Download Eighteenth-Century `ground theories` of money

Blood and Oil: Eighteenth-Century Monetary Anxieties
Dario Castiglione1
... trust and confidence in each other, are as necessary to link and
hold a people together, as obedience, love, friendship, or the
intercourse of speech.
Charles Davenant (Discourses on the Public Revenues)2
... the fact that two people exchange their products is by no means
simply an economic fact.
Georg Simmel (Preface to The Philosophy of Money)3
Setting the scene: Money, credit and everyday life
When earlier this year I moved with my family from Britain to Washington to take up a one-year
visiting fellowship, I did not expect many practical difficulties. For someone working in the
University system, such a temporary move is not unusual. Moreover, we had carefully prepared it
in advance. Even before leaving the UK, we had a house where to live, a school for our child, and a
reliable - though rather big for our standards - car. We had no trouble in getting our visas, and were
1
This essay started life long time ago for different purposes. I hope its central argument has not lost its relevance. The
final revision was conducted while I was Visiting Academic Fellow at the Center for Democracy and the Third Sector,
Georgetown University, Washington DC. I gratefully acknowledge the advise, patience and encouragement of the
editors of this volume, particularly Dan Gordon.
2
Charles Davenant, "Discourses on the Public Revenues" (1698), in The Political and Commercial Works of Dr.
Charles Davenant, edited by Sir Charles Whitworth, 6 vols. (London, 1771), vol. I, p. 151.
3
Georg Simmel, The Philosophy of Money, edited by David Frisby and translated by Tom Bottomore and David
Frisby, second enlarged edition (London and New York, 1990), p. 55.
well informed on what to do regarding taxes, medical insurance and banking. All the rest was
routine - or so we thought. We soon discovered otherwise. From the day we arrived, we realised
that without a US social security number, a state driving licence, and an American credit card, we
had become invisible to most public and private administrative bodies. Our passports and visas
were not sufficient, since they were no part of a national and easily accessible database. That the
social security number and the driving licence were used, to all intent and purposes, as substitutes
for a national identity card was not very surprising. But the request for an American credit card to
have trouble-free access to the more "stantial" kinds of services such as water, gas, electricity, a
telephone line, or even a cell phone, struck us as odd. After all, we had used our international credit
cards all over the world (including the USA) to acquire the most diverse goods and services. Why
all the fuss? Moreover, switching to an American card did not seem to solve our problem; since the
reason behind this request was neither chauvinism nor parochialism (at least not obviously so), but
the more practical one of allowing the service provider to check our credit record. In the
circumstances, acquiring a new credit card was of no help, for such a card had no previous credit
worthiness to speak of: hence, our practical difficulties.
At this point the reader may ask: "What’s in this anecdote?" The realisation, perhaps, that in
our ordinary life we seem to take for granted the complex and rather flimsy operations of the credit
system on which our everyday exchanges and transactions normally rest. Let me explain. For most
of us, credit and debit cards have become an easy substitute for either ready cash or checks. We
now use them to pay for most of the things we purchase in our daily life: from a meal to a jumper,
from a theatre ticket to an air ticket. Some of the readers may still remember the sense of
uneasiness and slight uncertainty, the cautiousness with which they first paid something by using
"plastic" instead of checks or "real" money. The latter two gave a greater sense of security. Checks,
2
for instance, seem more permanent. A paradox, considering the difference in the materials used, but
one entirely supported by symbolism. Their authenticity is conveyed by one’s personal signature, a
clear and distinct sign of one’s intention in purchasing something from another person. As for
banknotes, that very same sense of permanence and durability is expressed by the national symbols
represented on them,4 while their value is vouchsafed by the neatly printed, though hardly
noticeable, signature of the "Secretary of the Treasury". Even though we may have now forgotten
the uneasiness felt in switching to "plastic", we can probably surmise the even more unsettlingly
sensation experienced when we first paid for something by phone or on the web, by the mere almost magical - use of the card's numbers: Will it work? Will it be safe? In our ordinary lives,
once we overcome the sensation of insecurity associated with doing things for the first time, the use
of cash, checks, cards, or numbers is a matter of relative indifference, since they appear to us as
nothing but different means of payment, with varying degrees of practicality. Indeed, it is entirely
feasible that in a few years time we may dispense with most, if not all of them altogether. Payments
could then be made by mere "information", through the use of voice recognition machines linked to
some central computer, which automatically transfers our money into someone else’s account. By
then, we shall have no use for what in ordinary language we call "money". This will have become
no more than a numéraire. But the question - the point around which this essay will revolve - is
whether money has ever been more than a simple numéraire – the product, as Locke once wrote, of
"fancy and agreement".5 This is no recent discussion, but one that has periodically punctuated the
intellectual history of monetary debates. The main purpose of this essay is to illustrate it by
focusing on a particular episode of such intellectual history, one which had three prominent
4
It is interesting to notice that banknotes still bears the symbols of national history, tradition and culture, while these
have obviously disappeared from our plastic cards.
5
J. Locke, Two Treatises of Government, edited by Peter Laslett (Cambridge, 1963), p. 342.
3
Enlightenment figures as protagonists at a distance: David Hume in Edinburgh, Ferdinando Galiani
in Naples, and the Abbé Morellet in Paris. Intriguingly, the dialogue I am here piecing together the one mainly between Hume and Galiani - never took place, if not through the mediation offered
by Morellet, who acted as an intermediary in their "indirect exchange" - a kind of exchange, one
may add, that it is typical of monetary transactions, which in the early progress of mankind have
come to substitute the more direct, but cumbersome, exchanges through barter.6
Act one: How it was that a young man decided to write an important book
The protagonists of our episode, and the other writers I shall examine hereafter, are only a few
amongst the many who engaged in the wide-ranging debate on money, inflation, debasement, and
monetary reforms, which started in the second half of the seventeenth century and further
developed throughout the eighteenth century, at a time when the effects of the commercial and
financial revolutions captured the attention of philosophers, moralists, legislators, politicians, and
men of business in Europe and the American colonies.7 Mine is not an account of the historical and
political impact of such a complex debate, nor does it cover the whole range of monetary theories
and issues raised by it. My analysis is limited in both scope and substance. The precise object of the
half-imaginary discussion that I am going to stage between Galiani and Hume is not easy to define,
for it can only be located in between some of the traditional questions comprising the literature on
money, straddling across now firmly established - but once undefined - disciplinary boundaries.
6
For a crisp presentation of the economic logic of the move from barter to a money economy, see the classical
statement in W.S. Jevons, "Barter", in Money and the Mechanism of Exchange (London, 1910), pp. 1-7. This is further
explained in R.W. Clower (ed), Monetary Theory, (Harmondsworth, 1969) "Introduction", pp. 7-14.
7
For a comprehensive history of monetary theory from an economist's perspective, see Joseph A. Schumpeter, History
of Economic Analysis (London, 1961), pp. 276-334. For more historical and political perspectives of the debate, see
J.G.A. Pocock, The Machiavellian Moment (Princeton, 1975), Chapter XIII; Franco Venturi, Settecento Riformatore
(Torino, 1969), Chapter 7, pp. 443-522, and Manuela Albertone, Moneta e Politica in Francia dalla Cassa di Sconto
agli assegnati (Bologna, 1992).
4
Money as a topic can be discussed from very different perspectives. Perhaps somewhat simplifying
the issue, we can identify four such perspectives: money's origins and diffusion; the social impact
of the monetary economy; the relationship between money and "value"; and the more particular
disputes on the substance and technicalities of monetary policies. Each of these questions has been
the object of separate though occasionally overlapping literatures, with distinct disciplinary
interests. Obviously, the economic literature dominates the field, claiming an interest in all aspects
of the phenomenology of money, but it has mainly exercised itself on the issues of value and
policy, leaving the origins and impact of money to the investigations of historians, anthropologists,
sociologists, moralists and philosophers. The issue of value, however, is one where economic
theory and philosophical investigation are often indistinguishable, the more so at a time - as the
mid-eighteenth century still was - when economics had not yet emerged as a separate science.
Moreover, seventeenth- and eighteenth-century discussions of the value of money tended to mix all
four levels of analysis, with many authors making use of arguments on its origins in order to prop
up their own theories of value and to support their preferred monetary policies. The topic at the
centre of the "indirect exchange" between Hume and Galiani inevitably mixes these various levels
of analysis together. It mainly concerns the nature and functions of money, something that Joseph
Schumpeter was later to describe as the "fundamentals" of money - or, what in German he referred
to as the Grundlagenforschung.8 For Schumpeter and other economists, the study of the
"fundamentals" of money implies a logical, rather than simply historical, investigation of why we
need money and what money does: a search for its definition, which inevitably touches on the way
in which money relates to value and to its social functions.
8
Schumpeter, History of Economic Analysis, pp. 288.
5
The first act of our story starts with the appearance of Ferdinando Galiani's impressive first
work, Della Moneta (1751), published anonymously and composed when the author was only
twenty-one year old.9 Franco Venturi has suggested that the central role that the monetary question
played in the Italian political debate of mid-eighteenth century - after this debate appeared to be
waning in other parts of Europe - was mainly due to the inflationary tendencies and the large
increases in public expenditure and public debt in the Italian states, following the Austrian war of
succession.10 As in most other cases, the question of the debasement of the value of the currency
functioned as a trigger for the discussion. This was more immediately concerned with the likely
effects and overall efficacy of debasement, with the justness of such a measure from both a legal
and a moral perspective, and more generally with the sovereign's right to manipulate the "value" of
the currency. Nowadays, Galiani's book is rightly considered as the most original and accomplished
product of that discussion.11 But even when it first appeared, at the height of the monetary
controversy, it made an immediate impact and was acclaimed as a remarkable piece of work. Its
fame rapidly travelled to France, where l'Abbè Morellet, one of the other protagonists of our
intellectual episode, planned its translation. In spite of its instant fame, and of a certain amount of
influence that the work seems to have exercised on later writers and on the development of
monetary theory at large, the book never became a European success. Only two abridged
9
Ferdinando Galiani, Della Moneta, in Illuministi Italiani, Tomo VI, Opere di Ferdinando Galiani, edited by Furio
Diaz (Milano-Napoli, 1975)
10
Venturi, Settecento Riformatore, pp. 490-509. It is perhaps significant that, after having encountered some
difficulties, Tavanti and Pagnini were able to have their translation of Locke's tracts on interest and money published in
1751: J. Locke, Ragionamento sopra la moneta, 2 vols. (Firenze, 1751).
11
For a comprehensive bibliography on Galiani, see Luciano Guerci, "Bibliograpfia", in Illuministi Italiani, Tomo VI,
Opere di Ferdinando Galiani, pp. cvii-cxxvii. For an attempt to place Galiani within the history of the economic theory
of value, see Schumpeter, History of Economic Analysis, pp. 300-02.
6
translations can be found in other European languages, one in English and one in French, and there
seems to be no recent translation in circulation.12
In his preface to the second edition published in 1780, Galiani - whose name now appeared
as that of the author - stated the two more immediate reasons that had convinced him to write the
book in the first place. One was the publication, a few years earlier, of Carlantonio Broggia's
Trattato de' tributi, delle monete e del governo politico della sanità,13 where the author defended
the role of the "money of account" (moneta immaginaria) in stabilizing the value of the currency,
and fencing off inflationary tendencies.14 The other reason was what Galiani regarded as the
widespread alarm and confusion that dominated monetary discussions in the kingdom of Naples
particularly after the peace of Aquisgrana in 1748. Ostensibly, and somewhat encomiasticly, the
young Galiani intended his book as a vindication of the political acumen and wisdom of the
sovereign of the time, Carlo VII, King of Naples (Charles III of Spain), and hoped it would thus
contribute to restore public confidence in the economic fortunes of the kingdom.
The book, however, was not entirely concerned with matters of monetary policy; nor were
its arguments solely confined to the Neapolitan State. As Galiani himself noted, money was the
"occasion" to write more generally on the economy. 15 He commented that, his was one of the very
first books dealing with that "very noble and almost new science regarding the economic
government of Nations" - a science, as he added, that was becoming corrupt even before attaining
maturity, due to the obscure and metaphysical jargon of the physiocrats (economisti). 16 Galiani's
claim regarding the wide compass of his own book is not without justification. A large part of the
12
Cf. E.A.Moore, Early Economic Thought (Cambridge, Mass., 1924); and Bousquet's abridged translation, F. Galiani,
De la monnaie (Paris, 1956).
13
Carlantonio Broggia, Trattato de' tributi, delle monete, e del governo politico della società (Napoli, 1743)
14
See, Galiani, Della Moneta, pp. 272-3.
15
Ibid. p. 275
7
book deals with what we would now consider to be main problems of economics. It does so with
consistency of approach and a sophisticated level of analysis, shading light on some of the
questions involved in the development of a modern commercial society.
In his treatment of money in particular, Galiani's main polemical intention was to reject
what he regarded as the wrong attitude towards wealth supported by the moralists (savi, filosofi)
and the Aristotelians (moralisti, giureconsulti). In his view, their conception of money and riches
ran against the grain of common sense (pensiero comune), being instead based on mere prejudice
and on the illusion that wisdom has a prominent role in human history. According to Galiani, the
"origins" of money is one of the key questions to address, if one wishes to understand the "true
nature" of both money and wealth, counteracting in this the moralistic attitudes towards
commercial society that Galiani himself detected in those ancient writers on the subject such as
Aristotle and his followers. However, Galiani was also critical of those more modern writers such
as Davanzati, Locke, Broggia, and Montesquieu, who - though more sympathetic towards
commerce and to Galiani's own position on monetary and economic issues - paradoxically based
their own conclusions on mistaken premises. It was in order to put the foundations of monetary
policy and economic thinking right, that Galiani decided to write his Della Moneta.
Act two: The heavy burden of tradition
But what was the tradition against which Galiani was reacting, and which were the wrong premises
he wanted to correct? The second act of our intellectual story takes us back to a more distant past,
to Aristotle's discussion of money in the Politics and the Nicomachean Ethics.17 The particular
16
Ibid. p. 270
Aristotle, The Politics, in The Politics and The Constitution of Athens, edited by Stephen Everson (Cambridge,
1996); Ethics (London, 1963).
17
8
passages in the two texts in which he discussed the matter seem to point towards different
directions, although they are not necessarily inconsistent. In the Politics, Aristotle analysed two
forms of chrematistics. One he described as being "natural", meaning by this all those activities
that, directly or indirectly, are concerned with the household's administration and the satisfaction of
its needs. The other he called "commercial", identifying it with those exchanges of commodities
that take place through the medium of money. Aristotle claimed that commercial chrematistics, like
medicine and the arts, has limited means, but no limits to its ends. In the Nicomachean Ethics
instead, Aristotle considered money within the context of a discussion of the nature of justice.
According to him, commercial exchanges are paradigmatic of those exchanges where comparisons
are made of things that are not exactly equal. In commercial justice, men are bound together on the
basis of reciprocity "in accordance with a proportion".18 But exact proportions between things can
only be established when things are commensurable, or, to put it another way, when human beings
reduce different things to a common measure. In commerce, as Aristotle argued, money does not
operate as a common measure of commodities themselves, but as an approximation to the demand
for different commodities.
In both texts Aristotle dealt with money as part of an exchange economy, but in each of
them he developed different aspects of his analysis, with the result that he seems to be presenting
different theories on the nature and functions of money. In the Nicomachean Ethics, Aristotle
introduced the idea that the origin of money is conventional, in so far as it is the product of
common agreement. Money, as we have seen, represents the demand for commodities, and its
function is that of acting as a common measure and a guarantee for future exchange (what could be
described as its pledge function). In the Politics, Aristotle was less sanguine about the conventional
18
Aristotle, Ethics, p. 101
9
origin of money, an idea that here he associated with the Cynics' criticism of money as a form of
unreal wealth. Instead of emphasising its function as a common measure or as a pledge, he talked
of money as performing the more obvious functions of means of exchange and store of value (by
hoarding). The whole passage of the Politics was more obviously concerned with the social
significance of commerce and money, and it is significant that from his analysis of the opposition
between a natural and a commercial chrematistic, Aristotle derived his condemnation of usury as a
"non-natural" use of money, whose real function (and nature), he insisted, was exclusively as a
means of exchange for the satisfaction of natural needs.
This brief summary of Aristotle's complex position shows how later authors could find
different kinds of inspiration in his texts. Both the two main lines of thinking that dominated
successive discussions on the nature of money can already be found in embryo in his work. From
the more rarefied perspective of the history of economic theory, Aristotle's position can be
assimilated, as Schumpeter has indeed done, to what the latter describes as a "metallist" conception
of money. By this, Schumpeter means a position that regards the value of money as ultimately
determined by the intrinsic value of the "currency-commodity" (usually a metal). This line of
thinking seems to develop Aristotle's account of the passage from barter to exchange as he
presented it in the Politics. There, he suggested that for the convenience of exchange, some metal
of "intrinsic" value and easy applicability was used as a means of exchange. This was first
measured by weight, but later the practice developed to use a stamp so to simplify matters. But the
upshot of this account of the origins of money is that money acts as measure of the value of other
things in so far as it has already a value of its own. According to Schumpeter, this was the
dominant tendency on the "fundamentals" of money up to recent times, though "theoretical
metallism" seems to have fully triumphed in the eighteenth century. However, when we turn to the
10
Ethics, one may consider things otherwise. Indeed, the dominant interpretation of Aristotle's
position until the eighteenth century was that, if anything, he supported an agreement-theory of
money, which, in Schumpeter's terms, made him a defender of "theoretical cartalism". In the
Ethics, Aristotle maintained that money is only a representative of the demands for goods by law
and convention (nomos), hence its name: nomisma. He concluded that for this reason "we have the
power to alter its value and even to render it useless".19
From the perspective that most interests us - that of the reconstruction of the tradition
against which Galiani was reacting - it is significant to note that most of the authors after Aristotle
and almost until the eighteenth century, agreed with the Aristotelian account of the origins of
money as the product of convention. Moreover, they also accepted the implication that the value of
money could be changed at will, quoting approvingly the relevant passage from the Ethics, where
he insisted on the etymological connection between money and human law. If anything, the
agreement-theory of money was further emphasised by the translation of Aristotle into Latin, where
the idea of nomos was rendered with lege, which linked money more directly to the sovereign,
almost anticipating what in the twentieth century came to be called a "statalist theory" of money. 20
Although until the eighteenth century the agreement-theory of money vent almost
unchallenged, the consequences that authors derived from this statement varied considerably. There
were differences between those who, from a conventional definition of money as valor impositus
mechanically deduced the absolute power of the sovereign (usually the prince, but in some cases
the people) to alter the value of money; and those who wished instead to limit the sovereign’s
power by introducing a number of qualifications. One of the most common arguments advanced in
19
Ibid. p. 103.
In modern times, a coherent statalist theory of money was advanced by G.F. Knapp, Staatliche Theorie des Geldes
(Leipzig, 1905)
20
11
this respect was to suggest that, in order to operate as a common measure, the value of money
needed to remain stable, thus limiting the scope for sovereign’s discretion. A second argument,
which emerged as a reflection on the experience of the sixteenth- and seventeenth-century price
revolution, was to suggest that if the value of money depended on demand and supply, a radical
intervention of the sovereign would disrupt the order of things.21 This argument was in fact a
development of the kind of "metallism" adumbrated by Aristotle’s discussion of the passage from
barter to exchange in the Politics, where it is implied that the value of money depends on the
intrinsic value of the currency-commodity, which in turn depends on the relationship between
demand and supply.
By the seventeenth century and with the emergence of the modern natural law tradition, the
literature on money developed significantly, becoming both more sophisticated in approach and
more interested in policy matters. This is evident when one compares the short treatment that the
issue was given, for example, in Suarez's work with the much larger space that was devoted to it in
Grotius's and particularly Pufendorf's. Although neither of their contribution was particularly
original, they exercised a noticeable influence on the literature of the time on this as on other
subjects. Grotius discussed money as part of his analysis of contractual transactions, while
Pufendorf considered it as one of the main features of the form that natural law takes in commercial
societies.
Grotius maintained that the function and value of money is determined "naturally" by its
general equivalence to the sum of all other commodities, thus rejecting the idea that its value can be
linked to the intrinsic characteristics of the commodity chosen for that function. Its value changes
21
Bernardo Davanzati suggested that if we had perfect knowledge, we could arrive at the evaluation of the value of
things by simple arithmetical calculations, without the need to use empirical devices such as the demand for goods:
Lezione delle monete (1582), in Le Opere (Firenze, 1888), vol. II, p. 446.
12
like that of any other commodity, though less so owing to the general stability of both offer and
demand for precious metals. The theory expounded by Pufendorf was more complex. In brief, his
discussion of money is an offshoot of his analysis of price (de pretio). Pufendorf developed
Aristotle’s intuition that commerce requires the commensurability of things. He considered value
as a "moral quality" of things, whose outward appearance is expressed by their price. According to
Pufendorf, there are two types of price: "proper price" (vulgare), which expresses commodities’
usefulness and the pleasure they give to the people who own or acquire them; and "extrinsic price"
(eminens), which represents a common standard. In direct opposition to Grotius, Pufendorf
maintained that price is not determined by "need", but by the "aptitude" things have to satisfy
human needs, depending on particular circumstances such as scarcity, for instance, or the general
inclination of people. Indeed, such inclinations are not always guided by "right reason", something
that explains the high price of luxury items. In ordinary social life, however, price may also depend
on whether this is established by law ("legal price"), or agreed amongst the contracting parties
("common price"). It is only natural that "common price" should take into account the pain and
labour necessary for the production of the commodity. Pufendorf’s elaborate discussion of price
formation seems to suggest that money itself makes no great contribution to the mechanisms of
valorisation of commodities. Although Pufendorf acknowledged that the choice of precious metals
as means of exchange is a natural one, he suggested that this was only the result of agreement, and
that there was no particular reason why other materials could not have been used instead. Pufendorf
did not conclude, however, that this gave authority to the sovereign to change the value of money
at will.
The rather simplified picture of the tradition, from Aristotle to the seventeenth-century
natural jurists (Aristotelians and moralists), against which Galiani intended to react would not be
13
complete without mentioning what Jacob Viner considered Aristotle’s main legacy in the form of
his ontological theory of money, which mainly expressed his rejection of interest and usury as
unnatural practices. The same line of reasoning, which considered money as inherently barren, was
taken up by Thomas Aquinas and subsequently repeated with little variation for many centuries.
Even those who took a different position did so by simply pointing out that the rejection of interest
and usury was already clearly stated by divine command. As Viner has noticed,22 the scholastics'
condemnation of usury was often mitigated by practical and piecemeal concessions, normally
justified on the basis of the needs of the poor. But a more positive attitude towards the institutions
of commercial society was introduced by the modern natural lawyers. In De Jure Belli ac Pacis,
Grotius remarked that the terminological shift from usury to interest was a clear sign of a new,
more positive attitude towards money lending. Such an attitude was based on the consideration that
interest is a sort of payment for the time elapsed between borrowing and returning the money (what
is now commonly known as delayed consumption).23 Pufendorf went further by explicitly rejecting
many of the traditional arguments mounted against usury. Against Aristotle’s "ontological
argument", he advanced the suggestion that lending at interest is a "civil fruit", concluding that in a
civilised society money lending provides what charity fails to do.24
Act three: The importance of a "natural history" of money
Even from the sketchy survey of some of the pre-eighteenth-century literature offered above, it
appears that Galiani's preoccupations were over-exaggerated. There was indeed a diffuse agreement
22
Jacob Viner, "Religious Thought and Economic Society: Four chapters of an unfinished work", History of Political
Economy,10:1 (1978).
23
H. Grotius, De Jure Belli ac Pacis, edited by J. Brown Scott, Latin text and translation, 2 vols. (New York, 1923),
vol. 2, Chapter 12.
14
that money was a human convention (a kind of agreement), but this starting point in the discussion
on the nature of money was open to different kinds of elaboration. There appeared to be very few
authors who made a conscious effort to build a complete theory on such a basic insight, or who
used it consistently as a logical premise from which to argue against commercial wealth. Some of
the popular and religious literature clearly pursued such a line of argument, but the more
specialised literature showed a growing historical appreciation of the origin and evolution of
money, insisting, amongst other things, on its pledge function.25 Locke, who as we know wrote of
money as the product of "fancy and agreement", was nonetheless one of the authors who seemed to
point towards this new direction, or so it seemed to some of his eighteenth-century readers, as
shown by this note appended by the editors to the Italian translation of his monetary tracts:
we should not infer that our Author intended to speak of a proper convention, in the true
meaning of the word, but rather he intended a use which insensibly, and tacitly, men have
agreed upon amongst themselves for their own benefit and advantage.26
The same kind of sensitivity to the evolutionary process through which money got
established can be detected in Montesquieu's work. Even though his was not a very original
contribution, one should not underestimate the influence it had at the time, due to the impact that
L'Esprit des lois made throughout Europe and in the Americas. In discussing the nature of money,
Montesquieu observed that "la monnaie est un signe qui représente la valeur de touts les
marchandises".27 At first, the use of the word "sign" seems to point towards the idea of agreement
and convention. Indeed, this is how Turgot interpreted it when a few years later he took issue with
24
S. Pufendorf, De Jure Naturae et Gentium, edited by J. Brown Scott, Latin text and translation, 8 vols. (New York,
1927) vol. 5, Chapter 7.
25
Cf. A.E. Monroe, Monetary Theory before Adam Smith (New York, 1966); and K.I. Vaugh, John Locke. Economist
and Social Scientist (London, 1980).
15
Montesquieu on this very point, maintaining that money is not a sign of value, but has a value of its
own.28 The charge, however, was a rash one, since Montesquieu had been careful to state that in the
same sense in which money was the sign of commodities, the latter were a sign of money.29 It
would thus seem that by describing money as a "sign", he did not necessarily imply that money was
entirely conventional in its origins. Yet, in speaking of the passage from barter to commerce,
Montesquieu only concentrated on the more material features of metallic money, as a means of
exchange, in so far as it was easy to transport; and as a measure of things, since it was easy to
divide. In his exposition, he did not seem particularly concerned with the fundamental attributes of
money, while he insisted on the necessary role that money play in a civilised society, thus
concluding that money was a sure sign of civilization:
Soyez seul, et arrivez par quelque accident chez un peuple inconnu: si vous voyez une pièce
de monnaie, comptez que vous êtes arrivé chez une nation policée.30
Was Galiani's negative attitude towards his predecessors unjustified? Perhaps, but not
entirely so. It may be remembered, that Galiani acknowledged his agreement with the spirit of
some of the recent literature, but that in his view those authors were not fully consistent in their
analysis - hence his own desire to expound on the workings of the monetary economy. His
argument developed two fundamental intuitions. I have anticipated one of them when I referred to
Turgot's criticism of Montesquieu, that money is not merely a sign. Galiani's other intuition was
26
Locke,Ragionamento, vol. I, p. 48. Locke did not use the word "convention" when he spoke of money, but
"agreement", "invention", "general consent", and "fancy".
27
C.-L. Montesquieu, L'Esprit des Lois, 2 vols. (Paris, 1973) vol. 2, XXII, 2, p. 67.
28
The Economics of A.R.J. Turgot, edited by P.D. Groenewegen, (The Hague, 1977), p. 140. In writing on Galiani, the
nineteenth century Italian economist, Francesco Ferrara, also expressed strong criticism of the definition of money as a
"sign", since in his view this would imply a previous "convention". On the contrary, he insisted that the representative
function of money is the product of "tacit consent", resulting from a common interest and from human dispositions. Cf.
F. Ferrara, Opere Complete, edited by B. Rossi Ragazzi and F. Caffè, (Roma, 1961), vol. 5, pp. 100-103.
29
Montesquieu, L'Esprit des Lois, vol. 2, XXII, 2, p. 68.
30
Ibid. vol. 1, XVIII, 15, p. 311.
16
that what was needed was a consistent narrative of the "natural history" of money. Although he was
fully aware that primitive people had originally used a variety of commodities as a means of
exchange, he argued that such a natural history needed to start from a discussion of the use of
precious metals. The reason lied in the fact that gold, silver, and bronze had invariably been
adopted at the early stages of all civilised societies. Such uniformity, or so Galiani maintained, was
not the result of either chance or convention but human nature. Previous authors had already
remarked that these metals excelled other commodities in the qualities necessary for money to
perform its functions: transportability, divisibility, storing great value. But Galiani insisted that
they had missed the main point, that in order to represent and measure the value of commodities,
precious metals needed to have a value of their own. His "natural history" of money purported to
explore how precious metals had acquired such value throughout the early stages of human history:
'cosí scoperti [the precious metals], fu la loro singolare bellezza, e lustro, che fecegli aggradire'. 31
Having established the phenomenological aspects of the valorisation of the early forms of
commodity-money, Galiani moved on to a more analytical discussion of the principles according to
which value is generally attributed to commodities.
Galiani identified two main principles at the root of our concept of value. One is utility and
the other scarcity. This was hardly original. But Galiani's elaboration of the two principles was
more ambitious than what had been attempted previously, aiming to find a way of working out
some exact ratio between the two principles, so to calculate the value of commodities with some
precision. Moreover, he considered utility to depend on the pursuit of happiness, and this in turn on
both the satisfaction of the passions and on the degree to which they were satisfied.32 According to
31
Galiani, Moneta, p. 27: "As soon as they were discovered, they pleased people for their beauty and splendor".
Ibid. p. 44. Galiani's definition of utility as the aptitude of things to give happiness is obviously indebted to
Pufendorf's discussion of value.
32
17
Galiani, the suggestion that utility depends on the passions has important analytical consequences
with regard to the process of valorisation of commodities. It suggests that the value of things
depend on more than one factor, for the human passions are many and cannot be reduced to the
simple satisfaction of needs, but include also self-love and self-aggrandisement. Moreover, it
makes utility a more subjective concept, dependent on the inner constitution of human beings.
Galiani suggested that the combination of these two factors accounted for the paradox of the high
value we give to luxury items such as diamonds, for instance, even though these are not as
necessary as the basic necessities of life, such as water.33
The other principle on which Galiani based his calculation of the value ratio of
commodities, scarcity, depends on the relation between the supply of a particular commodity and
the uses that the buyer may intend to make of it. Galiani considered such uses to include both
hoarding and consumption, a fact that was bound to influence the calculation of the value ratio
itself. Moreover, when considering the supply side, Galiani suggested that one should calculate
both the input of unaided nature and man's accumulated labour (fatica).34
The value ratio as described by Galiani was the result of many complex operations, but
these were neither capricious nor the product of simple agreement; on the contrary, they were
entirely dependent on the way in which human nature works (la interna costituzione dell'uomo). By
paying close attention to the regular and predictable way in which these various mechanisms
operated, the value attributed to things is made certain, constant, and universal - not arbitrary and
haphazard. Of course, the value of commodities may vary, but it does so in accordance with the
'orderly, harmonious, and necessary' variations of nature. Money is thus an "ideal" entity (ideale),
which has the same degree of stability and justness as any idea directly dependent on human needs
33
Ibid. pp. 44-49.
18
and pleasures. The only instance when, according to Galiani, the attribution of value does not
follow the regular operations of human nature is when fashion (moda) intervenes. But fashion only
applies, or so Galiani maintained, to those cases where there is no difference in utility, expressing a
mere difference in the degrees of appreciation for sensual beauty.35
By arguing that precious metals were useful by nature and that the attribution of value to
commodities is both natural and calculable, Galiani built up the foundations of his own theory of
money. This can be summarised in four general propositions. First, the just price (or value) is
commonly arrived at through a self-regulating mechanism that reflects the operation of supply and
demand according to the principles of utility and scarcity as Galiani had described them. The
operation of this mechanism result in a state of equilibrium, which can neither be commanded nor
determined a priori. From this it seems to follow that the "just" price is no different from the
"common" or market price.
Secondly, in explaining the gradual and evolutionary passage from metal-money to propermoney, Galiani emphasised that money must maintain some intrinsic value. Although people may
readily accept the introduction of forms of currency with no value of their own, and reconcile
themselves to the prospect of real-money being driven out from circulation by paper-money; the
complete elimination of an ultimate intrinsic value of money would make this entirely dependent
on public opinion (fede pubblica), and no longer dependent on the more solid foundation of human
instinct and common sense.
Thirdly, the value of money, like the value of any other commodity, is subject to variation.
It would be an illusion to think that perfect stability is either feasible or desirable. Since there is no
commodity capable of guaranteeing unchanging value, the best approximation one can find to an
34
Ibid. p. 51.
19
"ideal" measure of value is the cost of man's physical reproduction. But Galiani was keen to point
out that this was a "moral measure", good only for historians and legislators.
The final, and more general proposition that emerges from Galiani's discussion of the
monetary economy is that commerce is necessary to overcome the shortcomings of the barter
system, while there seems to be no alternative to it. As a corollary to this, Galiani noticed that the
achievements of civilisation need to be attributed to the workings of self-interest, which works in
the same way for both the virtuous and the wicked, rather than to piety and virtue. An observation,
at the time, that sounded dangerously Mandevillian.
Act four: The French connection
Whether convincing or not, Galiani's "natural history" of money was a systematic treatment of the
issue, which he considered to be central to the emerging science of economics. One of his central
contentions, that the agreement-theory of money was misguided, can be interestingly compared to
contemporary criticisms of contractualist theories of government and society. In a book on the
theories of money before Adam Smith, Arthur Eli Monroe remarks that Galiani may have done for
the question of the origins of money what ten years earlier Hume did for the question of the origins
of government.36 And yet, when in 1752 Hume published his Political Discourses, he made no
attempt at a "natural history" of money. On the contrary, in a couple of passages, he seemed to
embrace the old agreement-theory wholeheartedly. In the essay "Of money" he maintained that
money, "by agreement, is the common measure of exchange";37 while in "Of interest" he stated
35
Ibid. p. 55.
Monroe, Monetary Theory, p. 158
37
D. Hume, Essays Moral, Political, and Literary, edited by E.F. Miller (Indianapolis, 1987), pp. 291.
36
20
that "value [arises] from the agreement and convention of men".38 Monroe's explanation of Hume's
apparent inconsistency is that, with respect to money, he was being "careless", and that he should
not therefore be taken literally.39 As we shall presently see, this will not do as an explanation of
Hume's meaning. We may do better, therefore, to consider Hume's own monetary theory more
closely.
When looking at Hume's essay on money, there emerge at least two questions of policy and
interpretation on which his position is broadly similar to Galiani's. The first is that both authors
seem mainly preoccupied with the "real" economy - production, employment, and the industry of
people - while considering monetary matters - circulation, hoarding - as dependent on the former.
Hume maintained, for instance, that the quantity of money and gold in possession of a nation is in
itself, and when the nation is taken in isolation, a matter of indifference. There may be a number of
contingent reasons, linked to international trade or to the balance of power between nations, that
make the quantity of money significant; but in general this only influences the nominal level of
prices. The second point of agreement is a narrow, but nonetheless significant one. It concerns the
kind of explanation that Hume gives to the positive effect that may result from some inflationary
pressure. As we have seen, Hume stated that the quantity of money in a single country is of no real
consequence to the economy, while its only use was "as a method of rating and estimating" labour
and commodities.40 But then he goes on to argue that an increase in the quantity of money may
nonetheless have a positive effect on economic productivity, as the result of a time-lag factor
operating in the real economy. Indeed, as the quantity of money increases, "everything takes a new
38
Ibid. p. 632. This sentence appeared in the first edition of the Essays, and was kept for the successive editions until
1770, when Hume decided to drop it and substitute with the statement that money has 'fictitious value' (p. 297), which
however does not seem to signal a change of mind on the issue.
39
Monroe, Monetary, p. 158, and footnote 4.
40
Hume, Essays, p. 285.
21
face: labour and industry gain life".41 These are short-term effects that take place "in [the] interval
or intermediate situation, between the acquisition of money and rise of prices". In the long-term,
the price rise may not make a difference, since its effect is only nominal, but in the short term it
may boost the economy, as its effects spread through the ranks of society. Hume seemed to
recommend this as a policy principle, when he suggested that "the good policy of the magistrate
consists in keeping it [money], if possible, still increasing..."42. Galiani's own position was not
much different. In considering the effects of debasement (alzamento), which he considered to be
mainly nominal - if it were not for the slowness with which people tend to react to the increase in
the quantity of circulating money.43
When one compares the two important issues of monetary analysis on which Hume and
Galiani seem to agree - the relationship between money and the real economy, and the changes in
the quantity of money - one may notice a certain tension between the two sets of propositions.
While on the one hand, both Hume and Galiani seem to downplay the importance of monetary
issues as being no more than a reflection of the real economy, on the other, they seem to suggest
that monetary phenomena can determine economic behaviour. We shall see below that such a
tension is real and, in a sense, productive. But for the moment we may rest content with noticing
their general agreement on broad policy matters. From this, one might be tempted to conclude that
Monroe's intuition on Hume's careless of language is right. Alternative one could argue that the
issue on which they seemed to disagree - on the origins and nature of money - was of little
consequence. But this would undermine Galiani's position. Neither explanation needs, however, to
41
Ibid. p. 286.
Ibid. p. 288.
43
For an analysis of the way in which Hume's discussion of the short-term effects produced by an increase in the
quantity of money seems to change the traditional interpretation of his version of the quantity-theory of money, cf. J.R.
Hicks, "Monetary theory and history: An attempt at perspective", in Clower (ed.), Monetary Theory, pp. 258-9. A
42
22
be right. There is some evidence pointing towards a different direction. In 1769, the Abbé Morellet
printed a Prospectus for a new dictionary of commerce, which he was planning but never
completed.44 The most interesting part of this prospectus is the one dealing with money, which, as
Morellet himself remarked, was discussed at some length as a specimen for the articles that would
eventually comprise the forthcoming dictionary. Why Morellet chose money is not clear. He may
have found particular inspiration in a paper, probably written as a contribution to the dictionary, by
his friend, Turgot. That we know, Turgot's paper, Valeurs et monnaies, was never finished.45 From
the extant text it appears that Morellet followed closely Turgot's line of argument. In the paper
Turgot was attempting to sketch a "general theory of value", from which to derive a more specific
discussion of the nature and function of money. In the course of his discussion, Turgot refers
explicitly to what he considered Galiani's greatest achievement:
'... one of the newest and most profound truths of a general theory of value contains ... [is
the one] stated... l'Abbé Galiani stated twenty years ago in his treatise Della Moneta with so
much clarity and vigour, but almost without further development, when he said that the
common measure of all value is man'.46
Morellet's discussion of money in the prospectus strikes a balance between Galiani's and
Turgot's respective preoccupations. On the one hand, he follows Turgot's line of argument when
dealing with the general issue of value; on the other hand, tracks Galiani's own argument in
discussing the origins, functions, and nature of money. Following on Galiani's footsteps, Morellet
engaged in a concerted and direct attack against the agreement-theory of money. It is this argument
similar distinction between a static and a dynamic conception of the quantity theory is advanced by L. von Mises. The
Theory of Money and Credit (Indianapolis, 1981), pp. 160-8.
44
A. Morellet, Prospectus d'un nouveau Dictionnaire de Commerce (Paris, 1769).
45
Turgot, "Valeurs et monnaies", in Écrits Économiques, edited by B. Cages and C. Lévi (Paris, 1970)
46
Ibid.
23
that most intrigued Hume, when, in 1769, he received several copies of Morellet's prospectus, with
a request for his comments and to pass the other copies on to his Scottish friends.
Act five: Of conventions and metaphors
Within two months of having received a copy of the Prospectus, Hume wrote to Morellet:
That part of your prospectus, in which you endeavour to prove that there enters nothing of
human convention in the establishment of money, is certainly very curious, and very
elaborately composed; and yet I cannot forbear thinking that the common opinion has some
foundation. 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 which another will take
from me; and the person who shall convert it into metal is, probably, several millions of
removes distant. (...) Our shillings and sixpences, which are so much worn by use, that they
are twenty, thirty, or forty per cent below their original value; yet they pass currency which
can arise only from a tacit convention.47
This passage seems to show that, contrary to Monroe's suggestion, Hume was not careless
when he referred to money as a convention. Indeed, he meant what he wrote in his Political
Discourses. But to get to his exact meaning it needs some further investigation. We may find help
in this by examining his idea of justice as convention, of which he wrote at greater length in both
the Treatise and the Enquiry concerning the principles of morals:
It has been observed by some, that justice arises from human conventions, and proceeds
from the voluntary choice, consent, or combination of mankind. If by convention be here
47
David Hume, The Letters, 2 vols. (Oxford 1932), vol. II, p. 204.
24
meant a promise (which is the most usual sense of the word) nothing can be more absurd
than this position. (...) But if by convention be meant a sense of common interest (...) it must
be owned, that, in this sense, justice arises from human conventions.48
According to Hume then, convention is a kind of mutual agreement that arises from the
perception that there may be a common interest in either performing or not performing some
particular action, as in the famous example of the two men who pull the oars of a boat: they see and
agree that their common interest is to pull the oars, and to pull them in the same direction, though
they have made no promise, nor are they under any obligation to fulfil this agreement. The
establishment of justice, money, and language have developed through such conventions. In
embracing each of these conventions, every man "must have an eye to the whole plan of the
system, and must expect the concurrence of his fellows in the same conduct and behaviour".
Besides, according to Hume, conventions are not arrived at a single stroke, but rather in the
ripening of mutual understanding and the growing recognition of a common interest; their origin is
gradual, and their force is the result of a slow progression, which consists in the repeated
experience that the transgression of the rules of the convention is ultimately against one's interest.
In short, Hume's idea of convention was neither meant as a strict contract nor as a nudum
pactum in the sense often used by the natural lawyers - nor indeed as the result of "fancy and
agreement", as Locke had put it - but as a principle of co-ordination, which human beings discover
in the pursuit of their own interest. As such, it was meant in opposition both to Hobbes's idea of a
social contract and to the natural lawyers' emphasis on the natural obligation that comes with pacts
and with a sense of justice. Instead, Hume's analysis of convention opens the way to a more
48
Hume, An Enquiry concerning the Principles of Morals, edited by T.L. Beauchamp (Oxford, 1998), Appendix III, 7,
p. 172; cf. also A Treatise of Human Nature, edited by D. Fate Norton and M.J. Norton (Oxford, 2001), 3,2,2,10, pp.
314-5.
25
evolutionary conception of social institutions, whose origins he considered as the result of
particular social relationships in which human beings find themselves and on the perception they
have of such relationships.
This more evolutionary sense of convention would seem to agree with the thrust of Galiani's
account of the origins of money. But this is perhaps only half of the story. For, Hume's
evolutionary and broadly "tacit" sense of convention still carries a strong sense that human
intervention is at the origins of these institutions. All authors we have examined, however, agreed
that the value of money needed to be anchored to some intrinsic value, otherwise, as Hume himself
had remarked in his letter to Morellet, money "would be multiplied without end, and would sink to
nothing".49 This "realistic" conception of the nature of money, though refined through historical
and evolutionary analysis, reflected a certain anxiety in allowing the value of money to be entirely
dependent on the social operations of the human mind: people's confidence, the support of public
opinion, the credit and trust we give to strangers - thus relinquishing any anchorage to the more
solid moorings of "objective" nature. But, the "realistic" answer to such anxiety failed to take into
account that the evolutionary transformation of money may also contribute to changing its nature as
a social institution. It is indeed significant that those authors who expressed such anxiety were both
sceptical of and diffident about the future of paper-money. None of them envisaged the momentous
transformations of the financial system and the development of credit and "fiduciary money".
Perhaps against his own better judgement, Hume's intuition, that there was something
intrinsically conventional in the nature of money, offered a better perspective on the evolutionary
potential of the monetary system as a social institution. In his letter to Morellet, Hume insisted that
by stressing the conventional nature of social institutions one is judging them more in relation to
49
Hume, Letters, p. 204.
26
their functions than to their origins and natural history. This interpretation is confirmed by looking
again at the tension we noticed earlier, in both Hume and Galiani, between some their views on
how money relates to the "real" economy. In the opening sentence of his essay on money, Hume
had maintained the curious position that:
Money is not, properly speaking, one of the subjects of commerce; but only the instrument
which men have agreed upon to facilitate the exchange of one commodity for another. It is
none of the wheels of trade: it is the oil that renders the motion of the wheels more smooth
and easy'.50
Such a statement is rather difficult to square with Galiani's conviction that money was a "real" and
integral part of commerce, but also with Hume's own analysis of how the increase in the quantity of
money may produce "real" short-term effects by operating on the "spirit of industry" and "the stock
of labour".51 The only possible explanation is that such a statement is meant to reinforce Hume's
argument that what matters is the "real economy". But there is something else which may be of
interest to our discussion. The image of money as the oil of the wheels of trade was already
anticipated by Berkeley in The Querist,52 where he considered money as a means for circulating the
fruits of labour. In posing the question of what money is, whether a commodity, a standard, a
measure, or a pledge, Berkeley concluded that it is only a ticket or a counter - what Galiani called
bullettini. It is this kind of nominalism, in opposition to Galiani's realism, which seems to surface
in Hume's analysis. The alternative image to the oil in the wheels of trade is that which describes
the role of money in commerce as the blood in the human body, an image used by Galiani. The
difference between the two images is significant; blood is certainly an intrinsic part of the human
50
51
Hume, Essays, p. 281
Ibid. 288.
27
body, oil is only a means to make the wheels turn more easily of their own accord. The nominalist
position, though more open to the possibility of radical changes within the nature of social
institutions, seems however to play down the role of money.
A modern epilogue
The metaphors of money as the oil in the machine and the blood in the human body graphically
show different conceptions of what money is and what money does. These are some of the images
that the seventeenth- and eighteenth-century debate has bequeathed us, and which have, so to
speak, become ingrained in our theoretical language of money. It is entirely possible, as Ludwig
von Mises has suggested in his Theory of Money and Credit, that such metaphors do not help in the
construction of an economic theory of money and exchange;53 but they are powerful images in the
philosophy of money. This, as Georg Simmel showed in another remarkable book, is interested in
the pre-conditions of money, those that are "situated in mental states, in social relations and in the
logical structure of reality and values", so that, by pursuing such an enquiry, we may get to the
social meaning of money and to the position it holds in our way of life.54 The use that some of the
eighteenth-century authors we have examined made of such metaphors and of the arguments
supporting them illustrates how they grappled with these more philosophical issues, even when
they were debating more immediate policy concerns. These metaphors give us some clues about
the anxiety that these authors felt, as they observed the profound transformations caused by the
52
G. Berkeley, The Querist, containing several queries, proposed to the consideration of the public, (London, 1736) n.
461.
53
Von Mises, Theory of Money and Credit, pp. 503-4.
54
Simmel, Philosophy of Money, p. 54.
28
financial revolution, which under their own eyes was changing both their social world and many of
the categories through which they had interpreted it.55
The particular intellectual episode on which I have dwelled shows how some of this anxiety
emerged at a more abstract level of discussion. The authors of our story, amongst many others,
tried to elaborate the conceptual tools through which to understand a harness the power of the
monetary relationships that increasingly permeated and dominated social life. They clearly
perceived how such relationships were ultimately based on the bonds of trust, credit, agreement and
co-operation between people that form so much of the cement of increasingly individualised
societies. However, they were also fearful that to admit as much was too close for comfort. It meant
to acknowledge that the values - both material and spiritual - of our modern societies have no fix
and stable point of reference.
Since that time, we have further travelled along that road. It has become clearer that when
we talk of money, we no longer speak of an object, a commodity, an instrument, but instead of the
much more complex, intricate, and often obscure social institutions of credit. In the search for new
ways of economising time and effort and provide more efficient means through which to conduct
the increasing volume of exchanges that take place in our modern societies, the forms of "money"
and the "means of payment" have multiplied, diversified and become more and more sophisticated.
Through progressive conventions, through their continuous refinement, and through their
unintended consequences, we have piecemeal created a credit system that is by its very nature
unstable and increasingly reliant upon the intangible qualities of confidence and trust;56 but have
probably no other way to go. As Simmel rightly perceived, money has progressively, and under our
55
On this, cf. Pocock, The Machiavellian Moment, Chapter 7; and Catherine Ingrassia, Authorship, Commerce, and
Gender in early Eighteenth-Century England (Cambridge, 2001), "Introduction: paper credit", pp. 1-16.
56
Cf. Hicks, "Monetary theory and history", pp. 256-7.
29
own very eyes, lost the characteristics of a substance and become no more, but no less, than a
function and a web of relationships.57 I wish I had remembered this lesson, before coming to
America.
57
Cf. Simmel, Philosophy of Money, Part I, Chapter 2.
30