The Wealth of Nations · Chapter
I: Of the Principle of the Commercial or Mercantile System explained
Smith critiques the popular notion that wealth consists in money (gold and silver), arguing instead that true wealth lies in what money can purchase—the annual produce of land and labor.
What happens
Smith critiques the popular notion that wealth consists in money (gold and silver), arguing instead that true wealth lies in what money can purchase—the annual produce of land and labor. He traces the mercantile system's origins to this confusion, showing how it led to policies that restrict imports and encourage exports to maintain a favorable balance of trade. Smith contends that such policies are misguided because money is merely a tool of commerce, not wealth itself, and that the real goal of political economy should be to increase the annual produce of a nation's industry.
Themes in this chapter
Wealth and Money
Smith dismantles the mercantilist equation of wealth with gold and silver, arguing that true wealth is the annual produce of land and labor.
Free Trade and Market Competition
Critiques mercantilist trade restrictions (import restraints, export encouragements) as misguided, implying the superiority of free trade.
Role of Government
Examines how government policies (duties, bounties, treaties, colonies) are used to manipulate the balance of trade, often to the detriment of real wealth.
Characters to notice
- Adam Smith
Author and primary voice; critiques the mercantile system and the popular notion that wealth equals money.
- John Locke
Cited for his distinction between money and other moveable goods, arguing gold and silver are the most solid part of a nation's wealth.
- The Spaniards
Used as an example of a nation that equated wealth with gold and silver upon discovering America.
- The Tartars
Contrasted with Spaniards; they measured wealth in cattle, which Smith suggests is closer to the truth.
Key passages
“That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value.”
The common belief that wealth is gold and silver stems from money's roles as a medium of exchange and a standard of value.
Smith introduces the central fallacy of mercantilism.
“It is not because wealth consists more essentially in money than in goods, that the merchant finds it generally more easy to buy goods with money, than to buy money with goods; but because money is the known and established instrument of commerce, for which everything is readily given in exchange, but which is not always with equal readiness to be got in exchange for everything.”
Merchants prefer money over goods not because money is wealth itself, but because it is the universally accepted medium of exchange.
Smith clarifies the practical reason for money's desirability.
“Money, therefore, necessarily runs after goods, but goods do not always or necessarily run after money.”
Money is always seeking to be exchanged for goods, but goods are not always seeking to be exchanged for money.
Smith emphasizes that goods are the ultimate object of economic activity.
“The two principles being established, however, that wealth consisted in gold and silver, and that those metals could be brought into a country which had no mines only by the balance of trade, or by exporting to a greater value than it imported; it necessarily became the great object of political œconomy to diminish as much as possible the importation of foreign goods for home consumption, and to increase as much as possible the exportation of the produce of domestic industry.”
Once it was assumed that wealth is gold and silver and that these can only be obtained through a trade surplus, governments naturally sought to restrict imports and boost exports.
Smith outlines the logical foundation of mercantilist policy.
