CH. 23

NOTES ON MERCANTILISM, ETC.

343

an yearly Income by Interest, depends on the wholequantity of the then passing Money of the Kingdom ,in proportion to the whole Trade of the Kingdom (i.e.the general Vent of all the commodities)”. 1 Locke ex-plains that Money has two values: (1) its value in usewhich is given by the rate of interest “and in this it hasthe Nature of Land, the Income of one being calledRent, of the other, Use 2 ”, and (2) its value in exchange“and in this it has the Nature of a Commodity”, itsvalue in exchange “depending only on the Plenty orScarcity of Money in proportion to the Plenty orScarcity of those things and not on what Interest shallbe”. Thus Locke was the parent of twin quantitytheories. In the first place he held that the rate ofinterest depended on the proportion of the quantity ofmoney (allowing for the velocity of circulation) to thetotal value of trade. In the second place he heldthat the value of money in exchange depended on theproportion of the quantity of money to the total volumeof goods in the market. But—standing with one footin the mercantilist world and with one foot in theclassical world 3 —he was confused concerning the rela-tion between these two proportions, and he overlookedaltogether the possibility of fluctuations in liquidity-preference. He was, however, eager to explain that a

1 He adds: “not barely on the quantity of money but the quickness of itscirculation”.

2 “Use” being, of course, old-fashioned English for “interest”.

3 Hume a little later had a foot and a half in the classical world. ForHume began the practice amongst economists of stressing the importanceof the equilibrium position as compared with the ever-shifting transitiontowards it, though he was still enough of a mercantilist not to overlook thefact that it is in the transition that we actually have our being: “It is onlyin this interval or intermediate situation, between the acquisition of moneyand a rise of prices, that the increasing quantity of gold and silver is favour-able to industry. ... It is of no manner of consequence, with regard tothe domestic happiness of a state, whether money be in a greater or lessquantity. The good policy of the magistrate consists only in keeping it, ifpossible, still increasing; because by that means he keeps alive a spirit ofindustry in the nation, and increases the state of labour in which consistsall real power and riches. A nation, whose money decreases, is actually,at that time, weaker and more miserable than another nation, which possessesno more money but is on the increasing trend.” (Essay On Money, 1752).