The role of public credit
These considerations regarding British foreign policy give meaning to the other economic essays. This imperial policy cannot be financed by taxes, and Hume showed that it cannot be financed by the external trade surplus either, since this is inevitably ephemeral.
The external trade surplus cannot therefore constitute the “English Treasure” evoked by the mercantilists (Thomas Mun, for instance). The wars can therefore only be financed by public credit, Hume tells us in “Of Public Credit”, the essay that concludes the series of Political Discourses, the content of which is essentially economic: “It must, indeed, be one of these two events; either the nation must destroy public credit, or public credit will destroy the nation” (Hume 1742 [1987], II, ix: 28).According to Hume, the growth of the public debt threatened Great Britain’s constitutional order in three ways. First, in order to reimburse its debt, the government had to exact a toll to replace the tax that the taxpayers’ representatives would not or could not vote. Consequently, the government had to collect a tribute from the citizens. This measure brought Great Britain’s situation back to one of “Oriental despotism”. This issue signified the violent death of public credit and of the Constitution. A second issue is public bankruptcy, a measure used by continental absolute monarchies that signified the natural death of public credit and, once again, of the Constitution (the “lesser evil” solution that Hume therefore favoured). Third, otherwise, it seems probable that Great Britain, no longer able to pursue this policy of the balance of power in Europe due to lack of resources, would become the victim of invasion by a dominant continental power. The latter outcome would signify the end of the nation, destroyed by public credit.
The monetary discourse in the Essays thus falls within the framework of a coherent position.
Not only does the increase in the wealth of nations not corrupt their military virtues, but it may also, through public credit, stimulate their nationalism and give rise to the constitution of new empires financed by the growth of public debt. The real danger of an increase in wealth therefore does not reside in an excess of moral refinement, but in the exacerbation of national passions financed by public credit.The affirmation of the neutrality of money thus serves above all to criticize the mercantilist theories according to which a trade surplus allows the constitution of a war chest. We must not, therefore, misjudge the essentially political dimension of the Essays. Yet, naturally, the neutrality of money affirmed in the Political Discourses series had to be argued on economic grounds, as called for by Tucker and Oswald soon after publication of the book (see Rotwein 1955: 190, 197, 202). For instance, they raised the question of the process through which an increase in the quantity of money would leave real economic variables unchanged. This argument is strong, as Hume himself used the fact that an economy without money remains backward and poor. Here, we find an expression of the central tension mentioned above: how can we accept the idea of the neutrality of money if we accept that a non-monetary economy is necessarily poorer than a monetary economy? This difficulty gave rise to an abundant literature that is well described in Wennerlind (2008). It was generally admitted (Rotwein 1955; Schabas 1994; Schabas and Wennerlind 2008; Wennerlind 2001, 2005) that Hume, along with most of the supporters of the quantity theory of money, accepted the non-neutrality of money in the short term and its neutrality over the long term. Wennerlind (2005) proposes a slightly different interpretation. According to him, Hume contrasted an increase in “endogenous” money, the effects of which would be positive on growth and employment, with an increase in “exogenous” money (imported money) that would be neutral. This interpretation underlines the importance of the anti-mercantilist dimension of Hume’s argument.
Beyond these debates, we find here one of the major difficulties encountered by the quantity theory of money, and this is perhaps why most economists concur (Clower 1969; Lucas Jr 1996) in attributing the paternity of this theory to Hume.