The Wealth of Nations explicitly categorize gold and silver money, despite its necessity for commerce, as a “dead stock” that is unproductive, contrasting its circulation function with the actual generation of wealth. This perspective is central to understanding the true nature of national capital.
I. Money as the Universal Instrument of Circulation
The function of money arose out of the practical difficulties inherent in a system of barter once the division of labour had been thoroughly established. To conduct exchanges efficiently, men ultimately gave preference to metals, such as gold and silver, over every other commodity. These metals possess qualities, like durability and the ability to be divided and easily reunited, that render them uniquely fit to be the instruments of commerce and circulation.
In all civilized nations, money has become the universal instrument of commerce, intervening in the buying, selling, and exchanging of all kinds of goods. This function means that money acts as the “great wheel of circulation,” distributing the society’s revenue among its members. The price of every commodity is thus most frequently estimated by the quantity of money it exchanges for.
II. Gold and Silver as Dead Stock
Despite serving this vital function of distribution, the sources stress that the gold and silver comprising the currency do not themselves constitute or produce wealth; they are merely an expensive piece of machinery:
- Unproductive Capital: The stock of money circulating in any country is considered a “very valuable part of the capital of the country, which produces nothing to the country”. The ready money a dealer is obliged to keep unused for answering demands is called “dead stock,” yielding no product either to him or to his country while it remains idle. Money is regarded as the “most unprofitable part” of the national capital.
- Deduction from Revenue: Money, as the great wheel of circulation, makes no part of the revenue of the society. When calculating the total or net revenue of any society, the entire value of the money must be deducted from the annual circulation of money and goods. The expense of supporting this “great but expensive instrument of commerce”—which includes valuable materials (gold and silver) and highly skilled labor—is a deduction from the neat revenue of the society. This expense does not augment the stock reserved for consumption, conveniences, or amusements.
- Analogy of the Highway and Utensil: To emphasize its non-productive nature, the circulating gold and silver money is compared to a highway. A highway circulates and carries the grass and corn to market, but it “produces itself not a single pile of either”. Similarly, gold and silver, whether coined or in plate form, are functionally considered utensils. The quantity of these metals in any country is necessarily limited by the use for them (for coin to circulate commodities, or for plate as household furniture).
III. Converting Dead Stock into Active Capital via Banking
The recognition that circulating gold and silver is unproductive dead stock forms the basis for advocating the introduction of paper money and judicious banking.
The substitution of paper for gold and silver money essentially replaces a very expensive tool of commerce with one that is much less costly, enabling circulation to be carried on by a new “wheel” that costs less to erect and maintain.
The goal of banking operations is to convert this dead stock into productive capital:
- Active Stock: Judicious banking enables a dealer to convert his unused ready money (dead stock) into “active and productive stock”—such as materials to work upon, tools, and provisions for workers—which produces something for both the individual and the country.
- National Gain: By substituting paper in the place of a large portion of gold and silver, the country can convert this dead stock into active and productive stock.
- The Metaphor of the Waggon-Way: This transformation is described vividly: banking provides, by a “violent metaphor,” a sort of “waggon-way through the air,” which enables the country to convert a large part of its “highways” (the unproductive gold and silver circulation) into “good pastures, and corn fields,” thus significantly increasing the annual produce of its land and labour.
When paper money replaces gold and silver, the quantity of materials, tools, and maintenance that the circulating capital can supply is increased by the whole value of the gold and silver released. This released gold and silver is then sent abroad in exchange for foreign goods, which are likely to be purchasing materials, tools, and provisions necessary to employ and maintain an additional number of industrious people. This process transforms the former dead stock into capital that encourages industry.