Front Page Titles (by Subject) Part II, Chapter III: Of the Circulation of Money - Essai sur la Nature du Commerce en Général
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Part II, Chapter III: Of the Circulation of Money - Richard Cantillon, Essai sur la Nature du Commerce en Général 
Essai sur la Nature du Commerce en General, edited with an English translation and other material by Henry Higgs, C.B. Reissued for The Royal Economic Society by Frank Cass and Co., LTD., London. 1959.
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Part II, Chapter III
Of the Circulation of Money
It is the general opinion in England that a Farmer must make three Rents. (1) The principal and true Rent which he pays to the Proprietor, supposed equal in value to the produce of one third of his Farm, a second Rent for his maintenance and that of the Men and Horses he employs to cultivate the Farm, and a third which ought to remain with him to make his undertaking profitable.
The same idea obtains generally in the other Countries of Europe, though in some, like the Milanese State, the Farmer gives the Landlord half the produce instead of a third, and many Landlords in all Countries try to let their Farms at the highest Rent they can; but when this is above a third of the Produce the Farmers are generally very poor. I doubt not that the Chinese Landowner extracts from his Farmer more than three fourths of the Produce.
However when a Farmer has some capital to carry on the management of his Farm the Proprietor who lets him the Farm for a third of the Produce will be sure of payment and will be better off by such a bargain than if he let his Land at a higher rate to a beggarly Farmer at the risk of losing all his Rent. The larger the Farm the better off the Farmer will be. This is seen in England where the Farmers are generally more prosperous than in other Countries where the Farms are small.
The assumption I shall make in this enquiry as to the circulation of money is that Farmers earn three Rents and spend the third Rent on living more comfortably instead of saving it. It is in fact the case with the greatest number of Farmers in all Countries.
All the Produce of the Country comes directly or indirectly from the hands of the Farmers as well as all the materials from which commodities are made. It is the Land which produces everything but Fish, and even then the Fishermen who catch the Fish must be maintained on the Produce of the Land.
The three Rents of the Farmer must therefore be considered as the principal sources or so to speak the mainspring of circulation in the State. The first Rent must be paid to the Landowner in ready money: for the second and third Rents ready money is needed for the Iron, Tin, Copper, Salt, Sugar, Cloth and generally all the merchandise of the City consumed in the Country; but all that hardly exceeds the sixth part of the total or three Rents. As for the Food and Drink of the Country folk ready money is not necessary to obtain it.
The Farmer may brew his Beer or make his Wine without spending cash, he can make his Bread, kill the Oxen, Sheep, Pigs, etc. that are eaten in the country: he can pay in Corn, Meat and Drink most of his Assistants—not only Labourers but country Artisans, valuing the Produce at the prices of the nearest Markets and Labour at the ordinary price of the Locality.
The things necessary to Life are Food, Cloaths, and Lodging. There is no need of cash to obtain Food in the country, as I have just explained. If coarse Linen and Cloths are made there, if Houses are built there, as is often done, the Labour for all this may be paid in barter by valuation without cash being needed.
The only cash needed in the Country is that for the principal Rent of the Landlord and for the Manufactures which the Country necessarily draws from the City, such as Knives, Scissors, Pins, Needles, Cloaths for some Farmers or other well-to-do People, the kitchen utensils, plates, and generally all that is got from the City. I have already observed that it is reckoned that half the Inhabitants of a State live in the cities, and consequently the citizens spend more than half the Produce of the Land. Cash is therefore necessary, not only for the Rent of the Landlord, corresponding to one third of the Produce, but also for the City merchandise consumed in the Country, which may amount to something more than one sixth of the produce of the soil. But one third and one sixth amount to half the produce. The cash circulating in the Country must therefore be equal to at least one half the produce of the land, by which means the other half or somewhat less may be consumed in the Country without need of cash.
The circulation of this money takes place when the Landlords spend in detail in the City the rents which the Farmers have paid them in lump sums, and when the Undertakers of the Cities, Butchers, Bakers, Brewers, etc. collect little by little this same money to buy from the Farmers in lump sums Cattle, Wheat, Barley, etc. In this way all the large sums of money are distributed in small amounts, and all the small amounts are then collected to make payments in large amounts, directly or indirectly, to the Farmers, and this money large or small always passes in return for services.
When I stated that for the Country circulation there is needed a quantity of Money often equal in Value to half the Produce of the Land, this is the minimum; and in order that the Country circulation should be easily conducted I will suppose that the ready cash which conducts the circulation of the three rents, is equal in value to two of these rents, or two thirds of the Produce of the Land. It will be seen later that this supposition is not far from the truth.
Let us now imagine that the money which conducts the whole circulation of a little State is equal to 10,000 ounces of silver, and that all the payments made with this money, Country to City, and City to Country, are made once a year; and that these 10,000 ounces of silver are equal in value to two of the Rents of the Farmers or two thirds of the Produce of the Land. The Rents of the Landlords will correspond to 5000 ounces, and the whole circulation of the remaining silver between the Country people and the Citizens, made by annual payments, will correspond also to 5000 ounces.
But if the Landlords stipulate with their Farmers for half yearly instead of yearly payments, and if the Debtors of the two other Rents also make their payments every six months, this will alter the rapidity of circulation: and whereas 10,000 ounces were needed to make the annual payments, only 5000 will now be required, since 5000 ounces paid twice over will have the same effect as 10,000 ounces paid once.
Further if the Landlords stipulate with their Farmers for quarterly payments, or if they are satisfied to receive their Rents from the Farmers according as the four Seasons of the year enable them to sell their Produce, and if all other payments are made quarterly, only 2500 ounces will be needed for the same circulation which would have been conducted by 10,000 ounces paid once a year. Therefore, supposing all payments made quarterly in the little State in question, the proportion of the value of the money needed for the circulation is to the annual Produce of the soil (or the three Rents), as 2500 livres is to 15,000 livres, or as 1 to 6, so that the money would correspond to the sixth part of the annual produce.
But seeing that each branch of the circulation in the Cities is carried out by Undertakers, that the consumption of Food is met by daily, weekly or monthly payments, and that payment for the clothing purchased once or twice a year by Families is made at different times by different people; and whereas the expenditure on Drink is usually made daily, that on Small Beer, Coal, and a thousand other articles of consumption is very prompt, it would seem that the proportion we have established for quarterly payments would be too high and that the circulation of a land produce of 15,000 ounces of silver in value could be conducted with much less than 2500 ounces of silver in ready money.
As however the Farmers have to make large payments to the Landlords at least every quarter and the Taxes which the Prince or the State collects upon consumption are accumulated by the Collectors to make large payments to the Receivers-General, there must be enough ready cash in circulation to make these large payments without difficulty, without hindering the circulation of currency for the Food and Clothing of the people.
It will be seen from this that the proportion of the amount of money needed for circulation in a State is not incomprehensible, and that this amount may be greater or less in a State according to the mode of living and the rapidity of payments. But it is very difficult to lay down anything definite as regards this quantity in general, as the proportion may differ in different countries, and it is only conjectural when I say that "the real cash or money necessary to carry on the circulation and exchange in a State is about equal in value to one third of all the annual Rents of the proprietors of the said State."
Whether money be scarce or plenty in a State this proportion will not change much because where money is abundant Land is let at higher Rents, and where money is scarce at lower Rents. This will be found to be the case at all times. But it usually happens in States where money is scarcer that there is more Barter than in those where Money is plentiful, and circulation is more prompt and less sluggish than in those where Money is not so scarce. Thus it is always necessary in estimating the amount of money in circulation to take into account the rapidity of its circulation.
Supposing the money in circulation equal to the third of all the Rents of the Landowners and these Rents equal to the third of the annual Produce of the Land, it follows that "the money circulating in a State is equal in value to the ninth part of all the annual produce of the soil."
Sir Wm. Petty, in a Manuscript of 1685, supposes frequently that the money in circulation is equal to one tenth of the Produce of the Soil. He gives no reason. I suppose it is an opinion which he formed from experience and from his practical knowledge both of the money circulating in Ireland (a great part of the Land of which country he had measured as a Surveyor) and of the Produce which he estimated roughly from observation. I am not far removed from his conclusion to the Landlords' Rents (ordinarily paid in money and easily ascertainable by a uniform Land Tax) rather than to the Products of the Soil, the Prices of which vary daily in the Markets, and a large part of which is consumed without entering into the Market. In the next Chapter I shall give several reasons, supported by examples, to confirm my conclusion. I think it useful, even if not mathematically exact in each Country. It is enough if it is near the truth and if it prevents the governors of States from forming extravagant ideas of the amount of money in circulation. There is no branch of knowledge in which one is more subject to error than Statistics when they are left to imagination, and none more demonstrable when they are based upon detailed facts.
Some Cities and States which have no Land belonging to them subsist by exchanging their Labour or Manufactures for the Produce of the Land of others. Such are Hamburg, Dantzig, several other Cities of the Empire, and even part of Holland. In these States it seems more difficult to estimate the circulation. But if we could estimate the amount of foreign Land which furnishes their subsistence, the calculation would probably not differ from that I have made for the other States which live chiefly on their own produce and are the subject of this Essay.
As to the cash needed to carry on Foreign Trade it seems that no more is required than what is in circulation in the State when the Balance of Foreign Trade is equal, that is when the Products and Merchandise sent abroad are equal in value to those imported.
If France sends Cloth to Holland and receives from her Spices, of equal value, the Landowner who consumes these Spices pays the value of them to the Grocer, who pays the same amount to the Clothmaker, to whom it is due in Holland for the Cloth he has sent there. This is done by Bills of Exchange which will be explained later. These two money payments take place in France apart from the Rent of the Landowner, and no money leaves France on that account. All other Classes of Society who consume Dutch spices, similarly pay the Grocer, viz. those who live on the first Rent, that is the Landowners, pay from this Rent, and those who live on the other two Rents in Country or in City pay the Grocer directly or indirectly out of the money which conducts the circulation of these Rents. The Grocer again pays this money to the Manufacturer for his Bill upon Holland, and no increase of money is needed for circulation in the State because of Foreign Trade when the balance is equal. But if it is not equal, if more merchandise is sold to Holland than is bought back, or vice versa, money is needed for the surplus which Holland must send to France or France to Holland. This will increase or diminish the amount of money circulating in France.
It may even occur that when the balance with the Foreigner is equal to the Trade with him may retard the circulation of ready money and therefore require a greater quantity of money by reason of this commerce.
For example, if the French ladies who wear French stuffs wish to wear Dutch velvets, which are paid for by the Cloth sent to Holland, they will pay for these velvets to the Merchants who imported them from Holland, and these Merchants will pay the Manufacturers of Cloth. The money thus passes through more hands than if these Ladies took their money to the Manufacturers of Cloth and contented themselves with the fabrics of France. When the same money passes through the hands of several Undertakers the rapidity of circulation is slowed down. But it is difficult to make an exact estimate of this sort of delay which depends upon various circumstances. Thus, in our present example, if the Ladies pay the Merchant for the velvet today, and the Merchant pay the Manufacturer tomorrow for his Bill on Holland, if the Manufacturer pay the Wool Merchant the next day and this last pay the Farmer the day after, it is possible that the Farmer will keep the money in hand more than two months to make up the quarter's Rent which he must pay his Landlord. This money might in two months have circulated through the hands of a hundred Undertakers without locking up the circulating medium needed by the State.
After all, the principle Rent of the Landowner must be considered to be the most necessary and considerable branch of the Money in regard to circulation. If he lives in the City and the Farmer sells in the same City all his produce and buys there all the Merchandise necessary for Country use, the ready money may always remain in the City. The Farmer will sell there Produce exceeding half the output of his Farm; he will pay his Landlord in the same City the money value of one third of his Produce and the rest to Merchants or Undertakers for Merchandise to be consumed in the Country. Even here, however, as the Farmer sells his Produce for lump sums, which are subsequently distributed in retail purchases, and are again collected to serve for lump payments to the Farmers, the circulation has always the same effect (subject to its rapidity) as if the Farmer took to the Country the money received for his Produce and sent it back again to the City.
The Circulation consists always of this, that the large sums which the Farmer receives on the sale of his produce are split up in detail and then brought together again to make large payments. Whether this money go partly out of the City or remain there entirely it may be regarded as the circulating medium between City and Country. All the circulation takes place between the inhabitants of the State, and they are all fed and maintained in every way from the Produce of the Soil and raw materials of the Country.
It is true that the Wool, for example, which is brought from the Country, when made up into Cloth in the City is worth four times its former value. But this increase of Value, which is the price of the Labour of the workmen and Manufactures in the City, is exchanged for the Country produce which serves for their maintenance.