Hume's "Of Money"

On the long flight to China I tried to do as much sleeping as I could manage, but besides that I did some reading and one book that I was reading was Scott Sumner's The Money Illusion.  I confess I haven't gotten around to finishing that book yet, but it had so many references to a much shorter work that I did manage to go out and read that.  This was David Hume's Of Money, an essay that seems remarkably ahead of its time.

Economists these days basically all accept the neutrality of money, that how much money a country has doesn't matter in the long run since prices will eventually rise or fall to correspond to the amount of money.  Hume believed the same thing in contrast with the mercantilism common in his day.

[M]oney is nothing but the representation of labour and commodities, and serves only as a method of rating or estimating them. Where coin is in greater plenty; as a greater quantity of it is required to represent the same quantity of goods; it can have no effect, either good or bad, taking a nation within itself

But of course economists will acknowledge that changes in the supply of money don't change the price level instantly.

[T]he high price of commodities be a necessary consequence of the encrease of gold and silver, yet it follows not immediately upon that encrease; but some time is required before the money circulates through the whole state, and makes its effect be felt on all ranks of people. At first, no alteration is perceived; by degrees the price rises, first of one commodity, then of another; till the whole at last reaches a just proportion with the new quantity of specie which is in the kingdom...

Increases in the supply of money stimulate the economy.

 The farmer and gardener, finding, that all their commodities are taken off, apply themselves with alacrity to the raising more; and at the same time can afford to take better and more cloths from their tradesmen, whose price is the same as formerly, and their industry only whetted by so much new gain.

While decreases can cause depressions.

The farmer cannot dispose of his corn and cattle; though he must pay the same rent to his landlord.

And having a cheaper currency can help poor countries compete in manufacturing 

And as to foreign trade, it appears, that great plenty of money is rather disadvantageous, by raising the price of every kind of labour.

Where one nation has gotten the start of another in trade, it is very difficult for the latter to regain the ground it has lost; because of the superior industry and skill of the former, and the greater stocks, of which its merchants are possessed, and which enable them to trade on so much smaller profits. But these advantages are compensated, in some measure, by the low price of labour in every nation which has not an extensive commerce, and does not much abound in gold and silver. Manufactures, therefore, gradually shift their places, leaving those countries and provinces which they have already enriched, and flying to others, whither they are allured by the cheapness of provisions and labour; till they have enriched these also, and are again banished by the same causes.

We usually think of David Hume as a philosopher and his friend Adam Smith as an economist.  But Adam Smith was also a good philosopher based on his Theory of Moral Sentiments and Hume was a good economist as well.  While Adam Smith was writing about what we would now call microeconomics Hume was working on macroeconomics.  In many way economics has advanced much more in micro than macro.  We can point to a lot of things Adam Smith didn't know a quarter millennium ago but less so with Hume.  As Friedman said in 1975:

As I see it, we have advanced beyond Hume in two respects only; first, we now have a more secure grasp of the quantitative magnitudes involved; second, we have gone one derivative beyond Hume.