyone what to do. Put another way, production depends on demand, except that here there is in effect one demander, the monopoly landowner.
Cantillon then makes one simple realistic change in his model. The landowner has farmed out the land to various producers of all kinds. But as soon as that happens, the economy cannot continue with one man giving orders. For its continued operation, the individual producers must exchange their products, and a free market economy comes into being, with its attendant competition, trade and price system. Furthermore, money arises out of this exchange as a commodity serving as a much-needed medium of exchange and ‘measure’ of values.

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The founding father of modern economics: Richard Cantillon

Most people, economists and laymen alike, think that economics sprang fullblown, so to speak, from the head of Adam Smith in the late eighteenth century. What has become known as the first, or ‘classical’ period of modern economic thought then developed, out of Smith, through David Ricardo, including an aggregative approach, and a cost-of-production, or even a labour, theory of value. We now know, however, that this account is flatly incorrect. For modern economic thought, i.e., analysis centring on explaining the market economy, developed a half-century before Smith's Wealth of Nations, not in Britain but in France. More significantly, the French writers, despite their diversity, must be set down not as pre-Ricardian but as proto-‘Austrian’, that is, as forerunners of the individualistic, micro, deductive, and subjective value approach that originated in Vienna in the 1870s.


Cantillon the man

The honour of being called the ‘father of modern economics’ belongs, then, not to its usual recipient, Adam Smith, but to a gallicized Irish merchant, banker, and adventurer who wrote the first treatise on economics more than four decades before the publication of the Wealth of Nations. Richard Cantillon (c. early 1680s–1734) is one of the most fascinating characters in the history of social or economic thought. Little is known about Cantillon's life despite the fact that he died a multimillionaire, but the best modern researches show that he was born in Ireland in County Kerry of a family of Irish landed gentry, who had been dispossessed by the depredations of the English puritan invader Oliver Cromwell. Cantillon's first cousin once removed, also named Richard, emigrated to Paris to become a successful banker, thereby perpetuating the tradition, born in the sixteenth century, of religio-political exiles from Britain emigrating to France.1 The Cantillons were part of the Catholic emigration, centring, by the end of the seventeenth century, around the Stuart pretender to the throne of Great Britain.

Richard Cantillon joined the emigration to Paris in 1714, quickly becoming the chief assistant to his cousin at the latter's bank. Moreover, Richard's mother's uncle, Sir Daniel Arthur, was a prominent banker in London and Paris, and Arthur had named Richard's cousin as the Paris correspondent of his London-based bank.2 In two years, Cantillon was in a position to buy his cousin's ownership of the bank.

Richard Cantillon was now in the important position of banker for the Stuart court in exile, as well as for the bulk of the British and Irish emigrés in Paris. But his most important coup came from his association with the Scottish adventurer and arch-inflationist John Law (1571–1729), who had captured the imagination and the greed of the regent of France. The death of the aged Louis XIV in 1715 had inaugurated a looser and more optimistic regime, control of which had been seized by the regent, the duke of Orleans. John Law persuaded the regent that France could find permanent prosperity and need have no further worries about the public debt. The French government need only finance heavy deficits by a massive infusion of the relatively new device of government paper money. Becoming the leading financier of the French government, and even controller-general of the finances of France, Law set loose a rampant inflation that generated the wildly speculative Mississippi bubble (1717–20). The bubble created instant millionaires before it collapsed, leaving John Law in poverty and disgrace. Indeed, the very word ‘millionaire’ was coined during the heady years of the Mississippi bubble.

But when the dust had settled, the shrewd Richard Cantillon emerged, after being a top partner in John Law's Mississippi speculations, as a multimillionaire. Legend has it that, at the beginning of his meteoric career running French finances, John Law had come to Cantillon and warned him that ‘If we were in England we would have to strike a deal and settle matters, but as we are in France, I can send you this evening to the Bastille, if you do not give me your word to leave the kingdom within twenty-four hours’. To which Cantillon is supposed to have replied: ‘Hold on, I will not go and I will make your system succeed’. In any case, we know that Law, Cantillon, and the English speculator, Joseph Edward (‘Beau’) Gage, formed a private company in November 1718. Gage was so wealthy from paper speculation in Law's government-sponsored paper-issue bank, the Mississippi Company, that he seriously attempted, in this period, to purchase the kingdom of Poland from its king, Augustus.
As the Mississippi bubble careened onward, Cantillon, an astute analyst of monetary affairs, saw deeply that the bubble was bound to burst soon, and he took steps to make millions out of the foolishness of his partners and clients. Lending money to Gage and others with which to buy inflated Mississippi Company shares, Cantillon quietly sold all of his own shares as well as the inflated shares that his borrowers had left him as collateral, locked all his papers in a strongbox, took his accumulated millions and left town for Italy, there to await in safety ‘the financial storm that he could see developing’. After Gage and the other Cantillon clients went broke in the 1720 crash, Cantillon pursued them to repay his loans, for which they had been happy to pay a rate of interest up to 55 per cent, which had incorporated a huge inflation premium.

Richard Cantillon returned to Paris a multimillionaire, albeit unpopular with his former associates and debtors. Soon he married Mary Anne, daughter of the late Count Daniel O'Mahony, an Irish general. His mother-in-law, Charlotte Bulkeley, was the sister-in-law of James Fitzjames, the duke of Berwick, marshal of France and the natural son of the English King James II; he was, therefore, the Stuart pretender, James III. Cantillon thus married into an Irish military family closely connected with the Stuarts and with the French court.

At some time during the early 1730s, probably around 1730, this successful banker and speculator wrote his great work, in French, the Essai sur la nature du commerce en général. In the fashion of the day, the result of the censorship of that era, this treatise was not published, but circulated widely in manuscript, in literary and intellectual circles, until it was finally published two decades later, in 1755.
Richard Cantillon's exit from this life was as mysterious and adventurous as his overall career. In May 1734, while living in London, in one of his many houses in the leading cities of Europe, Cantillon died in a fire that burned his house to the ground. It was subsequently found that he was murdered inside the house, the fire being presumably set to cover the murder. Three of his servants were tried for his murder and found not guilty, while his French cook, who had been dismissed three weeks earlier, fled overseas with a considerable amount of valuables. The runaway cook was never found. Earl Egmont, whose brother lived next door to Cantillon, wrote in his diary that Cantillon ‘was a debauched man, and his servants of bad reputation’. And so ended, under highly mysterious circumstances, the only leading economist in history who lost his life as a victim of murder.

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Laissez-faire by mid-century: Tucker and Townshend

If a hard-money stance had been pretty well established in English thought by the middle of the eighteenth century, so too had a corresponding if not fully consistent commitment to free markets and freedom of international trade. The Vanderlint-Cantillon–Harris analysis of international trade and money flows lent powerful arguments in the direction of freedom of trade. And, as we shall see in later chapters, the Scottish views of Carmichael, Hutchison and Hume were leading in the same direction in the northern part of Great Britain.

Josiah Tucker (1713–99), Anglican clergyman and dean of Gloucester from 1758 on,41 was a celebrated eighteenth century writer on religion, politics and economics who was extravagantly hailed in his day as a free trader by such men as the great laissez-faire statesman and economist A.R.J. Turgot, who translated two of Tucker's works into French.42 But Tucker's devotion to freedom of trade was only moderate, and marred by inconsistencies and contradictions. Thus Tucker favoured absolute prohibition on the export of raw materials, tariffs on manufactures, protective tariffs for infant industries, government compulsion – under severe penalties – of landlords to set aside 20 out of every 400 acres for timber, and heavy taxes on consumption of sports, recreation and luxuries. In general, even though he anticipated Adam Smith in praising the consequences of self-interest and ‘self-love’, he also believed in the importance of government directing and guiding the activities based on self-interest. He was also a characteristic mercantilist in urging the government to encourage ever greater population. It is true, however, that Tucker attacked the restrictionism of the navigation acts and the usury laws, both areas in which he was closer to a free trade position than that of the chronically over-praised Adam Smith.

On one free market point, moreover, Tucker was consistent and determined: opposition to war and conquest. In a letter to Lord Kames, during the Seven Years’ War with France, Tucker wrote: ‘War, conquests and colonies are our present system and mine is just the opposite’. Interestingly enough, however, Tucker was not at all moved by sympathy for the American cause. On the contrary, he believed that Britain had the full right to tax the colonies. But Tucker's opposition to war triumphed, including a war to keep the colonies; to Tucker America ‘ever was a millstone hanging about the neck of this country, to weigh it down; and as we ourselves had not the wisdom to cut the rope and to let the burden off, the Americans have kindly done it for us’.

Actually, Josiah Tucker's main historical contribution was to highlight the views of a far sounder laissez-faire economist who has been shamefully neglected by virtually all historians of economic thought. Charles, the third Viscount Townshend (1700–64), has been virtually unknown, and often confused with his son of the same name who was infamously responsible for the fateful Townshend taxes on tea and other imports into the American colonies.

Our Lord Townshend was a scion of one of the great agricultural estates in England, son of the well-known diplomat and scientific farmer ‘Turnip’ Townshend, and husband of the glamorous socialite Audrey. Lord Townshend's first published pamphlet cut against his own personal economic interest by denouncing the policy of large subsidies on the export of corn. The pamphlet, National Thoughts (1751), was signed ‘By a Landowner” to emphasize this point of arguing against his own subsidy.44
Dean Tucker struck up a correspondence with Townshend, in defence of the export bounty on corn. But soon Tucker was converted on the issue. Thus Townshend pointed out the folly of the British government subsidizing foreigners by allowing them to buy cheaper corn than the British themselves had to pay. Tucker was especially admiring of Townshend's uniqueness in arguing particular cases from general principles instead of the other way round, and specifically the general interest in favouring free competition as against grants of monopoly by government. Thus, Tucker writes to Townshend that

I am mightily pleased with your Lordship's... manner of accounting for People's frequent and gross Mistakes in the Affairs of Commerce... by arguing from Particulars to Generals; whereas in this case a Man should form to himself a General Plan drawn from the Properties of Commerce, and then descend to Particulars and Individuals, and observe whether they are cooperating with the general Interest: Unless he doth this, he studies Trade only as a Monopolist, and doth more Hurt than Good to the Community.

Tucker declared himself convinced that ‘bounties cannot be of any national service to a manufacture which is passed its infancy’.

A bit later in this correspondence, Lord Townshend demonstrated his adherence to free market principles by criticizing the inconsistencies of Sir Matthew Decker, a director of the East India Company. Decker (1679–1749), a Dutch immigrant, had also attacked the corn bounty, but Townshend was sharply critical because ‘Notwithstanding this sound Doctrine he [Decker] proposes to form [monopoly] Companies and to erect [governmental] Magazines of Corn in every County.... A most surprising absurdity and inconsistency’.46 Of course, the inconsistency is not so surprising if we realize that Decker was a director of the greatest monopoly company of them all. Townshend then goes on to point out that if, as he advocates, ‘Trade and Industry and all our Ports were thrown open and all Duties, Prohibitions, Bounties, and Monopolies of every kind whatever were taken off and destroyed’, then ‘private Traders here would erect Warehouses for Corn as they have done for other manufactures and we should then have them on a regular and natural footing and this Island would then be, as Holland has been, the great market of Europe for Corn. But as long as the Bounty remains this cannot be...’.

In National Thoughts Lord Townshend was worried about the poor, and paternalistically advocated removing the enforceability in court of small amounts of debt in order to help their condition. In later letters, however, Townshend introduced a bill in Parliament which would, instead, increase the mobility of the labouring poor by removing ‘certain Disabilities and Restraints’ upon them. Professor Rashid speculates that the change in stance came about because, ‘having accepted the validity of laissez-faire, Townshend came to believe that the poor could not be helped more than by making them free to help themselves’.

So eager was Lord Townshend to spread the principles of free markets and free trade that in 1756 he sponsored prizes at Cambridge for essays on economic topics. Essay contests after the first year were discontinued because Townshend and the university could not agree on essay questions. Thus Cambridge turned down Townshend's suggested topic: ‘What influence has Trade on the Morals of a Nation?’ Lord Townshend was indignant at Cambridge University's implicit denial of any connection between trade and morality, and he replied indignantly and with keen perception: ‘There is not any moral Duty which is not of a Commercial nature. Freedom of Trade is nothing more than a freedom to be moral Agents’. This latter sentence expresses the crucial libertarian insight of the unity between free moral agency and freedom to act, produce, and exchange property.

Other questions suggested by Lord Townshend also put the libertarian rhetorical case very well:

‘Has a free trade or a free Government the greater effect in promoting the wealth and strength of a Nation?’
‘Can any restraints be laid on trade or industry without lessening the advantages of them? And if there can, what are they?’
‘Is there any method of raising taxes without prejudice to Trade? And if there is what is it?’48

Despite his neglect by historians, Lord Townshend's views seem to have had substantial influence in his day. The prominent Monthly Review guessed the identity of ‘the Landowner’ author of National Thoughts immediately upon publication, and the pamphlet was quoted in another tract on the corn bounty the following year. Lord Townshend had a prominent connection with the important periodical, The Gazetteer. And in 1768, four years after Lord Townshend's death, an anonymous pamphlet on Considerations on the Utility and Equity of the East India Trade argued, once again, for breaking the East India Company monopoly, and lamented the death of Lord Townshend, so sound and knowledgeable on commercial questions.

Clearly, Lord Townshend was far more influential in mid-eighteenth century England than later historians would know. Moreover, he was both an example and an embodiment of a rising tide of laissez-faire sentiment in the Britain of that era.

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The hard-money response

The bulk of the eighteenth century response to the doctrines and failures of John Law, however, was understandably to return to and redouble devotion to the original continental tradition of hard money, a tradition now challenged by the new institutions of central banking and fractional-reserve banking. One of the earliest and most brilliant responses, which cannot be limited to the term ‘hard money’, was that of Law's former partner and sceptic in the Mississippi bubble, Richard Cantillon, who virtually founded modern economics in his remarkable Essay written about 1730. (On Cantillon, see Chapter 12.)

The most immediate hard-money reaction to Law in England was also one of the most remarkable. Isaac Gervaise (d. 1739) was born in Paris of a French Protestant father who owned a firm manufacturing and trading in silk. Gervaise senior moved to London, where his son Isaac was employed in the family firm. In 1720, Gervaise published a brief but extraordinary pamphlet of less than 30 pages, The System or Theory of the Trade of the World.32\\ In the course of attacking Law's doctrine of bank credit and monetary expansion, Gervaise arrived, before Cantillon and Hume, at the process towards international monetary equilibrium, or the specie-flow-price ‘mechanism’. Without artificial bank credit expansion, Gervaise pointed out, the supply of money in each country would tend to be proportionate to its production or volume of trade. Each nation's consumption and production, and its imports and exports, would tend to be in balance. If this equilibrium should be disturbed, and, for example, ‘excessive’ gold or silver flow into a particular country, then this excess would be spent on imports, the balance of trade would tilt and imports exceed exports, and this excess would have to be paid for by an outflow of specie. This outflow, in turn, would reduce the excess of money and return the country to a monetary and foreign trade balance.

But, Gervaise charged, schemes such as John Law's upset this balance: bank credit, serving as substitute money, artificially and unnaturally increases the money supply, expanding consumption including imports, raising domestic prices and lowering exports, so that the increased bank credit will cause an outflow of specie. The artificial credit can bring no lasting gain. There is also a strong hint in Gervaise that the credit expansion will only manage to divert investment and production from those ‘natural’ fields serving consumers efficiently into those areas that will prove to be wasteful and uneconomic.

Gervaise's analysis of the effects of monetary expansion was also significant in being more akin to Cantillon, by stressing the expansion of money inducing people to spend more, than to Hume, who confined his analysis to the increased money supply causing rising prices – neglecting the outflow of specie caused by greater monetary spending, on imports as well as on domestic products.34
From his analysis of natural law, trade, self-equilibration on the market and their disruptions by government, Isaac Gervaise proceeded to a strong recommendation of all-out free trade, free of any distortions or restrictions by government. Gervaise's uncompromising free trade conclusion was all the more remarkable because his own firm enjoyed monopoly privileges conferred on it by the English Parliament. But Gervaise courageously concluded that ‘trade is never in a better condition, than when it's natural and free; and forcing it either by laws, or taxes being always dangerous; because though the intended benefit or advantage be perceived, it is difficult to perceive its contrecoup; which ever is at least in full proportion to the benefit’. Here Gervaise anticipated the keen insights of the nineteenth century French laissez-faire economist Frédéric Bastiat, who stressed that government intervention stemmed from the fact that the benefits of subsidies or privileges are often direct and immediate, whereas the greater unfortunate consequences are more remote and indirect. The former are ‘seen’ whereas the latter are ‘unseen’, and therefore the seeming benefits get all the attention. Gervaise concluded with a plea for freedom and natural law that would anticipate Turgot and other French laissez-faire thinkers of his century: ‘Man naturally seeks, and finds, the most easy and natural means of attaining his ends, and cannot be diverted from those means, but by force, and against his will’.35
Isaac Gervaise wrote no more on economic questions, but he did become a distinguished Anglican clergyman, which makes it all the more puzzling that his exceptional and innovating pamphlet exerted no influence whatever on English opinion. It was lost to the world until resurrected by historians in the twentieth century.

Another hard-money advocate who developed a theory of international monetary equilibrium was a timber merchant of Dutch extraction, Jacob Vanderlint (d. 1740), in his tract, Money Answers All Things (1734). Despite the title, Vanderlint's theme was that money is distributed properly and optimally on the free market. There is a tendency on the market for all nations’ prices to be equal, and if one country should acquire more money, its higher price level would soon draw the money out of the country until prices are back in equilibrium. It doesn't matter, then, how much specie a nation may have, since prices would adjust. Thus, if a nation had little specie, its prices would be low and it would outcompete other nations, with gold and silver consequently flowing into the country. Indeed, so concerned was Vanderlint to keep prices low and competitive with other nations that he unknowingly replicated Cantillon's advice for rulers or other worthies to hoard their gold and silver so as to keep national prices low.

Vanderlint consistently carried over his hard-money analysis to the problem of expanding bank credit. Bank credit, Vanderlint pointed out, expands the money supply, and so, ‘as the Price of things will hence be rais'd, it must and will make us the Market, to receive the Commodities of every Country whose Prices of Things are cheaper than ours... [and hence] turn the Balance of Trade against us...’.
Vanderlint, like Gervaise, was thus a severe critic of inflation and fractional-reserve banking, as well as an analyst of the international harmonies of money, prices and the balance of trade on the free market. Like Gervaise, Vanderlint was also an advocate of unrestricted free trade, concluding ‘In general, there should never be any restraints of any kind on trade, nor any greater taxes than are unavoidable’. Attempts to fix the price of gold and silver or to prohibit the export of coin are also futile: ‘it's no less absurd for the government to fix the price they will give for gold and silver brought to be coined, than it would be to make a law to fix and ascertain the prices of every other commodity’. Vanderlint also deplored the rise, during the eighteenth century, of the war-making state, and of the high taxes and public debts which war brings in its wake. Indeed, for Vanderlint, free trade and free markets, and international peace, go hand in hand, while war is the enemy of freedom. War, warned Vanderlint, is ‘one of the greatest calamities to which mankind can be subjected; the end of which none can well foresee, and the burdens of which (i.e. public debts and taxes) are seldom discharged in one generation...’. Eloquently, Vanderlint concluded that ‘it's monstrous to imagine,  the author of this world hath constituted things so as to make it any ways necessary for mankind to murder and destroy each other’.

The culminating hard-money theorist in eighteenth century England was Joseph Harris (1702–64), who published a massive two-volume Essays Upon Money and Coins (1757–58). Harris began life as a country blacksmith, but then went to London, where he became a prominent writer on navigation, mathematics and astronomy. He was an employee at the Mint, and was made assay master of the Mint in 1748.

Harris was a hard-money critic of debasement or fractional-reserve banking and bank credit expansion. He was an explicit follower of Cantillon's analysis of money flows. Thus he saw, with Cantillon, that international monetary matters tended towards an equilibrium, but he also saw, with Cantillon, that inflows or increases of the money supply did not simply raise prices; they also necessarily affected the distribution of money, benefiting some people at the expense of others. Hence the flows of money, though self-adjusting, would cause economic harm, especially during the adjustment process. As Hutchison sums up Harris's view: ‘Inflows of money enrich some at the expense of others, and such processes may for a time cause distress’. Sudden fluctuations of money, therefore, whether flowing in or out, ‘would be pernicious while it lasted and for some time afterwards’.

As a result of his analysis, Harris was determinedly opposed to any alteration whatever of the monometallic monetary standard of a country (Harris favoured silver over gold as being more stable). As Harris emphatically warned: ‘The established standard of money should not be violated or altered, under any pretence whatsoever’.

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The inflationists

It is not surprising that mercantilists, with their concentration on greater revenues and power to the state, should fasten on inflationist schemes of creating bank paper and credit, as well as government paper money. Such proposals and schemes, however, had to wait for the discovery of printing in the fifteenth century, for the development of bank paper and fractional reserves in sixteenth century Italy, and finally, for the invention of government paper money and central banking, both dubious innovations of Britain in the 1690s.

The first English inflationist was William Potter, whose most famous tract was The Key of Wealth (1650). It was Potter whose theories and proposed schemes set the stage for more famous inflationist followers, such as the Scotsman John Law. Potter, who worked in the government land office, began with the generally agreed axiom that a greater amount of money is beneficial to society. But with impeccable logic, Potter asked: if more money is good, why shouldn't a perpetual and greater increase of money be even better? Why indeed? Why not an increasing supply of money leading to infinity?
Potter offered a plethora of money-creating schemes, in which paper money would be secured, not by specie, which is inconveniently scarce, but by the ‘nation's land’. More relevantly, of course, paper notes can actually be redeemed in physical gold or silver coin, whereas redemption of notes ‘in land’ would prove a chimera. How are you supposed to carry around a few acres of land with you to make exchanges? But that of course is the idea of a ‘land bank’: money seemingly and in the eyes of the deluded public backed by the land of the nation, but actually not backed at all.

William Potter saw other wonders emerging from a land bank. Thus, increasing the money supply would increase land values, and thereby increase the ‘value of the backing’ of the money: a sort of magical perpetual motion machine! Actually, of course, the increased land values simply reflect the increasing prices and values caused by the manufacture of more money.

Since Potter was anxious to inflate money and land values, he was almost frantically opposed to ‘hoarding’, since he realized that if the new money were ‘hoarded’, that is piled up in cash balances and not spent, the supposed benefits of inflation would not accrue. Indeed, one reason Potter greatly preferred paper money to specie is that paper is far less likely to be ‘hoarded’; this means, of course, that paper money is far more likely to depreciate sharply in value as people try to get rid of it rather than add to their cash holdings.

William Potter, however, was cagey about prices rising as a result of his proposed monetary inflation. He believed, instead, that the increased money supply would greatly expand the ‘volume of trade’ and therefore the amount of production of goods, and that wealth would therefore accumulate. Potter preferred to believe that all the increased money supply would be absorbed in increased production, so that prices would not rise at all; but even if prices rose, everyone would be better off. Rising prices, of course, is the Achilles heel of inflationists’ schemes, so that all of them deprecate the extent of subsequent price inflation and currency depreciation. They did not recognize, of course, that the ‘volume of trade’ may increase in money terms, but that this gain, like the alleged rise in land values, would simply reflect the increase in all monetary terms and values as more money supply is created and spreads throughout the system.

The argument of the alleged increase of trade and production largely rested on a flimsy analogy to the physical sciences. The Englishman William Harvey had only recently, in 1628, discovered the circulation of the blood within the human body. And Potter launched the very popular analogy between blood in the human body and money in the body economic. Just as people depend on the circulation of their blood, so the economy needs the circulation of money. But the inflationist notion of the more money the better can scarcely be supported by this feeble analogy; after all, who advocates the more blood the better in the human body, or the faster the circulation the better?27
In his bold moments, William Potter actually maintained that monetary inflation would cause prices to fall(!). Trade would be vivified and production would increase so greatly that supply would rise, and prices would fall.

William Potter, however, proved to be only preparation for the locus classicus of inflationism, the prince of proto-Keynesian money cranks, both theorist and activist, John Law of Lauriston (1671–1729). Son of James Law, a wealthy Scottish goldsmith and banker, John was born and grew up in Edinburgh, proceeding to squander his father's substantial inheritance on gambling and fast living. Convicted of killing a love rival in a duel in London in 1694, Law bribed his way out of prison and escaped to the Continent. After a decade in Europe pondering monetary problems, Law returned in 1703 to Scotland, where he was not subject to arrest. There, Law concentrated on developing and publishing his monetary theory cum scheme, which he presented to the Scottish Parliament in 1705, publishing the memorandum the same year in his famous or infamous tract, Money and Trade Considered, with a Proposal for Supplying the Nation with Money (Edinburgh, 1705). The Scottish Parliament considered but turned down his scheme; the following year, the advent of the union of Scotland with England forced Law to flee to the Continent once more, since he was still wanted by English law under the old murder charge.

Karl Marx, in a sense, should have been proud of the way John Law ‘unified theory and practice’ in his proposal. On the one hand, Law was the theorist, arguing for a central land bank to issue inconvertible paper money, or rather, paper money ‘backed’ mystically by the land of the nation. As a crucial part of his proposal, the grateful nation – in this case Scotland – was supposed to appoint Law himself, the expert and theoretician, in charge of putting this inflationist central bank scheme into effect.
John Law, as his subtitle states, proposed to ‘supply the nation’ with a sufficiency of money. The increased money was supposed to vivify trade, increase employment and production – the ‘employment’ motif providing a nice proto-Keynesian touch. Law stressed, in opposition to the scholastic hard-money tradition, that money is a mere government creation, that it has no intrinsic value as a metal. Its only function is to be a medium of exchange, and not any store of value for the future.
Even more than William Potter, John Law assured the nation that the increased money supply and bank credit would not raise prices, especially under Law's own wise aegis. On the contrary, Law anticipated Irving Fisher and the monetarists by assuring that his paper money inflation would lead to ‘stability of value’, presumably stability of the price of labour, or the purchasing power of money.
Law also anticipated Adam Smith in the latter part of the eighteenth century in his fallacious justification for fractional-reserve banking that it would provide a costless ‘highway in the air’ – furnishing a money supply without spending resources on the mining of gold or silver. In the same way, of course, any expenditure of resource can be considered a ‘waste’ if we supply our own assumptions that are not held by people on the free market. Thus, as Professor Walter Block has pointed out, if there were no crime, all expenditure on locks, fences, guards, alarm systems, etc. could be denounced as ‘wasted resources’ by external observers criticizing these expenditures. Similarly, if there were no such thing as governmental inflation, market expenditure on gold or silver could be considered ‘wasteful’ by observers.

If domestic price rises constitute the Achilles heel of monetary inflation, another worry has been the outflow of gold and silver from the country, in short, an ‘unfavourable balance of trade’ or of ‘payment’. But John Law dismissed this problem too. On the contrary, he declared that an increase in the money supply would expand employment and output and ‘therefore’ increase exports, thus causing a favourable balance of payment, with gold and silver flowing into the country. Note that there is no analysis of why an increase in the money supply should increase output or employment, let alone drag exports along with it in this seemingly universal expansion.

Interestingly enough, one of Law's talking points about the need for more money was, as in the case of low interest, based on a striking misinterpretation of the reasons for the prosperity of the Dutch, whom all other nations envied in the seventeenth century. We have seen that everyone saw that the Dutch had low interest rates, leading English mercantilists to put the cart before the horse and attribute Dutch prosperity to low interest rates, instead of realizing that high savings and higher standards of living had brought about these low interest rates. Hence the mercantilists suggested that England force the maximum usury rate still lower.

Similarly, John Law saw that prosperous Holland enjoyed a plenty of metallic money; he attributed the prosperity to the abundance of money, and proposed to supply paper money instead. Again, he overlooked the point that it was Dutch property and high production and export that brought a plenitude of coin into the country. The export surplus and abundant coin was a reflection of Dutch prosperity, not its cause.

Not that John Law neglected the low interest argument for Dutch prosperity. But instead of direct usury laws, Law proposed to arrive at low interest rates in what would become the standard inflationist manner: expanding bank credit and bank money and thereby pushing down the rate of interest. Indeed, Law worked out a proto-Keynesian mechanism: increasing the quantity of money would lower interest rates, thereby expanding investment and capital accumulation and assuring general prosperity.
To Law, as to Potter before him and Keynes after him, the main enemy of his scheme was the menace of ‘hoarding’, a practice which would defeat the purpose of greater spending; instead, lower spending would diminish trade and create unemployment. As in the case of the late nineteenth century German money crank Silvio Gesell, Law proposed a statute that would prohibit the hoarding of money.29
It took John Law another decade to find a ruler of a country gullible enough to fall for his scheme. Law found his ‘mark’ in the regent of France, a country that had been thrown into confusion and turmoil upon the death of its seemingly eternal ruler, Louis XIV, in 1715. The regent, the duke of Orleans, set Law up as head of the Banque Générale in 1716, a central bank with a grant of the monopoly of the issue of bank notes in France. Soon the banque became the Banque Royale. Originally, banque notes were receivable in French taxes and were redeemable in silver; soon, however, silver redeemability was ended. Quickly, by 1717, John Law had all monetary and financial power in the realm placed into his hands. To his old scheme he added the financing of the massive government debt. He was made the head of the new Mississippi Company, as well as director-general of French finances; the notes of the Mississippi Company were allegedly ‘backed’ by the vast, undeveloped land which the French government owned in the Louisiana territory in North America. Law's bank created the notorious hyperinflationary ‘Mississippi bubble’; notes, bank credit, prices and monetary values skyrocketed from 1717 to 1720. One aristocratic observer in Paris noted that for the first time the world ‘millionaire’ had become prevalent, as suddenly many people seemed to possess millions. Finally, in 1720, the bubble collapsed, Law ended a pauper heavily in debt, and he was forced once again to flee the country. As before, he roamed Europe, making a precarious living as a gambler, and trying to find another country that would adopt his scheme. He died in 1729, in Naples, trying to persuade the Neapolitan government to make him its inflationary central banker.

The cataclysm of John Law's experiment and his Mississippi bubble provided a warning lesson to all reflective writers and theorists on money throughout the eighteenth century. As we shall see below, hard-money doctrines prevailed easily throughout the century, from Law's former partner and outwitter Richard Cantillon down to the founding fathers of the American Republic. But there were some who refused to learn any lessons from the Law failure, and whose outlook was heavily influenced by John Law.31
Perhaps the most prominent of the post-Law inflationists in the eighteenth century was the eminent Anglo-Irish idealist philosopher, Bishop George Berkeley (1685–1753). Berkeley studied at Trinity College, Dublin, the intellectual centre of the Anglo-Irish Establishment, and his great philosophical works were all written in his 20s, while he was a fellow at Trinity. Berkeley then spent several years in the late 1720s vainly trying to establish a Christian college in Newport, Rhode Island. After that, Berkeley was appointed dean of Derry and then bishop of Cloyne.

Berkeley's major pronouncements on economic questions came in his pamphlet, The Querist (1735–37), published in three instalments. The Querist was highly influential, ten editions being published in Berkeley's lifetime. It was written solely as a series of 900 loaded questions, by which Berkeley hoped to influence public opinion through sheer rhetoric without having to engage in reasoning. Berkeley's monetary views were heavily influenced by John Law. A typical example of one of Berkeley's loaded queries is ‘whether the public is not more benefited by a shilling that circulates than a pound that lies dead?’ Money, for Berkeley, was a mere ticket, and the centrepiece of The Querist was the advocation of a Law-type central bank that would expand money and credit, lower interest rates (as Berkeley put it, ‘put an end to usury’), and expand employment and prosperity.

Berkeley was shrewd enough to recognize that he had to answer objections based on John Law's egregious flop, and so he hastened to put some distance between his own schemes and the ‘madness of France’. Like Law before him, Berkeley promised that his proposed bank notes would only be injected into the economy ‘by slow degrees’, and that he or his surrogates would take pains to keep the expansion of bank credit ‘proportional’ to the ‘multiplication of trade and business’. In that way, prices would supposedly not rise. But of course Berkeley embodied the usual inflationist failure to see that ‘the multiplication of trade and business’ in money terms would precisely be the result of the monetary inflation and the consequent inflation of all prices and monetary values. (Berkeley's manipulative query on this theme is: ‘Whether therefore bank bills should at any time be multiplied, but as trade and business were also multiplied?’)

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The North brothers, deductions from axioms, and Tory laissez-faire

Weighing in on the side of John Locke, not only on interest rates but also in a general and comprehensive vision of economic laissez-faire that even surpassed Locke, were two brothers, Dudley and Roger North, who came from a distinguished Tory family. Here was a fascinating convergence of views of a radical Whig, and high Tories and zealous subjects of Charles and James II. This juncture presaged a later meeting of minds of ‘extreme Left’ and ‘extreme Right’ during the eighteenth century, when the imperialist–Whig–mercantilist one-party Establishment, from 1715 to the 1750s, was opposed on the Left by radical libertarian Commonwealthmen and on the Right by the anti-imperialist, Catholic or proto-Catholic opposition, all agreeing on denunciations of the mercantilistic, high tax, high public debt, central banking state.21
Dudley and Roger North were sons of the fourth Baron North. Showing little aptitude for schooling, Dudley (1641–91), went to Turkey and became a prominent trader, as well as a director of both the Levant Company, which had been granted a monopoly of English trade with the Middle East, and the African Company, which enjoyed a monopoly of trade with that continent. Dudley North returned to London from Turkey in 1681, just in time to aid King Charles and his elder brother, Francis, Lord Guilford (1637–85), in the patriotic cause of trying to indict John Locke's patron, Lord Shaftesbury, on the charge of treason. Francis, a distinguished jurist, had risen swiftly from solicitor-general to attorney-general, to Lord Chief Justice of the Common Pleas, and finally, in 1682 at the age of 45, to Lord Keeper of the Great Seal, the highest law office in England. Indictments for treason had to be handed down by grand juries appointed by sheriffs of London, and so Dudley North, in a famous and irregular election, ran for and was elected sheriff, after which he and his juries became scourges of the Whig party.
At the end of the year, Dudley North was knighted by the king for his services, and soon rose in appointive office, becoming commissioner of the customs, MP and manager for King James II of all revenue matters in Parliament.
Toward the end of his brief but distinguished term in government service, Sir Dudley was inspired to think deeply about the two main monetary and financial questions agitating Parliament: the 1690 law to push down the rate of interest, and the recoinage question. Dudley wrote two Discourses upon Trade in 1691, one on interest and one on coinage, along with a postscript, that was scheduled for publication as a pamphlet when Dudley North died unexpectedly on December 31. His younger brother Roger (1653–1734), who was helping Dudley edit the booklet, then revised the draft, added a preface, and published it anonymously in early 1692. Despite the booklet's brilliance, and its systematic devotion to laissez-faire and hard-money views, the tract sank without a trace, and was not at all influential in the development of eighteenth century economic thought or in monetary or financial policy.
Roger North was not only the youngest of the brothers, he outlived them all by decades. Himself a queen's attorney-general, he spent much of his life defending his brothers’ reputations. He wrote voluminously in his lifetime on music, accounting, law, the English constitution, and on numerous philosophic and scientific subjects, but natural reticence led him to keep all these writings unpublished. A decade after Roger's death, his biographies, or Lives, of three of his eminent brothers were published, in two volumes, in 1742 and 1744.22
Even the publication of these two well-written volumes, however, made no dent in the history of economic thought until resurrected and praised by James Mill and by John Ramsay McCulloch in the early nineteenth century.23
Roger North, who in his preface explained the groundwork and methodology of his brother and made his conclusions more consistent, pointed out the innovation in Dudley's method of economic analysis. For Dudley pioneered, at least in the history of English thought, the method which would later be adopted by Cantillon and Say and Senior, and which Ludwig von Mises would, in the twentieth century, call ‘praxeology’. Praxeology is economic theory resting on a few broad, self-evident axioms grounded in apprehension of reality, then logically deducing the implications of these emphatically true axioms. But if A implies B, C, etc., and A is definitely true, the deductions can be accepted as truths as well.
Roger wrote of Dudley's method in his preface: ‘I find trade here treated at another rate than usually has been; I mean philosophically; for... he begins at the quick, from principles indisputably true....24 The older method of reasoning, Roger North added, ‘dealt in abstracts more than truths’, in ‘forming hypotheses to fit abundance of precarious and insensible principles’. In contrast, the new method, which North attributed to Descartes, builds knowledge ‘upon clear and evident truths’.
In addressing trade and its problems, Dudley North began in his first discourse by setting forth the clear and simple general axiom or principle: ‘Trade is nothing else but a commutation of superfluities’. In other words, as Buridan and the scholastics had emphasized but the world had forgotten: men only ‘commute’ or exchange goods or services because each benefits more from the good he receives than from the good he gives up in exchange (his ‘superfluity’). Trade, therefore, whether intranational or international, benefits both parties; trade is not a Montaigne–mercantilist form of warfare where one party or nation exploits, or benefits at the expense of the other trader. Wealth and riches, then, are the goods that people are able to produce and accumulate, and not the money, the gold or silver, that enables them to buy those goods. Dudley North concludes that ‘he who is most diligent, and raises most fruits or makes most of manufactory, will abound most in what others make or raise, and consequently be free from want and enjoy most conveniences, which is truly to be rich, although there were no such thing as gold, silver or the like...’.
There is no magic, then, to gold or silver; they are simply commodities selected by the market for their special qualities to be monies; as Dudley North says, gold and silver, in contrast to other market metals, are ‘by nature very fine, and more scarce than others’, and ‘imperishable, as well as convenient for easy storage...’.
Proceeding from there, North rediscovers the scholastic analysis of money. If gold and silver are commodities, their value is determined, as are all other commodities on the market, by supply and demand.
Having laid the groundwork in systematic and general analysis, Dudley North proceeds to the vexed question of the rate of interest. In the market, North points out, some people, in consequence of hard work and judgement, are able to accumulate property. If the property is accumulated in the form of land, the landowners will rent out some of the land to those who wish to cultivate it. Similarly, those who accumulate property in terms of money will ‘rent out’ their money, charging a rate of interest. And just as the rental price of land on the market will be determined by the supply and demand of land, so the interest rate – the price of loans – will be determined by the supply and demand for credit.
Since interest is a market price, government control will have consequences as injurious as the control of any price. Interest is low because the supply of capital is high; low interest itself does not create abundance of capital. As Letwin paraphrases North: ‘Nothing can lower interest rates except
 an increased supply of capital and as no law can by fiat increase the community's supply of capital, the proposed law is futile and injurious’.25 Furthermore, North pointed out: usury laws will reduce the supply of savings and capital and thereby raise instead of lower the market rate of interest; and the quantity of trade will diminish. Moreover, intervention to reduce interest rates is unjust, because all prices should be treated alike, and be equally free.
In his discourse on coinage, North did not really deal with the recoinage question, but he anticipated Smith, Ricardo and the classical economists in his keen and principled hard-money analysis. Everyone cries about a ‘shortage of money’, North noted, but what they really want is more goods, or, in the case of merchants, what they really mean is that the prices for their goods are not satisfactory. Analysing the components of the demand for money and its supply, North traced transactions and emergency demands, as well the different aspects of money supply. Unfortunately, he faltered when discussing how much money a nation really needed, failing to realize that any supply on the market is optimal; he believed that an increase in trade required an increase in the supply of money, not understanding that an increased demand for money could simply raise the market value of money (i.e. lowering prices), thereby increasing the value of each unit of currency.
Despite this failure, however, North ended up in the right laissez-faire place, for he pioneered breaking down the supply of money into coin and bullion. He demonstrated that coin, being more suitable for exchange, would tend to command a market premium over bullion. However, the coin premium is regulated by the respective supplies and demands for coin and bullion. Thus, if there is an increase in the stock of coin, the premium over bullion would fall, and coin would tend to be melted down into bullion. If, on the other hand, there is a shortage of coin, the coin premium would rise, and more people would mint bullion into coin. In this way, coin and bullion would tend to be kept in equilibrium. North likened the process to two ‘buckets’: ‘Thus the buckets work alternately; when money is scarce, bullion is coined; when bullion is scarce money is melted’.
So although Dudley North never reached the point of saying that the supply of money, compared to trade, is always optimal, he arrived at a similar laissez-faire, or market-equilibrating, conclusion by saying that no one has to worry about the supply of coin, which will always be kept optimal on the market.
As a result of his systematic, praxeological analysis, Dudley North arrived at firm, principled laissez-faire conclusions across the board. He opposed any usury laws: ‘It will be found best for the nation to leave the borrower and the lender to make their own bargains’. He opposed any sumptuary laws; he denounced laws trying to keep gold and silver inside a country as doomed to failure. Government laws and decrees could only diminish, and never promote human energy, thrift and ingenuity.
But it was Dudley's brother Roger who took the final step, not only in explaining his brother's methodology, but also in expounding consistent laissez-faire conclusions. Attacking government intervention across the board, Roger North declared:

There can be no trade unprofitable to the public, for if it prove so, men leave off; and wherever the trades thrive, the public, of which they are part, thrives also. No law can set prices in trade, the rates of which must and will make themselves. But when such laws do happen to lay any hold, it is so much impediment to trade... All favour to one trade or interest against another is an abuse...

Therefore, concluded Roger, ‘Laws to hamper trade, whether foreign or domestic, relating to money or other merchandises, are not the ingredients to make a people rich...’
What can government do for a prosperous economy? ‘If peace be procured, easy justice maintained, the navigation not clogged, the industrious encouraged...’ in short, wrote North: ‘It is peace, industry and freedom that brings trade and wealth, and nothing else’

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