The Online Library of Liberty

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• Introduction, By Henry Higgs
• Previous Editions, By Henry Higgs
• Essay On the Nature of Trade In General
• Part One
• Part I, Chapter I: Of Wealth
• Part I, Chapter II: Of Human Societies
• Part I, Chapter III: Of Villages
• Part I, Chapter IV: Of Market Towns
• Part I, Chapter V: Of Cities
• Part I, Chapter VI: Of Capital Cities
• Part I, Chapter VII: The Labour of the Husbandman Is of Less Value Than That of the Handicrafts-man
• Part I, Chapter VIII: Some Handicrafts-men Earn More, Others Less, According to the Different Cases and Circumstances
• Part I, Chapter IX: The Number of Labourers, Handicraftsmen and Others, Who Work In a State Is Naturally Proportioned to the Demand For Them
• Part I, Chapter X: The Price and Intrinsic Value of a Thing In General Is the Measure of the Land and Labour Which Enter Into Its Production
• Part I, Chapter XI: Of the Par Or Relation Between the Value of Land and Labour
• Part I, Chapter XII: All Classes and Individuals In a State Subsist Or Are Enriched At the Expense of the Proprietors of Land
• Part I, Chapter XIII: The Circulation and Exchange of Goods and Merchandise As Well As Their Production Are Carried On In Europe By Undertakers, and At a Risk
• Part I, Chapter XIV: The Fancies, the Fashions, and the Modes of Living of the Prince, and Especially of the Landowners, Determine the Use to Which Land Is Put In a State and Cause the Variations In the Market-prices of All Things
• Part I, Chapter XV: The Increase and Decrease of the Number of People In a State Chiefly Depend On the Taste, the Fashions, and the Modes of Living of the Proprietors of Land
• Part I, Chapter XVI: The More Labour There Is In a State the More Naturally Rich the State Is Esteemed
• Part I, Chapter XVII: Of Metals and Money, and Especially of Gold and Silver
• Part Two
• Part Ii, Chapter I: Of Barter
• Part Ii, Chapter II: Of Market Prices
• Part Ii, Chapter III: Of the Circulation of Money
• Part Ii, Chapter IV: Of Further Reflection On the Rapidity Or Slowness of the Circulation of Money In Exchange
• Part Ii, Chapter V: Of the Inequality of the Circulation of Hard Money In a State
• Part Ii, Chapter VI: Of the Increase and Decrease In the Quantity of Hard Money In a State
• Part Ii, Chapter VII: Continuation of the Same Subject
• Part Ii, Chapter VIII: Further Reflection On the Same Subject
• Part Ii, Chapter IX: Of the Interest of Money and Its Causes
• Part Ii, Chapter X: Of the Causes of the Increase and Decrease of the Interest of Money In a State
• Part Three
• Part Iii, Chapter I: Of Foreign Trade
• Part Iii, Chapter II: Of the Exchanges and Their Nature
• Part Iii, Chapter III: Further Explanations of the Nature of the Exchanges
• Part Iii, Chapter IV: Of the Variations In the Proportion of Values With Regard to the Metals Which Serve As Money
• Part Iii, Chapter V: Of the Augmentation and Diminution of Coin In Denomination
• Part Iii, Chapter VI: Of Banks and Their Credit
• Part Iii, Chapter VII: Further Explanations and Enquiries As to the Utility of a National Bank
• Part Iii, Chapter VIII: Of the Refinements of Credit of General Banks
• Richard Cantillon and the Nationality of Political Economy, By W. Stanley Jevons
• Life and Work of Richard Cantillon, By Henry Higgs
• Appendix a
• Appendix B: Bibliography

Part III, Chapter V

Of the augmentation and diminution of coin in denomination

According to the principles we have established the quantity of money circulating in exchange fixes and determines the price of everything in a State taking into account the rapidity or sluggishness of circulation.

We often see however in the increases and decreases practised in France such strange variations that it might be supposed that market prices correspond rather to the nominal value of coin than to its quantity in exchange, the quantity of livres tournois in money of account rather than the quantity of marks and ounces, which seems directly opposed to our principles.

Suppose, as happened in 1714, the ounce of silver or écu is current for 5 livres and the King publishes an Arrêt which orders the lowering of the écu every month for 20 months, viz. 1 per cent. per month to reduce its nominal value to 4 livres instead of 5. Let us see will be naturally the consequences of this having regard to the spirit of the Nation.

All those who owe money will make haste to pay it during the diminutions so as not to lose by them. Undertakers and Merchants find it easy to borrow money, which decides the least able and the least accredited to increase their enterprise. They borrow money, as they fancy, without interest and load themselves with merchandise at current prices. They even raise prices by the violence of their demands. Vendors have difficulty in getting rid of their merchandise for money which must diminish in their hands in nominal value. They turn towards foreign merchandise and import considerable quantities of it for the consumption of several years. All this causes money to circulate more rapidly and raises the price of everything. Then high prices prevent the foreigner from taking merchandise from France as usual. France keeps her own merchandise and at the same time imports great quantities. This double operation is the reason why considerable amounts of specie must be sent abroad to pay the balance.

The rate of exchange never fails to shew this disadvantage. Exchange is commonly seen at 6 and 10 per cent. against France during these diminutions. Enlightened people in France hoard their money in these times. The King finds means to borrow much money on which he willingly loses the diminution, proposing to compensate himself by an augmentation at the end of the diminution.

With this object after several diminutions they begin to hoard money in the King's Treasury, to postpone the payments, pensions, and army pay. In these circumstances money becomes extremely rare at the end of the diminutions both by reason of the sums hoarded by the King and various individuals and by reason of the nominal value of the coin, which value is diminished. The amounts sent abroad also contribute greatly to the scarcity of money, and this scarcity gradually brings it about that the merchandise with which the Undertakers are loaded up is offered at 50 or 60 per cent. below the prices prevailing at the time of the first diminutions. Circulation falls into convulsions. Hardly enough money can be found to send to market. Many Undertakers and Merchants go bankrupt and their merchandise is sold at bargain prices.

Then the King augments anew the coinage, settles the new écu or ounce of silver of the new issue at 5 livres, begins with this new coinage to pay the troops and the pensions. The old coinage is demonetised and received at the Mint at a lower nominal value. The King profits by the difference.

But all the sums of new coinage which come from the Mint do not restore the abundance of money in circulation. The amounts kept hoarded by individuals and those sent abroad greatly exceed the nominal increase on the coinage which comes from the Mint.

The cheapness of merchandise in France begins to draw thither the money of the foreigner, who finding it 50 or 60 or more per cent. cheaper sends gold and silver metal to France to buy it. In this way the foreigner who sends his bullion to the Mint recoups himself easily from the tax paid there on this bullion. He finds the double advantage of the low price of the merchandise he buys, and the loss of the Mint charge falls really on the French in the sale of their merchandise to the foreigner. They have merchandise enough for several years' consumption. They resell to the Dutch, for example, the spices which they bought of them for two thirds of what they paid. All this takes place gradually, the foreigner decides to buy these merchandises from France only because of their cheapness. The balance of trade, which was against France at the time of the diminutions turns in her favour at the time of augmentation, and the King is able to profit by 20 per cent. or more on all the bullion brought into France and taken to the Mint. As Foreigners now owe a trade balance to France and have not in their country coins of the new issue they must take their bullion and coins of the old issue to the Mint to obtain new coins for payment. But this trade balance which Foreigners owe to France arises only from the merchandise which they import from it at low prices.

France is all round the dupe of these operations. She pays very high prices for foreign goods during the diminutions, sells them back at very low prices at the time of the augmentation to the same foreigners, sells her own merchandise at low prices which she had kept so high during the diminutions and so it would be difficult for all the money which left France during the diminutions to come back during the augmentation.

If coins of the new issue are counterfeited abroad, as is nearly always the case, France loses the 20 per cent. which the King has established as the Mint charge. This is so much gained for the Foreigner who profits further by the low prices of merchandise in France.

The King makes a considerable profit by the Mint tax, but it costs France three times as much to enable him to make this profit.

It is well understood that when there is a current balance of trade in favour of France against the foreigner the King is able to raise a tax of 20 per cent. or more by a new coinage and an increase in the nominal value of coins. But if the trade balance was against France at the time of this new coinage and augmentation the operation would have no success and the King would not derive a great profit from it. The reason is that in this case it is necessary to send money continually abroad. But the old écu is as good in foreign countries as the new. That being so the Jews and Bankers will give a premium or bonus in secret for the old coins and the individual who can sell them above the Mint price will not take them thither. At the Mint they give him only about 4 livres for his écu, but the Banker will give him at first 4 livres 5 sols, and then 4 livres 10, and at last 4 livres 15. And this is how it may happen that an augmentation of the coinage may lack success. It can hardly happen when the raising is made after the lowerings indicated, because then the balance naturally turns in favour of France, as we have explained.

The experience of the augmentation of 1726 may serve to confirm all this. The diminutions which had preceded this augmentation were made suddenly without warning, which prevented the ordinary operations of diminutions. This prevented the trade balance from turning strongly in favour of France at the augmentation of 1726, few people took their old coin to the Mint, and the profit of the Mint tax which was in view had to be abandoned.

It is not within my subject to explain the reasons of Ministers for lowering the coinage suddenly nor the reasons which deceived them in their project of the augmentation of 1726. I have mentioned the increases and decreases in France only because their results seem sometimes to clash with the principles I have established that abundance or scarcity of money in a State raises or lowers all prices proportionably.

After explaining the effects of lowering and raising the coinage, as practised in France, I maintain that they neither destroy nor weaken my principles, for if I am told that what cost 20 livres or 5 ounces of silver before the lowering referred to does not even cost 4 ounces or 20 livres of the new money after the augmentation, I will assent to this without departing from my principles, because there is less money in circulation than there was before the diminutions, as I have explained. The difficulties of exchange in the times and operations of which we speak cause variations in the prices of things and in that of the interest of money which cannot be taken as a rule in the ordinary principles of circulation and dealing.

The change in the nominal value of money has at all times been the effect of some disaster or scarcity in the State, or of the ambition of some Prince or individual. In the year A.U.C. 157 Solon increased the nominal value of the drachma of Athens after a sedition and abolition of debt. Between A.U.C. 490 and 512 the Roman Republic several times increased the nominal value of its copper coins, so that their as came to be worth six. The pretext was to provide for the needs of the State and to pay the debts incurred in the first Punic War. This did not fail to cause great confusion. In 663 Livius Drusus, Tribune of the people, increased the nominal value of silver coins by one eighth, lowering their fineness by that amount, and this gave occasion to introduce confusion into exchange. In A.U.C. 712 Mark Antony in his Triumvirate increased the nominal value of silver by 5 per cent., mixing iron with the silver, to meet the needs of the Triumvirate. Many Emperors subsequently debased or increased the nominal value of the coinage. The Kings of France at different times have done likewise. This is why the livre tournois, which was worth a pound weight of silver has sunk to so little value. These proceedings have never failed to cause disorder in States. It matters little or nothing what is the nominal value of coins provided it be permanent. The pistole of Spain is worth 9 livres or florins in Holland, about 18 livres in France, 37 livres 10 sols at Venice, 50 livres at Parma. In the same proportion values are exchanged between these different countries. The price of everything increases gradually when the nominal valne of coins increases, and the actual quantity in weight and fineness of the coins, taking into account the rapidity of circulation, is the base and regulator of values. A State neither gains nor loses by the raising or lowering of these coins so long as it keeps the same quantity of them, though individuals may gain or lose by the variation according to their engagements. All people are full of false prejudice and false ideas as to the nominal value of their coinage. We have shewn in the Chapter on Exchanges that the invariable rule of them is the price and fineness of the current coins of different countries, marc for marc and ounce for ounce. If a raising or lowering of the nominal value changes this rule for a time in France it is only during a crisis and difficulty in trade. A return is always made little by little to intrinsic value, to which prices are necessarily brought both in the market and in the foreign exchanges.