I was reading Paul Krugman’s quick Substack post today on why we don’t need to worry or panic so much of the nation’s (US) trade deficit. He makes the case that America now “has a president who is obsessed with trade imbalances.” This protectionist attitude and changing the financial landscape is cheered on and supported from those around President Donald Trump especially his economic advisors.
Krugman references another post by Adam Tooze that is highly critical of Trump’s economic policies. The proposed Mar-a-Lago Accord aims to fix America’s trade and fiscal deficits by devaluing the dollar and ending current terms of foreign investment, with the goal of making exports more competitive and reviving domestic industry. Though the idea seems extreme and controversial, it’s gaining traction among serious thinkers due to widespread concern over U.S. deindustrialization and mounting debt. This support partly stems from a broader crisis mindset and the belief that major structural changes are urgently needed, echoing arguments from economists like Klein, Pettis, and Bianco.
A passage from another previous post by Krugman caught my attention and I fed it to GPT.
ChatGPT:
<contemplator> Let’s slow-walk this one, piece by piece.
First line: “But trying to put an intellectual gloss on Trumpist international economic policy is sanewashing…” — Okay, what’s going on here? The author is pushing back, sharply, against efforts to legitimize or rationalize Trump’s economic ideas with academic or intellectual framing. “Sanewashing” — that’s an evocative neologism. Like “whitewashing,” but instead of covering something with a clean coat of paint, it’s covering irrational or unsound policies with a veneer of intellectual respectability. So, dressing up chaos in the suit of reason. The accusation is that doing so doesn’t clarify things — it misleads readers. It obfuscates.
Next paragraph: “We actually know what Trump and the people around him… believe about international economic policy.” This shifts to specifics — we’re reminded that Trump appointed advisors who either agreed with or pretended to agree with his beliefs. That’s an important qualifier: belief or performance of belief. This is setting the stage for the main critique.
Enter Wilbur Ross and Peter Navarro. The piece claims they released a “white paper” before Trump took office that committed a basic economic fallacy. What fallacy? Misinterpreting a core accounting identity:
GDP = Domestic Spending + Net Exports.
Now here’s the key point: This isn’t a theory. It’s a tautology — an identity, true by definition. But Ross-Navarro apparently argued that because net exports are subtracted, a trade deficit reduces GDP. This is… oversimplified, to say the least. The author points out that you could just as easily frame it the other way: a trade deficit allows more domestic spending. And since trade deficits correspond to capital inflows (another accounting identity), they can fund investment — which might boost growth. That’s the orthodox macroeconomic counterpoint.
So Navarro took a simplistic — arguably misleading — interpretation and used it to justify Trump’s “crude mercantilist prejudices.” That phrase is loaded. “Crude” — unsophisticated, zero-sum thinking. “Mercantilist” — treating trade as a competition where exports are wins and imports are losses. That’s a centuries-old view, largely discarded in mainstream economics since Adam Smith. So it’s not just wrong — it’s anachronistically wrong.
Then we’re told this thinking isn’t just background noise. Trump has actively cited trade imbalances — such as the one with Canada, which he reportedly exaggerates by 3x — as justification for aggressive policies. Including, bizarrely, the “idea of a forced annexation” of Canada. That’s a startling detail. Whether meant literally or not, it shows how distorted the worldview is.
So this isn’t just bad economics. It’s dangerous, if it informs real policy or stokes hostility toward allies.
The overall tone is one of exasperation. It’s not just that Trump’s trade views are flawed — it’s that efforts to rationalize them end up laundering misinformation and elevating economic illiteracy.
Final answer:
The passage criticizes attempts to legitimize Trump’s trade policies as intellectually serious, calling it “sanewashing” that misleads rather than informs. It argues that Trump and his advisors, particularly Peter Navarro, promoted flawed economic logic—such as misinterpreting basic accounting identities to claim that trade deficits shrink GDP. This simplistic view aligns with Trump’s outdated mercantilist beliefs, which treat trade as a zero-sum game. Despite these errors, Trump has acted on these misconceptions, even exaggerating trade imbalances and making extreme policy suggestions, highlighting the risks of rationalizing unsound ideas.
</contemplator>
Krugman original post I read referenced how these fears and economic irrationality goes back to David Hume who wrote Of the Balance of Trade, which is a chapter from his broader work, Hume’s Political Discourse. Of course I was curious and it caught my attention since I never read this piece of literature, but I do know Hume is/was a major figure in philosophy. I inserted this section specifically to GPT and it pleasantly surprised me that it suggested a modern annotation of Hume’s paper after the summary (custom prompt). I couldn’t resist because reading old English texts can be a pain and confusing to go through if you’re like me–not always, but often…; so why not.
Summary Version
ChatGPT:
Comprehensive Summary of Of the Balance of Trade
Author(s): David Hume
Publication Date: 1752
Journal/Publisher: Published as an essay in Political Discourses, later included in Essays, Moral, Political, and Literary
Field/Discipline: Political Economy / Philosophy
DOI/Link: Not applicable (public domain historical text)
Executive Summary
David Hume’s Of the Balance of Trade is a foundational essay in political economy that challenges the prevailing mercantilist view that a favorable balance of trade—meaning exports exceeding imports—is essential to national prosperity. Hume argues, with rigorous reasoning and analogies to physical principles, that gold and silver (specie) cannot accumulate indefinitely in one country because trade and monetary flows tend toward equilibrium, just as water seeks its level. He critiques various protectionist policies and misperceptions of trade balances, emphasizing instead the primacy of industry, population, and productive activity in maintaining national wealth. The essay also includes an early, nuanced discussion of paper money and its macroeconomic consequences.
Research Question & Objectives
Hume’s central inquiry revolves around the validity of national concerns over unfavorable trade balances, especially the fear that gold and silver are leaving a country.
He aims to:
- Investigate whether such fears are well-founded.
- Explore the mechanisms by which specie balances are self-correcting.
- Critique mercantilist trade policies based on fallacious economic assumptions.
- Offer a more coherent and empirically grounded framework for understanding trade, money, and credit.
Core Argument or Hypothesis
Hume’s primary thesis is that concerns over the balance of trade and the outflow of money are generally misplaced. Due to price adjustments and market mechanisms, trade imbalances are self-correcting over time. Therefore, as long as a country maintains its industry and population, its money supply will stabilize relative to other nations.
He famously writes:
“I should as soon dread, that all our springs and rivers should be exhausted, as that money should abandon a kingdom where there are people and industry.”
Key Findings & Conclusions
• Trade restrictions based on fears of specie loss are counterproductive and rest on a misunderstanding of economic interdependence.
• Money (gold/silver) behaves like water—it flows to where it is needed and levels out across nations unless artificially obstructed.
• Attempting to hoard money through restrictive trade policy is not only futile but damaging.
• Paper credit, while facilitating trade, also substitutes for specie and can result in reduced monetary reserves.
• Real wealth lies not in money itself, but in industry, population, and productive capacity.
• Jealousy and fear of trade deficits are more political than economic in nature and often linked to bad moods, dissatisfaction with government, or irrational nationalistic feelings.
• The difference in money between regions or nations is proportional to labor and commodity value, not trade balance per se.
• The illusion that “paper wealth” enriches society is shortsighted; it affects prices but not underlying productivity.
• Hoarding specie can temporarily raise a nation’s monetary stock but invites instability or conquest, especially for smaller states.
Methodology & Data
As a philosophical essay rather than an empirical study, Hume’s method is primarily deductive, employing thought experiments, historical examples, and logical analogies (notably comparing money flows to water equilibrium).
He cites:
- Historical laws (e.g., Athenian fig prohibition, French grain laws).
- Parliamentary acts in England.
- Observations from Jonathan Swift’s economic writings on Ireland.
- Statistical or historical data, e.g., the treasury of Henry VII and the census of Athens.
- Comparisons across cities and nations: England, France, China, Spain, Portugal, Genoa, Berne, etc.
While lacking modern statistical rigor, Hume’s analysis is sophisticated for its time and deeply informed by contemporary commercial realities.
Theoretical Framework
Hume works within and against the framework of Mercantilism, the dominant economic paradigm of early modern Europe that emphasized bullion accumulation and trade surplus.
He develops an early version of the Quantity Theory of Money—arguing that increases in money supply lead to proportional price increases.
He introduces a quasi-equilibrium model of international monetary flows, resembling what is now called Hume’s Price-Specie Flow Mechanism.
There is also a subtle appeal to natural law metaphors—particularly physical equilibrium (e.g., water levels, fluid mechanics)—to convey the inevitability of trade balance self-correction.
Results & Interpretation
Hume refutes specific examples of trade imbalance concerns:
- Ireland sending money to England did not impoverish Ireland as dramatically as thought.
- England’s fears of French wine undermining its economy are exaggerated—free trade would be mutually beneficial.
- Spain’s attempts to hoard New World gold failed because of natural monetary outflows to more industrious nations.
He interprets monetary flows as responding to supply and demand in goods and labor. If a nation’s prices are too high due to a surplus of money, imports rise and exports fall, leading to an outflow of money and restoration of equilibrium.
Hume’s analogy of water and gravity reinforces this idea:
“All water, wherever it communicates, remains always at a level.”
“There is a moral attraction, arising from the interests and passions of men, which is full as potent and infallible.”
He also offers a nuanced view of paper money: it increases liquidity and credit availability, especially through Scottish innovations like bank credits and small denomination notes. Yet he warns that paper credit can displace specie and produce systemic vulnerabilities.
Limitations & Critiques
- Historical and Statistical Constraints: Hume’s arguments rest largely on logic and anecdote rather than controlled data or econometric modeling.
- Assumption of Rationality and Frictionless Adjustment: His model assumes free market behavior without transaction costs, capital controls, or geopolitical disruptions.
- Underspecification of Exceptions: While he notes that communication barriers (e.g., distance to China) can temporarily disrupt monetary equilibrium, he doesn’t deeply explore the duration or effects of such exceptions.
- Underexplored Role of Government and Institutions: Though Hume critiques protectionism, he doesn’t elaborate on institutional or geopolitical determinants of trade success.
- Ambiguity on Paper Credit: While recognizing both the benefits and risks of paper money, Hume stops short of offering a clear policy stance, and instead outlines paradoxes without resolution.
Scholarly Context
Hume’s essay stands in stark contrast to Mercantilist writings, such as those by Thomas Mun and other English commercial thinkers of the 17th century.
He anticipates core ideas later developed by:
- Adam Smith (The Wealth of Nations, 1776), who praises Hume and expands on similar anti-mercantilist ideas.
- Classical economists like David Ricardo (comparative advantage) and John Stuart Mill (international equilibrium).
- 20th-century economists revisiting the Quantity Theory and trade balance mechanisms.
He references Jonathan Swift and other contemporary observers, challenging the alarmist tone of economic pamphleteers like Gee.
The work engages early economic thought with philosophical rigor, and foreshadows debates over free trade, monetary policy, and globalization.
Practical & Theoretical Implications
Theoretical:
- Hume provides a foundational refutation of zero-sum trade thinking.
- He integrates economic reasoning with naturalistic metaphors, establishing the foundation for equilibrium-based economic models.
- His thinking helped discredit the notion that wealth equates to bullion hoarding.
Practical:
- Implies that trade policy should prioritize openness and competitiveness, not protectionism.
- Suggests caution in adopting paper credit systems that substitute too much for real specie.
- Indicates that states should focus on productivity, labor, and industry, not currency stockpiles.
- Warns of the dangers of hoarding (public or private), advocating for currency circulation.
- Supports low duties and open trade where mutual gains are possible—anticipating later arguments for comparative advantage.
If you would like, I can also generate a modern annotated version of Hume’s essay or compare it to Adam Smith’s treatment of similar themes.
Of the Balance of Trade — Modernized Version
By David Hume (Modern Rewrite, Section 1)
Introduction: Misguided Trade Fears.
It’s common in countries unfamiliar with how commerce really works to restrict the export of goods they consider valuable, believing they should keep everything useful within their own borders. But this kind of restriction actually defeats its own purpose. The more a good is exported, the more will be produced to meet both foreign and domestic demand—and domestic consumers will always have first access to the new supply.
For example, ancient Athenian law made it a crime to export figs. This was because Attic figs were considered so tasty that Athenians thought no foreigner deserved to enjoy them. In fact, the term “sycophant” originally referred to informers who reported fig-exporters—a name derived from Greek words for “fig” and “to reveal.”
Similar attitudes show up in English law, especially during the reign of Edward III, and continue even today in France, where the export of grain is often banned in the name of preventing famine. Ironically, this policy likely causes more famines than it prevents in such a fertile country.
This same fear—this time about money—has existed in many nations. It took reason and experience to persuade people that banning the export of gold and silver actually makes things worse. These bans raise the exchange rate against the country, encouraging even more money to flow out.
Now, those are obvious mistakes. But even in sophisticated commercial societies, there remains a deep suspicion about trade deficits. People worry that all their gold and silver is leaving the country. In my view, such concerns are nearly always baseless. I’d sooner worry about all the rivers in a nation drying up than believe that money will abandon a country full of industrious people.
Section 2: The Self-Correcting Nature of Trade and Money.
It’s easy to see that calculations about the “balance of trade” are based on shaky foundations. Customs records are unreliable, and even the foreign exchange rate tells us little unless we understand how much money is actually being moved in and out with every trade partner—something no one can know for certain. Every economist who writes about this issue claims to “prove” their theory by adding up exports and imports, but their numbers rest on guesswork, not facts.
Take the writings of Mr. Gee, for example. He laid out tables showing that the nation’s trade deficit was so large that we would run out of money entirely within five or six years. This sparked widespread panic. But twenty years have passed since then—including during a long and costly war—and yet money is more plentiful in the country than ever before. The predictions didn’t come true.
Jonathan Swift, in his Short View of the State of Ireland, said that Ireland once had only £500,000 in circulation. He claimed that every year the Irish sent a full £1,000,000 to England, mostly in payment for French wine, and had almost no other source of income to make up for this loss. If that were true, Ireland’s money supply should have disappeared in three years. And yet, decades later, money still circulates in Ireland, and the belief in the country’s growing wealth seems stronger than ever.
In short, anxiety about a negative trade balance seems to come and go depending on people’s moods. Whenever the public is upset with the government, or just feeling pessimistic, they start worrying about losing their gold. And since it’s impossible to list every export that offsets the imports, it might be better to make a more general, logical case to show why this fear is unfounded—so long as we preserve our population and our industry.
Thought Experiment: If the Money Supply Shrinks or Grows Dramatically
Let’s suppose that 80% of all the money in Great Britain vanished overnight. The country would be in the same situation as it was centuries ago, under the early English kings. What would happen? Prices for goods and wages would drop sharply. Everything would be as cheap as it was back then.
Under such conditions, we would easily beat other nations in trade. No one could match our prices. Our goods would flood foreign markets, and their gold and silver would pour into Britain in return. Over time, the money we lost would come back. As money returned, prices would rise again until we reached a balance with neighboring countries.
Now imagine the opposite: that the money supply quintupled overnight. Prices for goods and labor would shoot up. Other countries wouldn’t buy from us, since everything would be too expensive. Their goods would be much cheaper by comparison. No matter what laws we passed to stop it, imports would surge and our money would flow out—until prices came down and trade reached equilibrium again.
Money Balances Like Water
The forces that would correct these extreme shifts—whether sudden loss or gain—are also at work every day. They make sure that, over time, money stays roughly proportional to the industry and productivity of each nation. Just as water naturally seeks its level, so does money.
Ask a physicist why water levels equalize between connected containers, and they’ll say that if one side is raised too high, gravity pulls it down until it matches the other side. The same thing happens with money—not because of physical gravity, but because of human behavior. Greed, self-interest, and the search for better prices act like gravity. They move money from one place to another, leveling out imbalances.
Why Spain Couldn’t Keep Its Gold
Could Spain have kept all the gold and silver it imported from the Americas? Could France have kept its prices permanently ten times lower than those of Spain? Of course not. Those countries may have wanted to hoard their wealth, but they couldn’t. Trade routes and price differences naturally pull money across borders.
That’s why almost every country profits when trading with Spain and Portugal. These nations were full of gold, but their domestic industries were weak. And just like a flood seeks low ground, money flowed out of them and into more industrious countries.
What If Trade Routes Are Blocked?
There is one situation where this leveling effect is slowed: when trade is blocked by distance, monopolies, or natural barriers. For example, China is far away, and our trade with it is tightly controlled by monopolistic companies. This lack of free flow means that Europe keeps more gold and silver than China, despite China’s size.
Still, even with these obstacles, the same forces are at work. Europe is more advanced in manufacturing, yet we still struggle to profit from trade with China. If it weren’t for the constant inflow of precious metals from the Americas, Europe’s money would fall, and China’s would rise—until they met at an equilibrium.
If China were as close as Poland or Morocco, they would quickly absorb our surplus money. There’s no need to invoke mysterious forces to explain this. It’s not some “magnet” pulling money. It’s simple human interest: people seek profit, and profit moves money.
Section 3: Internal Trade Balances: Provinces, Cities, and Domestic Equilibrium.
So how is the balance of money maintained among the provinces within a kingdom? The same forces apply. It’s impossible for one region to permanently hoard money while others run dry. Why? Because prices of labor and goods adjust. The moment money becomes scarcer in one province, its goods and labor become cheaper, attracting buyers and drawing money back in. The result? Equilibrium.
If this principle weren’t so well understood through long experience, imagine the anxiety it could cause. Picture a gloomy Yorkshireman tallying up the money flowing out of his county to London — via taxes, absentee landlords, and imported goods. He might despair at how little seems to flow back.
Now imagine that England still had its ancient Heptarchy — seven separate kingdoms instead of one. Each region would be paranoid about losing its money to its neighbors. Trade would be choked with restrictions. Each petty kingdom would act on suspicion and jealousy. But since the union, trade between Scotland and England has become open and free. And which country has benefited? Likely both. If Scotland has grown richer since the union, it’s not because they’ve “drained” England—it’s because their productivity and industry have increased.
Before the union, the English feared Scottish access to their markets. They imagined their treasure would be siphoned away. Meanwhile, the Scots feared the same thing in reverse. Yet history has proven both wrong. Once barriers fell, prosperity followed.
Europe, Like a Large Kingdom
What happens in small, domestic regions happens in larger ones too. In the days of the Roman Empire, provinces kept trade balances with one another and with Rome. That balance didn’t need to be imposed by law—it emerged naturally.
And today, anyone traveling across Europe can see, through commodity prices and wages, that money is fairly evenly distributed. Not perfectly, but close. The price differences between countries aren’t greater than the differences between counties within a single country.
People naturally migrate to cities, ports, and rivers. That’s where business happens. As a result, there’s more money in London than in the countryside—but this matches the higher concentration of people and industry there. The ratio remains stable.
France, Wine, and Trade Jealousy
We English are famously suspicious of France—sometimes with good reason. But this suspicion leads to irrational trade restrictions, especially when we are the ones enforcing them. The results? We lost the French market for our woollen goods. We now buy wine from Spain and Portugal, which is worse quality and more expensive.
Most Englishmen would panic if French wine became cheap and abundant in England, replacing domestic beer. But from a purely economic point of view, such a change could be harmless—or even beneficial. If France planted more vineyards to supply us with wine, they would need to import more wheat and barley to feed their own population. In effect, we’d be trading up—we’d get wine, and they’d need to buy our food. That’s a favorable position.
Even the French government recognizes this. They sometimes prohibit planting new vineyards, preferring to preserve farmland for crops. Their great military engineer, Vauban, often complained about the taxes and restrictions on southern wines entering northern provinces. He believed that, even with free internal trade, the balance would be maintained.
If free trade works between French provinces, why not between France and England? A few extra miles of ocean shouldn’t make a difference. If it does, it affects both sides equally.
Exceptions: Paper Credit and Public Hoarding
There are two cases—rare but real—where money can sink below or rise above its natural level in a nation. But even these fit the general theory when examined closely.
The first way to depress the level of money is through the widespread use of paper credit—banknotes, credit instruments, or government-backed IOUs that circulate like cash. These substitutes for specie (gold and silver) effectively raise prices, make goods and labor more expensive, and drive out precious metals.
This seems like a good thing at first glance. If every person had twice as much money, wouldn’t everyone be richer? Not really. Prices would simply double. You’d be no better off. The illusion comes from confusing individual wealth with aggregate money supply. More money doesn’t equal more value.
Paper credit is useless in foreign trade—it isn’t accepted abroad. So we get all the inflationary downsides of increased money supply without gaining more leverage in international commerce.
Imagine our total circulating capital is £30 million—£18 million in real coin, £12 million in paper. If we had no paper credit, we might have drawn in £12 million more in hard money from abroad. That would have strengthened our position in international trade. Instead, our reliance on paper blocks this influx. We’re “full” of money—on paper—but it’s not real, and it doesn’t serve us outside our borders.
We’re obsessed with printing banknotes and creating credit, as if gold and silver were burdens we want to avoid. Meanwhile, countries like France, with less paper credit, retain more bullion.
France, Credit, and Gold
Why does France have more bullion than England, despite having weaker trade networks? Because they lack a culture of paper credit. They have no banks like ours. Bills of exchange don’t circulate widely. Interest is legally restricted. As a result, people keep cash and silver plate in their homes. Their churches are full of gold and silver artifacts. With this kind of real money supply, prices for labor and food stay low. That gives them an edge in trade.
The same thing once happened in Genoa. People began replacing silver dishes with porcelain. The government stepped in and limited porcelain use to preserve their silver stockpile. In England, we tax silver plate, which may discourage its use and indirectly reduce our specie reserves.
In our colonies, before paper money, gold and silver circulated. After introducing paper currency, precious metals vanished. Remove the paper money, and the metal will return—because the colonies still have valuable goods to trade. People want money only to buy things. Where there are goods, money follows.
If Lycurgus had invented paper money instead of using iron as currency in ancient Sparta, he could have banned gold more effectively and discouraged foreign trade even further—since paper credit has even less value outside its place of origin.
Section 4: Hoarding: The Only Way to Artificially Raise Money Levels.
If paper credit is how a nation can depress its money level below natural equilibrium, then hoarding—stockpiling cash in a public treasury—is the only way to artificially raise it. But this also comes at a cost.
Think of it like this: if a large amount of money is gathered and locked away so it doesn’t circulate, then yes, the amount of money circulating in society drops. As a result, prices fall, exports become cheap, and foreign money flows in. Over time, the hoarded treasury grows even larger.
In theory, this process could continue indefinitely. A small city, like Geneva, could keep amassing money for generations and accumulate a vast treasure—far beyond what it “should” have. But reality doesn’t permit this. A small state with too much money becomes a target. A large state with a massive hoard will be tempted into wasteful wars or projects, squandering its treasure and destroying its economic base.
When money is raised above its natural level, the system eventually collapses. The pressure becomes too great. The “vessel bursts,” so to speak, and the excess money spills out, restoring the balance.
Case Study: Henry VII’s Massive Hoard
Most people can’t believe just how much money Henry VII of England stockpiled. Historians agree he left behind a treasury of £2.7 million—possibly 75% of all the coin in the country. The figure seems unbelievable to modern readers, and yet it’s consistently reported.
But what’s so hard to believe? He ruled for 20 years, was absolute in power, frugal, and suspicious. That he could gather this sum is entirely plausible. And what happened to the economy during that time? Prices fell. Exports became competitive. England attracted money from abroad. The hoarding might have helped Britain in trade, even if it made life harder domestically.
Athens: A Lesson in Ruined Treasure
Ancient Athens offers a dramatic example. In just fifty years, between the Persian and Peloponnesian wars, they accumulated more than 10,000 talents in their treasury—almost as much, in relative terms, as Henry VII. But they didn’t keep it. Once the money was spent—on ill-conceived military campaigns and foreign adventures—the economy collapsed. A generation later, a census showed that the total value of the state’s land, goods, and money had dropped to 6,000 talents.
What’s incredible is that the Athenians had the power to vote themselves this treasure at any time. Yet they left it untouched in hopes of future conquest. The irony? They destroyed themselves with the very hoard meant to empower them.
Macedon, Rome, and Modern Switzerland
Philip and Perseus of Macedon, who lived during an age with far less money in circulation than England under Henry VII, amassed even more in just thirty years. When the Roman general Paulus Aemilius captured Macedon, he brought £1.7 to £2.4 million back to Rome—and that wasn’t even the full sum. Much of it had been lost in Perseus’s failed defense and flight.
Switzerland gives a modern parallel. In the early 18th century, the canton of Berne had £1.8 million in reserves—six times what a state of its size “should” have. Yet no one traveling through that region found it impoverished. In fact, it was wealthier than many larger provinces in France or Germany.
The money didn’t hurt them. But again, this was an exception. Most hoarding results in waste or conquest. A state with a treasure it cannot defend will lose it. A state that spends its treasure recklessly will collapse from within.
The Ptolemies and the Limits of Frugality
Appian, the historian from Alexandria, reported that the Ptolemies had 740,000 talents stored away—nearly £200 million in modern terms. He said this came from official records. But we must doubt the number, not because Appian was dishonest, but because other rulers of the time, who were also frugal, couldn’t have allowed such hoarding. They would have taken steps to absorb some of it for themselves. In economics, extreme imbalances tend to correct.
Final Judgment: Trade Barriers Are a Fool’s Game
From everything above, we can now judge all the trade barriers, tariffs, and restrictions European nations have imposed—especially England. These were driven by a desire to hoard money, or by fear of losing specie. But these policies never achieve either goal.
What they do achieve is this: they damage trade, slow down industry, and rob both ourselves and our neighbors of the mutual benefits nature intended. Nature gave us different climates, soils, and talents so that we could exchange, not isolate.
Modern economic policy gets everything backwards. It embraces paper credit, which drives away real money. It rejects hoarding, which is the only way to accumulate money. And it adopts countless other regulations, all of which suppress industry and disrupt natural trade relationships.
That said, not all taxes on imports are harmful. Some are useful—not because they stop money from leaving, but because they serve a clear purpose. A tax on German linen might help British textile producers. A tax on French brandy might support our colonial rum industry. And taxes at ports are easy to collect—making them an efficient way to fund government.
But even here, we must be careful. Jonathan Swift said it best: in the arithmetic of customs, two and two don’t make four—they often make only one. If import taxes are too high, people stop buying. If wine duties were cut to a third, government revenue might actually increase, public health might improve, and no harm would be done to the “balance of trade.”
What About Countries That Have Lost Their Wealth?
Some will object: haven’t many once-rich countries become poor? Didn’t they lose their money?
Yes—but only because they lost their industry, their trade, or their people. Gold and silver follow productivity, not the other way around. When Lisbon and Amsterdam took over the East India trade, they also took the profits—and the money—that once flowed through Venice and Genoa.
If armies are stationed abroad, if governments move, or if a region’s revenues are owned by foreigners, money may drain away. But in time, if industry and people remain, it will return—through countless channels we cannot even track.
Flanders, for example, has absorbed immense amounts of money during many wars. But much of that money has now flowed back to the nations that sent it—following the path of commerce and productive labor.
For a thousand years, gold flowed into Rome from across Europe. Yet today, the Papal States are among the poorest regions in Italy. Why? Because they lack industry and trade.
Final Word
In the end, a government’s true responsibility is to support its people and their productive work. Its money, it can safely leave to the natural flow of trade and exchange. And if money must be watched at all, it should only be in the ways it affects industry and population—not in panic about gold slipping through its fingers.
// I don’t know why, but this next part don’t match the sections from previously (only 4 sections versus 7 sections). So be forgiven with the section numbers since they may not exactly match up with the modern version written by ChatGPT.
Commentary Annotation.
ChatGPT:
Excellent — here begins the Annotated Commentary on the modernized version of David Hume’s Of the Balance of Trade. This is a deep dive into the philosophical, historical, and economic layers of the text. I’ll follow the same structure as the modern rewrite, providing commentary section-by-section and highlighting:
- Conceptual frameworks
- Historical references and implications
- Economic theory connections
- Philosophical undercurrents
- Terms that may seem familiar today but meant something slightly different in Hume’s time
Let’s begin.
🔍 Annotated Commentary: Of the Balance of Trade
By David Hume – Commentary on Modern Rewrite
SECTION 1: Introduction — Misguided Trade Fears
“Countries unfamiliar with commerce…”
Hume critiques early, mercantilist economic thinking. Mercantilism assumed that the wealth of nations was based on their holdings of gold and silver (bullion). This led to bans on exporting both specie and certain goods.
Athens and the fig ban
This is a satirical example. Hume uses it to mock the idea of “protecting” national wealth through bans. The etymology of sycophant (from Greek “sukon” = fig + “phainein” = to show) supports his wit—it literally referred to someone who tattled on fig exporters. He’s illustrating how economic ignorance turns into legal absurdity.
Prohibition of grain exports in France
Still happening in Hume’s time. The belief: if you export food, you’ll cause famine at home. Hume flips the logic—restricting exports reduces farmer incentive to grow surplus food, increasing famine risk.
“Fear that all their gold and silver may be leaving them…”
This is the crux of Hume’s argument. He challenges the assumption that specie can drain out of a country and not come back. For him, industry and population are the anchors of wealth, not piles of coin.
SECTION 2: The Self-Correcting Nature of Trade and Money
Customs records and exchange rates are unreliable
Hume was ahead of his time in calling out poor data quality in economic policymaking. He’s emphasizing that complex international balances cannot be captured through imprecise ledgers.
Mr. Gee and fear-mongering statistics
Hume references Joshua Gee, a mercantilist pamphleteer who warned that Britain was hemorrhaging wealth. Hume critiques the rhetorical tactic of using ominous calculations without understanding dynamic flows.
Swift and the Irish gold drain
Swift’s satire becomes Hume’s evidence. The “impossible” money drain from Ireland to England would have wiped Ireland out in three years—yet money still circulates. Hume uses this to argue that gold doesn’t just vanish—it circulates based on trade, not directionless extraction.
Thought experiments: losing or gaining money overnight
These are proto-economic models. Hume’s imagination precedes modern equilibrium theory.
- If money vanishes, prices fall, exports rise → money returns.
- If money floods in, prices rise, exports fall → money drains out.
He’s effectively describing the Price-Specie Flow Mechanism, later named after him.
Water analogy
This is one of the most famous passages in the essay. The metaphor is physical but mapped onto economics:
“All water, wherever it communicates, remains always at a level.”
Just as gravity ensures water levels equalize, price and trade flows ensure monetary equilibrium. If one country is too rich, it loses competitiveness. If it’s too poor, it gains it.
SECTION 3: Internal Balances and Misguided Jealousy
Yorkshireman and regional paranoia
Hume shifts scales. If one county in Britain sends more tax to London than it receives, it might panic—but the system as a whole remains balanced. This anticipates what modern economists call fiscal federalism and the invisible hand of redistribution through price and wage equalization.
The Heptarchy and irrational trade controls
He speculates that had England remained seven separate kingdoms, each would have erected foolish trade barriers out of jealousy. He uses this counterfactual to argue for economic union and free trade.
Scotland-England union as proof
After the 1707 Act of Union, many feared economic disaster. Instead, Scotland prospered. Hume presents this as an empirical counter to protectionist alarmism.
SECTION 4: Europe, France, and China
Trade flows across Europe
Hume generalizes the province analogy to the continent. The variance in money between England, France, and Spain is no greater than between English counties.
France as an object of jealousy
This moves from economic to political psychology. Hume acknowledges English hostility toward France, but says it clouds economic judgment. For example, refusing to buy French wine out of nationalism leads to buying worse wine at higher cost elsewhere.
Mutual benefit of trade
Hume is invoking early comparative advantage: France makes wine, England grows grain. If France specializes in wine, it must import food. This is David Ricardo avant la lettre.
Vauban’s complaints
Vauban was a military engineer and social reformer who criticized France’s internal tariffs. Hume draws on his authority to support the idea that even within a nation, protectionism harms efficiency.
Trade with China and the effect of monopolies
China is the classic exception. Long distances and monopolistic control (British East India Company) interfere with equilibrium. Still, Hume argues, if money can’t reach China now, it will if barriers fall.
“Moral attraction” versus “physical attraction”
This is elegant. He reinterprets Newtonian language: human interest functions as an economic force just as gravity does in physics. This is an early application of naturalistic metaphors in political economy.
SECTION 5: Paper Credit, the Bank of England, and the Displacement of Specie
Paper credit depresses specie levels
This is a paradox: more liquidity = less gold. Hume’s logic is akin to Gresham’s Law (“bad money drives out good”). If paper circulates as money, people hoard gold and reduce its role in trade.
Critique of illusions about prosperity
Hume sees a fallacy in equating more money with more wealth. This is prescient. He anticipates nominal vs. real value distinctions. More paper means higher prices—not more output or wealth.
Comparison to France
France’s lack of banking paradoxically makes it richer in real coin. He notes that French homes and churches are stocked with silver—a reserve that gives them flexibility in war or crisis.
The Genoa case
Regulations banning porcelain were meant to keep silver circulating in Genoa. Hume sees wisdom in this seemingly odd law. He criticizes the English tax on silver plate as possibly counterproductive.
Colonial America and paper money
Before paper money, American colonies had hard currency. Paper drove it out. Remove the paper, and gold returns—if the colony still produces valuable goods. A basic point, but profound: money follows value, not the other way around.
Lycurgus and Spartan iron money
This is classic Humean irony. If ancient Sparta wanted to eliminate foreign trade, paper money would have worked even better than their infamous lumps of iron.
SECTION 6: Hoarding and the Dangers of Public Treasuries
Only hoarding can artificially raise money levels
If specie is removed from circulation (e.g., stored in a vault), prices fall, and money flows in. But the system strains. Hume compares it to raising fluid above its natural level—a fragile condition prone to collapse.
Henry VII’s treasure
£2.7 million was an enormous sum. Hume challenges skepticism: of course a frugal monarch could gather it. The hoard may have helped England competitively by lowering prices and attracting gold—but it came at a social cost.
Athens and fiscal suicide
Athens stored 10,000 talents before the Peloponnesian War—roughly equivalent to several national GDPs. After reckless wars, the state’s total value dropped to 6,000 talents. Hume presents this as a morality tale about hoarding leading to hubris and ruin.
Geneva and Berne
Swiss cities like Berne did hoard successfully—but they were exceptions: neutral, small, stable. Hume admits the possibility but emphasizes it’s rare and precarious.
SECTION 7: Final Argument Against Protectionism
Trade barriers motivated by fear
Hume’s final attack is clear: tariffs built on fear of losing gold are not just wrong—they’re destructive. They isolate nations, damage industry, and violate what he sees as the natural interdependence designed by Providence (or, as he would say, by the “Author of the world”).
Modern economic policy gets everything backwards
He’s not against all taxes—but those based on superstition and jealousy do harm. Strategic, transparent imposts (like on German linen or brandy) can support domestic industries. But taxing wine out of national pride is economic folly.
Swift’s maxim
“In the arithmetic of the customs, two and two make not four, but often make only one.”
This is an early version of Laffer Curve reasoning: higher taxes can reduce total revenue by distorting behavior.
Decline of once-rich nations
Hume answers a major objection: yes, nations lose money—but only because they lose people, industry, and trade. Venice, Rome, and Genoa didn’t become poor because of money drains—they became moneyless because they stopped producing.
Flanders and Rome
Money spent on war in Flanders returned home through trade. Rome absorbed Europe’s gold for centuries, but its lack of commerce drained it all away. Hume anticipates capital flight and current account reversals here.
🔚 Final Reflection: The Meta-Argument
Hume’s essay is not just an argument about trade—it’s a philosophical challenge to fear-based governance. His tone is satirical, rationalist, and deeply empirical. He anticipates:
- Modern monetary theory
- Open economy macroeconomics
- Free trade liberalism
- Behavioral economics (e.g., how fear clouds judgment)
Most importantly, he recognizes that human psychology—jealousy, panic, national pride—drives bad policy. His antidote is reason, evidence, and trust in natural economic equilibrium.
Social Scholarly 