Adam Smith’s Digression on Silver: the centrepiece of the Wealth of Nations

I suggest that Adam Smith’s ‘Digression on Silver’ should be read as his most powerful argument against mercantilism in the Wealth of Nations. For mercantilists money is wealth, according to Smith, and an increase in the quantity of silver, and the associated reduction in its value, implies higher prices in terms of silver. On the basis of this connection, mercantilists advocate trade protections to increase prices and therefore, in their view, wealth. Smith argues that this account obscures two processes occurring at the same time: a change in institutions that allows wealth to grow and leads to real prices decreasing, and a simultaneous increase in the quantity of silver leading to an increase in nominal prices. Overall, according to Smith, the nominal increase would be larger than the real decrease in prices. Mercantilists focused on nominal prices, attributing a causal relation between the decrease in the value of silver and an increase in wealth. Smith shows that correlation is not causation in this case, merely the coincidence of two simultaneous and independent processes. The Digression on Silver leaves mercantilists with nothing: what seems to be, is not what is. Money may seem to be wealth, but it is not: the ability to consume is.