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16: Of the Circulation of Money - Étienne Bonnot, Abbé de Condillac, Commerce and Government Considered in their Mutual Relationship [1776]

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Commerce and Government Considered in their Mutual Relationship, translated by Shelagh Eltis, with an Introduction to His Life and Contribution to Economics by Shelagh Eltis and Walter Eltis (Indianapolis: Liberty Fund, 2008).

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Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


16

Of the Circulation of Money

Each year, at appointed times, farmers bring the entire price of their leases into the towns: each market day, they sell some produce, and so they carry back to their village, in small amounts, the sums they have paid the landowners.

In the course of the year, the merchant receives in individual sales the price of the goods he bought wholesale; and the artisan, who bought his raw materials wholesale, sells them retail, when he has worked on them. So it is that day by day sales reimburse in small sums the large sums which have been used for payments or purchases in gross; and, when this reimbursement has been made, people pay out or buy again with large sums to have themselves reimbursed by new retail sales.

Money is thus constantly moving around, to be collected later as into reservoirs, from which it spreads through a mass of small channels which bring it back into the first reservoirs; whence it spreads out again, and to which it returns again. This continual movement, which collects it to distribute it, and distributes it to gather it up again, is what we call circulation.

Do I need to point out that this circulation assumes that, at each movement the money makes, there is an exchange; and that when it moves without causing an exchange, there is no circulation? For example, the money which comes from taxes has gone through many hands before it reaches the Sovereign’s treasury. But that is not circulation, that is only transport, and often very costly transport. It is important that, through circulating, money changes itself in some way into all the goods which are needed to support life and strength in the body politic. Thus money from taxation only begins to circulate when the sovereign exchanges it for products or works.

All the money in commerce circulates from the reservoirs to the channels, and from the channels to the reservoirs. If any obstacle holds up this circulation, commerce languishes.

I say all the money in commerce, and I do not say all that is in the state. There is always a certain amount which does not circulate at all, for example what one puts aside to have a standby in case of misfortune or to improve one’s position someday: such also are the savings of misers, who cut back on their needs.

That money does not circulate at all at present. But it is not very important whether there is more or less in circulation; the main point is that it should circulate freely.

We have seen that money is only a measure of value because it possesses value itself; that if it is scarce, it has greater value; and that it has a smaller value if it is plentiful.

If there is twice the amount of money in commerce, we will give for a good two ounces of this metal instead of one; and if there is half the quantity of money, we will only give half an ounce instead of a whole ounce. In the first case, an owner who would put out his land to farm for fifty ounces, would let it for a hundred; and in the second he would let it for twenty-five. But with a hundred ounces he will only do what he did with fifty; just as with fifty he will only do what he did with twenty-five. So he would be deceiving himself if he thought himself richer in one of these cases than in the other. His income is always the same, whether the coin is smaller or greater. Whether one counts it at a hundred ounces, or fifty, or twenty-five, nothing is changed; since with these various ways of counting, one can only ever make the same consumption.

So one sees that it is fairly unimportant whether there is plenty of money, and that it would even be a good thing if there were less. Indeed commerce would be carried on more conveniently. Would it not be dreadfully awkward if silver were as common as iron.

All products come from cultivated land. So one can consider farmers as the first reservoirs of all the money that circulates.

They spread some on the lands for the expenses of cultivation, another part, at different times, is carried bit by bit to the towns, where the farmers buy worked materials which they cannot find in their villages. Finally, a last portion is carried to the towns, in large sums, for the payment of the leases.

The landowners therefore form other reservoirs, from which money spreads among the artisans who work for them; among the merchants from whom they buy, and among the farmers who come to the town to sell their foodstuffs.

The merchant, who plans to make bulk purchases, becomes in his turn a reservoir as he sells his goods; and it is the same with the artisan, who needs to build up a stock in order to be able to supply himself with raw materials.

I agree that the merchant and the artisan can buy on credit, to pay later at different dates. But whether they pay when they buy, or only pay later, they must necessarily keep back a proportion of what they sell each day, if they do not want to fail to meet their undertakings. They therefore have to accumulate.

It would be beneficial for the use of credit to become established, since then a merchant and an artisan, without money, could keep an inventory, the one of merchandise, the other of raw materials; and, consequently, a larger number of actively occupied men would join together in advancing trade. For that to happen good faith must bring confidence. This is especially what happens in republics which have, shall we say, habits of simplicity and frugality.

The merchant and the artisan can do nothing without money, or at least without credit. The same does not hold true of the farmers. If they need the one or the other for the goods they buy in the town, they do not have the same need in providing for the expenses of cultivation; because they can pay all the country-dwellers who work for them with the grain they harvest, with the drinks they make, with the animals they raise. Custom sets the wages they owe, and the foodstuffs they hand over are valued at the market’s prices.

So one spends no money in the country, or one spends little; and as one can only earn on the one side what someone spends on the other, it must be the case that those who work for the farmers earn little money, or earn none at all. Money thus circulates less in the countryside than elsewhere.

The consequence is, in the last analysis, that the towns form large reservoirs which money enters and from which it issues by a self-sustaining movement, or one which constantly renews itself.

Let us suppose that half our tribe lives in the town, where we have seen that the landowners consume more than they did in their villages, and where, in consequence, they will consume more than half the product of the land.

To settle our ideas, let us value the produce of all the land at two thousand ounces of silver. On this assumption, since the inhabitants of the town consume more than half of all products, they will need more than a thousand ounces of silver to buy everything necessary for their subsistence. I make the assumption that they need twelve hundred, and I say that if this sum is enough for them, it will be enough to support commerce throughout the tribe. That is, it will pass to the farmers to return to the landowners; and as this cycle will only finish to begin again, it will always be with the same quantity of money that exchanges are made in the town and in the country. From that fact one could speculate that the amount of money that commerce needs depends mainly on the amount of consumption in the towns; or that this amount of money is almost equal to the value of the products that the towns consume.

It is at least certain that it could not be equal in value to the product of all the lands. Indeed, although we have evaluated this product at two thousand ounces of silver, it would not be enough to give our tribe these two thousand ounces to give it a value in silver equal to the product of all its lands. Silver would lose all the more of its value as it became more available: the two thousand ounces would only be worth twelve hundred. So it is in vain that one would put a larger amount of silver into trade. Whatever this quantity was, it could only ever have a value roughly equal to the value of the products consumed in the towns.

Indeed, as the wealth of the countryside is in products, the wealth of the towns is in silver. Now, if in the towns, where we assume that at the end of each year consumption had been paid for with twelve hundred ounces, we suddenly spread out another eight hundred, it is clear that the silver will lose its value in proportion to its increased plentifulness. So people will pay twenty ounces, or near enough, for what they used to pay twelve; and consequently the two thousand will only have the value of twelve hundred, or near enough. I say near enough since these proportions do not fix themselves by exact, geometric calculations.

The amount of silver needed for trade must also vary according to circumstances.

Let us assume that the payment of leases and that of everything on credit takes place once a year; and that to liquidate them, the debtors need a thousand ounces of silver; there would have to be, in relation to these payments, a thousand ounces of silver in circulation.

But if these payments were made half-yearly, half this amount would be enough, because five hundred ounces, paid twice, equal a thousand paid once. One can see that if these payments were made in four equal terms, two hundred and fifty ounces would suffice.

To make the calculation easier I am omitting the small, daily disbursements which are made in ready money. But people will no doubt say that I am establishing nothing precise about the quantity of money in circulation.* I would reply that my sole purpose is to show that internal trade can be conducted, and it is, following the customs of countries, with less money in circulation as with more; and it is not otiose to comment on it, in these days when people imagine that a state is only rich in proportion as it has more money.

Often little money is needed in trade, and credit takes its place. Established in different countries, the traders or dealers send each other goods which command a higher price in the places to which they are carried, and in continuing to sell the goods they stock, each for his own account, they all sell for each other’s accounts the goods they have received. By this means they can make an extensive trade without requiring silver to circulate between them. Because in valuing the merchandise entrusted to them, according to the current price, they will only have to pay for whatever some have supplied beyond that; yet again one can meet obligations towards them by sending them other merchandise. So it is that the largest enterprises are often those where silver circulates in the least quantity.

But money is needed for daily expenses: it is needed to pay the wages of artisans who live by work from day to day. It is needed for the small merchants who only buy and sell retail and who need their capital to come back to them continuously.

It is in small channels that circulation takes place more perceptibly and more rapidly. But the faster it is, the more the same pieces of coin pass and pass again frequently through the same hands; and as, in such a case, one coin takes the place of many, it is clear that this smaller trade can carry on with a quantity of coin which gets less as the circulation speeds up. So, in small channels one needs little money because it circulates rapidly; and in large ones even less is needed, as often it hardly circulates at all.

We may conclude that it is impossible to say anything with confidence about the precise amount of money circulating which is, or which should be, in commerce. I might have put it far too high when I supposed it roughly equal to the value of the products which are consumed annually in the towns. Since at the beginning of January each citizen certainly does not have all the money he will need in the course of the year; but because, as he is spending it, he is earning it, one can appreciate that, at the year’s end, the same coins have come back many times into the towns, just as they left them a good many times.

The circulation of money would be very slow if one always had to change it at great expense in the distant places where one might need it. Therefore it would matter to be able to make it pass in some way over very great distances. This is what one achieves by means of exchange which we are going to deal with.

[* ] It is estimated that the money which circulates in the states of Europe is in general equal to at least half the product of the land, and at most to two-thirds, [R. Cantillon, Essai sur la nature du commerce en général (Paris, 1755), Book 2, Chapter 3]. I have drawn the basis of this chapter from this work, and several observations of which I have made use in other chapters. It is one of the best works I know on this subject: but I am far from knowing them all.