Essai Sur La Nature du Commerce en General (in English) by Richard Cantillon Pt 3
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Date: 0101-01-01T00:00:00+00:00

Essay on the Nature of Commerce in General Richard Cantillon

1755

Part Three

Chapter One

On Foreign Trade

When a state exchanges a small product of land for a larger in foreign trade, it seems to have the advantage; and if current money is more abundant there than abroad it will always exchange a smaller product of land for a greater.

When the state exchanges its labour for the produce of foreign land it seems to have the advantage, since its inhabitants are fed at the foreigner’s expense.

When a state exchanges its produce conjointly with its labour, for a larger produce of the foreigner conjointly with equal or greater labour, it seems again to have the advantage.

If the ladies of quality of Paris consume yearly Brussels lace to the value of 100,000 ounces of silver, a quarter of an acre of land in Brabant, which will grow 150 pounds weight of flax, to be made into fine lace in Brussels, will answer this value. This will require the yearly labour of about 2000 people in Brabant for the several parts of the work from the sowing of the flax to the final perfection of the lace. The lace merchant or undertaker at Brussels will advance the capital. He will directly or indirectly pay all the spinners and lace-women and the proportion of the labour of those who make their tools. All those who have taken part in the work will buy, directly or indirectly, their maintenance from the farmer in Brabant who pays in part the rent of his landlord. If in this economy the produce of the land attributed to these 2000 persons be put at 3 arpents per head as well for the maintenance of themselves as for that of their families who subsist in part upon it, there will be 6000
arpents of land in Brabant employed for the support of those who have worked on the lace, at the expense of the ladies of Paris who will pay for and wear the lace.

The ladies of Paris will pay the 100,000 ounces of silver, each according to the amount she has bought. All this silver must be sent to Brussels in specie, less only the cost of remittance, and the entrepreneur at Brussels must find in it not only payment of all his advances and the interest of the money which he has perhaps borrowed, but also a profit on his undertaking for the maintenance of his family. If the price which the ladies pay for the lace does not cover all the costs and profits there will be no encouragement for this manufacture, and the entrepreneurs will cease to carry it on or become bankrupt; but as we have supposed this manufacture is continued, it is necessary that all costs be covered by the prices paid by the ladies of Paris, and the 100,000 ounces of silver sent to Brussels if the people of Brabant take no commodity from France to compensate this debt.

The ladies of Paris will pay 100,000 ounces to him who sells and delivers to them the lace; he will pay them to the banker who will give him one or more bills of exchange on his Brussels corespondent. The banker will remit the money to the wine merchants in Champagne who have 100,000 ounces of silver at Brussels and who will give him their bills of exchange of the same value drawn upon him by his Brussels correspondent. Thus the 100,000 ounces paid for the Champagne wine at Brussels will balance the 100,000 ounces paid for the lace at Paris, and in this way the trouble of sending to Brussels the money received at Brussels will be avoided. This balance is effected by bills of exchange, the nature of which I will try to explain in the next chapter.

Meanwhile this example shows that the 100,000 ounces which the ladies of Paris pay for the lace, come into the hands of the merchants who send Champagne wine to Brussels; and that the 100,000 ounces which the consumers of the Champagne pay for this wine at Brussels fall into the hands of the entrepreneurs or lace merchants. The entrepreneurs on each side distribute this money to those whose labour they employ, either on the wines or on the lace.

It is clear from this that the ladies of Paris support and maintain all those who work on the lace in Brabant and cause money to circulate there, and equally that the consumers of Champagne wine at Brussels support and maintain in Champagne not only the vineyard keepers and others who take part in the production of the wine, the cartwrights, farriers, carters, etc.

who take part in the transport, and the horses engaged in it, but that they also pay the value of the produce of the land for the wine, and cause a circulation of money in Champagne.

Nevertheless this circulation or trade in Champagne, which makes so great a stir, which maintains the keeper of the vineyard, the farmer, the cartwright, the farrier, the carter, etc. and which pays precisely as well the rent of the owner of the vineyard as that of the owner of the pastures which serve to feed the carthorses, is in the present case a burdensome and unprofitable trade to France when considered by the effects that it produces.

If the muid of wine sells at Brussels for 60 ounces of silver and if we suppose one arpent of vine land produces 4 muids there must be sent to Brussels the produce of 4166˝ arpents of land to correspond to 100,000 ounces of silver, and about 2000
arpents of pasture and arable for the hay and oats consumed by the cart horses if they are solely employed on this work all the year round. And so there will be about 6000 arpents of land abstracted from the maintenance of Frenchmen, and that of the people of Brabant increased by over 4000 arpents of produce, since the Champagne wine which they drink saves more than 4000
arpents which they would probably use to produce beer for their drink if they did not drink wine. However the lace with which all that is paid for costs the people of Brabant only one quarter of an arpent of flax. Thus with one arpent of produce allied to their labour, the people of Brabant pay for more than 16,000
arpents to the French, their conjoined labour being less. They obtain an increase of subsistence and give only an article of luxury which brings no real advantage to France, since the lace is worn and consumed there and cannot then be exchanged for anything useful. Following the rule of intrinsic values, the land used in Champagne for the production of the wine, the maintenance of the vineyard keepers, the coopers, the cartwrights, farriers, carters, carthorses, etc., ought to be equal to the land used in Brabant for the production of the flax, the support of the spinners and lace makers, and all those who have taken part in the manufacture of this lace.

But if money is more abundant in circulation in Brabant than in Champagne land and labour will be dearer there and consequently, valuing in silver both sides, the French will lose still more considerably.

This is an example of a branch of trade which strengthens the foreigner, lessen the number of inhabitants of the state, and without causing any circulating money to leave it weakens the same state. I have chosen it to show more strikingly how one state may be the dupe of another in trade, and the method of judging the advantages and disadvantages of foreign trade.

It is by examining the results of each branch of commerce singly that foreign trade can be usefully regulated. It cannot be distinctly apprehended by abstract reasons. It will always be found by examining particular cases that the exportation of all manufactured articles is advantageous to the state, because in this case the foreigner always pays and supports workmen useful to the state: that the best returns or payments imported are specie, and in default of specie the produce of foreign land into which there enters the least labour. By these methods of trading states which have very little raw produce are often seen to support inhabitants in great numbers at the expense of foreigners, and large states maintain their inhabitants in greater ease and abundance.

But as great states have no need to increase the number of their inhabitants it is enough to make those who are in it live there on the raw produce of the state with more comfort and ease and to increase the strength of the state for its defence and security. To do so by foreign trade it is needful to encourage as much as possible the export of goods and manufactures of the state in exchange so far as may be for gold and silver in kind.

If by abundant harvest it happened that there was in the state much produce over and above the ordinary annual consumption it would be profitable to encourage the exportation of it in return for its value in gold and silver. These metals do not corrupt and disappear like the produce of the land, and with gold and silver one can always import into the state what is lacking there.

It would not however be profitable to put the state into the annual custom of sending abroad large quantities of its raw produce in return for foreign manufactures. It would be to weaken and diminish the inhabitants and the strength of the state at both ends.

But I have no intention of entering into detail as to the branches of trade which should be encouraged for the good of the state. Enough to say that it should always be endeavoured to import as much silver as possible.

The increase in the quantity of silver circulating in a state gives it great advantages in foreign trade so long as this abundance of money lasts. The state then exchanges a small quantity of produce and labour for greater. It raises its taxes more easily and finds no difficulty in obtaining money in case of public need.

It is true that the continued increase of money will at length by it abundance cause a dearness of land and labour in the state. The goods and manufactures will in the long run cost so much that the foreigner will gradually cease to buy them, and will accustom himself to get them cheaper elsewhere, and this will by imperceptible degrees ruin the work and manufactures of the state. The same cause which will raise the rents of landlords (which is the abundance of money) will draw them into the habit of importing many articles from foreign countries where they can be had cheap. Such are the natural consequences. The wealth acquired by a state through trade, labour and economy will plunge it gradually into luxury. States who rise by trade do not fail to sink afterwards. There are steps which might be, but are not, taken to arrest this decline. But it is always true that when the state is in actual possession of a balance of trade and abundant money it seems powerful, and it is so in reality so long as this abundance continues.

Infinite inductions might be added to justify these ideas of foreign trade and the advantages of abundant money. It is astonishing to observe the disproportion in the circulation of money in England and in China. The manufactures of the Indies, like silks and printed calicoes, muslins, etc. in spite of a sea voyage of 18 months, are at a very low price in England, which would pay for them with the thirtieth part of her articles and manufactures if the Indians would buy them. But they are not so foolish as to pay extravagant prices for our work while work is done better and infinitely cheaper in their own country. So they sell us their manufactures only for ready cash, which we carry to them annually to increase their wealth and diminish our own. The Indian manufactures consumed in Europe only diminish our money and the work of our own manufactures.

An American who sells beaver skins to a European is rightly astonished to learn that woollen hats are as serviceable as those made of beaver, and that all the difference, which causes so long a sea journey, is in the fancy of those who think beaver hats lighter and more agreeable to the eye and the touch. However as these beaver skins are ordinarily paid for to the American in articles of iron, steel, etc. and not in silver, it is a trade which is not injurious to Europe, especially since it supports workmen and particularly sailors, who in the needs of the state are very useful, whilst the trade with the manufactures of the East Indies carries off the money and diminishes the workmen of Europe.

It must be admitted that the East India trade is profitable to the Dutch Republic and that she makes the loss of it fall on the rest of Europe by selling the spices and manufactures in Germany, Italy, Spain and the New World, which return to her all the money which she sends to the Indies and much more. It is even useful to Holland to clothe her women and other folk with the manufactures of India rather than with English or French fabrics.

It suits the Dutch better to enrich the Indians than their neighbours who might profit by it to oppress them. Moreover they sell to the other peoples of Europe the cloths and small manufactures of their own raw produce much dearer than they sell the Indian manufactures at home where they are consumed.

England and France would be mistaken to imitate the Dutch in this respect. These kingdoms have at home the means of clothing their women with their own raw material, and though their fabrics are dearer than those of Indian manufacture they should prevent their people from wearing the foreign material. They ought not to permit the falling off of their own articles and manufactures nor become dependent on the foreigner, still less allow their money to be taken away for that purpose.

But as the Dutch find means to sell Indian merchandise in the other states of Europe, the English and French should do the same, whether to diminish the naval power of Holland or to increase their own, and above all to do without the aid of Holland in the branches of consumption which a bad habit has rendered necessary in these kingdoms. It is an evident disadvantage to allow the wearing of Indian fabrics in the kingdoms of Europe which have wherewith to clothe their people with their own products.

Just as it is disadvantageous to a state to encourage foreign manufactures so it is to encourage foreign navigation.

When a state sends abroad its articles and manufactures it derives the full advantage if it sends them in its own ships. It then maintains a good number of sailors who are as useful to the state as workmen. But if it leaves the carriage of them to foreign vessels it strengthens the foreign shipping and weakens its own.

Navigation is an essential point in foreign trade. In the whole of Europe the Dutch are those who build ships the cheapest.

Timber is floated down to them by river, and the proximity of the north supplies them at less expense with masts, wood, pitch, rope, etc. Their windmills for sawing wood facilitate the working of it. Also they navigate with smaller crews and their sailors live very cheaply. One of their windmills for sawing wood saves the labour of 80 men a day.

Owing to these advantages they would be the only sea carriers in Europe if cheapness only were followed. And if they had enough of their own raw material to form an extensive commerce they would doubtless have the most flourishing maritime service in Europe. But the greater number of their seamen does not suffice without the interior strength of the state, for the superiority of their naval power. They would never arm warships nor sailors if the state had large revenues to build the ships and pay the men: they would profit in everything from extended markets.

England, in order to prevent the Dutch from increasing at her expense their advantage on the sea by this cheapness, has forbidden any nation from bringing into England other merchandise than that of their own growth. In this way, the Dutch being unable to serve as carriers for England, the English have strengthened their own shipping. And though they sail at greater costs than the Dutch the wealth of their overseas cargoes renders these costs less considerable.

France and Spain are maritime states which have rich produce sent to the north, whence goods and merchandise are brought to them. It is not surprising that their shipping is inconsiderable in proportion to their produce and the extent of their seaboard, since they leave it to foreign vessels to bring them all they receive from the north and to take away from them the goods which the states of the north receive from them.

These states, France and Spain, do not take into account in their policy the consideration of trade in the way in which it would be advantageous. Most merchants in France and Spain who have to do with the foreigner are rather agents or clerks of foreign merchants than adventurers carrying on the trade on their own account.

It is true that the states of the north are, by their situation and the vicinity of countries which produce all that is needed for building ships, in a position to carry everything cheaper than France and Spain could do. But if these two kingdoms took steps to strengthen their shipping, this obstacle would not prevent them. England has long since partly shown them the example. They have at home and in their colonies all that is needed for the construction of ships, or at least it would not be difficult to get them produced there, and there is an infinity of methods that might be used to make such a policy successful if the legislature or the ministry would concur in it. My subject does not allow me in this essay to examine these methods in detail. I will limit myself to saying that in countries where trade does not regularly support a considerable number of ships and sailors it is almost impossible for the prince to maintain a flourishing navy without such expense as would be capable by itself of ruining the treasure of his state.

I will conclude than by observing that the trade most essential to a state for the increase or decrease of its power is foreign trade, that the home trade is not of equally great importance politically, that foreign trade is only half supported when no care is taken to increase and maintain large merchants who are natives of the country, ships, sailors, workmen and manufacturers, and above all that care must always be taken to maintain the balance against the foreigner.

Chapter II

Of the Exchanges and their Nature

Inside the city of Paris the carriage of money from one house to another usually costs 5 sols per bag of 1000 livres. If it were necessary to carry it from the Fauxbourg St. Antoine to the Invalides it would cost more than twice as much, and if there were not generally trustworthy porters of money it would cost still more. If there were often robbers on the road the money would be sent in large amounts, with an escort, at greater cost, and if some one charged himself with the transport at his own cost and risks he would require payment for it in proportion to these costs and risks. So it is that the expense of transport from Rouen to Paris and from Paris to Rouen amounts generally to 50 sols per bag of 1000 livres which in the language of the bankers is 1/4 percent. The bankers generally send the money in strong kegs which robbers can hardly carry off because of the iron and the weight, and as there are always mail coaches on this route the costs are not considerable on the large sums sent between these two places.

If the city of Chalons sur Marne every year pays the receiver of the King’s taxes, 10,000 ounces of silver on the one hand, and on the other the wine merchants of Chalons and its neighbourhood sell to Paris, through their agents, Champagne wine of the value of 10,000 ounces of silver, if the ounce of silver in France passes in trade for 5 livres, the total of the 10,000
ounces in question will be 50,000 livres both in Paris and in Chalons.

The Receiver of Taxes in this example has 50,000 livres to send to Paris, and the agents of the Chalons wine merchants have 50,000 livres to send to Chalons. This double transaction or transport may be avoided by a set off or as they are called bills of exchange, if the parties get together and arrange it.

Let the agents of the Chalons wine-merchants take (each his own part) the 50,000 livres to the cashier of the Tax Office at Paris. Let him give them one or more cheques or bills of exchange on the Receiver of Taxes at Chalons, payable to their order. Let them endorse or transfer their order to the Chalons wine merchants and these will obtain from the Receiver at Chalons the 50,000 livres. In this way the 50,000 livres at Paris will be paid to the Cashier of the Tax department at Paris and the 50,000
livres at Chalons will be paid to the wine merchants of that City, and by exchange or set off there will be saved the trouble of sending this money from one city to the other. Or else let the wine merchants at Cahlons,who have 50,000 livres at Paris, go and offer their bills of exchange to the Receiver of Taxes, who will endorse them to the cashier of the tax office at Paris who will collect the amount there, and let the Receiver at Chalons pay the merchants for their bills of exchange the 50,000 livres which he has at Chalons. Whichever way this set off is effected, whether the bills of exchange be drawn from Paris, as in this example ounce for ounce is paid, and 50,000 livres for 50,000 livres, the exchange is said to be at par.

The same method might be adopted between these wine merchants at Chalons and the agents of the nobility in Paris who have land in the Chalons district, and the wine merchants or other merchants at Chalons who have sent goods or merchandise to Paris and have money there and other merchants who have drawn merchandise from Paris and sold it at Chalons. If there is a large trade between these two cities bankers will set up at Paris and Chalons who will enter into relations with the interested parties on both sides and will be the agents or intermediaries for the payments which would have to be sent from one of these cities to the other. Now if all the wine and other goods and merchandise which have been sent from Chalons to Paris and have actually been sold there for ready money exceed in value the total receipts of the taxes at Chalons, and the rents which the nobility of Paris have in the Chalons district as well as the value of the goods and merchandise sent from Paris to Chalons and sold there for ready money, by 5000 ounces of silver or 25,000
livres it will be necessary for the banker in Paris to send there for ready money, by 5000 ounces of silver or 25,000 livres it will be necessary for the banker in Paris to send this amount to Chalons in money. This will be the excess or balance of trade between these two cities. It will, I say, be of necessity sent to Chalons in specie, and this operation will be carried out in the following way or in some similar fashion.

The agents or correspondents of the wine merchants of Chalons and of others who have sent goods or merchandise from Chalons to Paris have the money for these sales in hand at Paris.

They are ordered to remit it to Chalons. They are not accustomed to risk it by carriage, they will apply to the cashier to the Tax Office who will give them cheques or bills of exchange on the Receiver of Taxes at Chalons up to the amount which he has at Chalons, and generally at par. But as they need to send further sums to Chalons they will apply to the banker who will have at his disposal the rents of the Paris nobility who have lands in that district. This banker will furnish them, like the Cashier of the Tax Office, with bills of exchange on his correspondent at Chalons up to the amount of the funds which he has at his disposal at Chalons and had been ordered to bring to Paris. This set off will also be made at par, unless the banker tries to make some little profit out of it for his trouble, as well from the agents who apply to him to send their money to Chalons as from the nobility who have charged him with the transmission of their money from Chalons to Paris. If the banker has also at his disposal at Chalons the value of the merchandise sent thither from Paris and sold there for ready money he will also furnish letters of exchange for this value.

But in our case supposed the agents of the Chalons merchants have still in hand at Paris 25,000 livres which they are ordered to remit to Chalons above all the sums mentioned above. If they offer this money to the Cashier of the Tax Office he will reply that he has no more funds at Chalons, and cannot supply them with bills of exchange or cheques on that city. If they offer the money to the banker he will tell them that he has no more funds at Chalons and has no need to draw, but if they will pay him 3
per cent for exchange he will provide cheques. They will offer one or two per cent and at last 2˝, not being able to do better.

At this price the Banker will decide to give them bills of exchange, that is if they pay to him at Paris 2 livres 10 sols he will supply a bill of exchange for 100 livres on his Chalons correspondent, payable at 10 or 15 days, so as to put his correspondent in a position to make the payment of the 25,000
livres for which he draws upon him. At this rate of exchange he will send him the money by mail or carriage in specie, gold or, in default of gold, silver. He will pay 10 livres for each bag of 1000 livres, or in bank parlance 1 per cent. He will pay his Chalons correspondent as commission 5 livres per bag of 1000
livres or ˝ per cent, and will keep one per cent for his own profit. On this footing the exchange at Paris for Chalons is at 2˝ per cent above par, because one pays 2 livres 10 sols for each 100 livres as the commission on exchange.

It is somewhat in this way that the balance of trade is transported from one city to the other through bankers, and generally on a large scale. All those who bear the name of bankers are not accustomed to these transactions and many of them deal only in commissions and bank speculations. I will include among bankers only those who remit money. It is they who always fix the exchange, the charge for which follows the cost and risks of the carriage of specie in the different cases.

The charge of exchange between Paris and Chalons is rarely fixed at more than 2˝ or 3 per cent over or under par. But from Paris to Amsterdam the charge will amount to 5 or 6 per cent when specie has to be sent. The journey is longer, the risk is greater, more correspondents and commission agents are involved.

From India to England the charge for carriage will be 10 to 12
per cent. From London to Amsterdam it will hardly exceed 2 per cent in peace time.

In our present example it will be said that the exchange at Paris for Chalons will be 2˝ per cent above par, and at Chalons it will be said that the exchange for Paris is 2˝ per cent below par, because in these circumstances he who will give money at Chalons for a letter of exchange for Paris will give only 97
livres 10 sols to receive 100 livres at Paris. And it is evident that the City or Place where exchange is above par is in debt to that where it is below par so long as the exchange continues on this basis. Exchange at Paris is 2˝ per cent above par for Chalons only because Paris is indebted to Chalons and that the money for this debt must be carried from Paris to Chalons. This is why when exchange is commonly seen to be below par in one city as compared with another it may be concluded that this first city owes a balance of trade to the other, and that when the exchange at Madrid or Lisbon is above par for all other countries it shows that these two capitals must send specie to other countries.

In all places and cities which use the same money and the same gold and silver specie like Paris and Chalons sur Marne, London and Bristol, the charge for exchange is known and expressed by giving and taking so much per cent above or below par. When 98 livres are paid in one place to receive 100 livres in another it is said that exchange is about 2 per cent below par when 102 livres, are paid in one place to receive only 100 livres in another it is said that the exchange is exactly 2 per cent above par, when 100 livres are given in one place for 100 livres in another it is said that the exchange is at par. There is no difficulty or mystery in all this.

But when exchange is regulated between two cities or places where the money is quite different, where the coins are of different size, fineness, make, and names, the nature of exchange seems at first more difficult to explain, though at bottom this exchange differs from that between Paris and Chalons only in the jargon of bankers. At Paris one speaks of the Dutch exchange by reckoning the ecu of three livres against so many deniers de gros of Holland, but the parity of exchange between Paris and Amsterdam is always 100 ounces of gold or silver against 100
ounces of gold or silver of the same weight and fineness. 102
ounces paid at Paris to receive 100 ounces at Amsterdam always comes to 2 per cent above par. The banker who effects the remittance of the balance of trade must always know how to calculate parity. But in the language of foreign exchange the price of exchange at London with Amsterdam is made by giving a pound sterling in London to receive 35 Dutch escalins at the bank: with Paris in giving at London 30 deniers or pence sterling to receive at Paris one ecu or three livres tournois. These methods of speech do not say whether exchange is above or below par, but the banker who remits the balance of trade reckons it up well and knows how much foreign money he will receive for the money of his own country which he despatches.

Whether we fix the exchange at London for English silver in Muscovy roubles, in Mark Lubs of Hamburg, in Rixdollars of Germany, in Livres of Flanders, in Ducats of Venice, in Piastres of Genoa or Leghorn, in Millreis or Crusadoes of Portugal, in Pieces of Eight of Spain, or Pistoles, etc. the parity of exchange for all these countries will be always 100 ounces of gold or silver against 100 ounces; and if in the language of exchange it happens that one gives more or less than this parity, it comes to the same in effect as if exchange is said to be so much above or below par, and we shall always know whether or not England owes a balance to the place with which the exchange is settled just as in our example of Paris and Chalons.

Chapter 3

Further explanations of the nature of the Exchanges We have seen that the exchanges are regulated by the intrinsic value of specie, that is at par, and their variation arises from the costs and risks of transport from one place to another when the valance of trade has to be sent in specie.

Argument is unnecessary in a matter which we see in fact and practice. Bankers sometimes introduce refinements into this practice.

If England owes France 100,000 ounces of silver for the balance of trade, if France owes 100,000 ounces to Holland, and Holland 100,000 to England, all these three amounts may be set off by bills of exchange between the respective bankers of these three states without any need of sending silver on either side.

If Holland sends to England in January merchandise of the value of 100,000 ounces of silver and England only sends to Holland in the same month merchandise to the value of 50,000
ounces (I suppose the sale and payment made in January on both sides) there will be due to Holland in this month a balance of trade of 50,000 ounces, and the exchange on Amsterdam will be in London in January 2 or 3 per cent above par, or in the language of exchange, the exchange on Holland which was in December at par or at 35 escalins to the pound sterling in London will rise there in January to about 36 escalins. But when the Bankers have sent this balance of 50,000 ounces to Holland the exchange on Amsterdam will naturally fall back to par or 35 escalins in London.

But if an English banker foresees in January, owing to the sending into Holland of an unusual quantity of merchandise, that at the time of payments and sales in March Holland will be indebted considerably to England, he may instead of sending the 50,000 ecus or ounces due in January to Holland, furnish in that month bills of exchange on his Amsterdam correspondent payable at double usance or two months, the amount of the value to be paid on maturity, and by this method profit on the exchange which in January was above par and in March will be below par, and so gain doubly without sending a sol to Holland.

This is what bankers call speculation, which often causes variations in the exchanges for a short period independently of the balance of trade; but in the long run we must get back to this balance which fixes the constant and uniform rule of exchange. And though the speculations and credits of bankers may sometimes delay the transport of the sums which one city or state owes to another, in the end it is always necessary to pay the debt and send the balance of trade in specie to the place where it is due.

If England gains regularly a balance of trade with Portugal and always loses a balance with Holland the rates of exchange with Holland and Portugal will make this evident: it will be seen that at London the exchange on Lisbon is below par and that Portugal is indebted to England. It will be seen also that the exchange on Amsterdam is above par and that England is indebted to Holland. But the quantity of the debt cannot be seen from the exchanges. It will not be seen whether the balance of silver drawn from Portugal will be greater or less than what has to be sent to Holland.

There is however one thing which will always show at London whether England gains or loses the general balance of her trade (by general balance is understood the difference of the individual balances with all the foreign states which trade with England), and that is the price of gold and silver metal but especially of gold (now that the proportion between gold and silver in coined money differs from the market rate, as will be explained in the next chapter). If the price of gold metal in the London market, which is the centre of English trade, is lower than the price at the Tower where guineas or gold coins are minted, or at the same price as these coins intrinsically, and if gold metal is taken to the Tower in exchange for their value in guineas or minted coins, it is a certain proof that England is a gainer in the general balance of her trade. It proves that the gold taken from Portugal suffices not only to pay the balance which England sends into Holland, Sweden, Muscovy, and the other states where she is indebted, but that there remains some of the gold to be sent to the Mint, and the quantity or sum of this general balance of trade is known from that of the specie coined at the Tower of London.

But if the gold metal is sold in the London market above the Tower price, which is usually Ł3.18.0 an ounce, the metal will no longer be taken to the Mint, and this is a certain sign that so much gold is not drawn from abroad (from Portugal for instance) as must be sent into the other countries where England is indebted. It is a proof that the general balance of trade is against England. This would not be known but for the prohibition in England to send gold coin out of the country. But this prohibition is the reason why the timid London bankers prefer to buy gold metal (which they are allowed to send abroad) at Ł3.18.0
up to Ł4 an ounce for export rather than send out guineas or gold coins at Ł3.18.0 against the law and at the risk of confiscation.

Some of them take this risk, others melt the gold coins to send them out as bullion, and it is impossible to judge how much gold England loses when the general balance of trade is against her.

In France the cost of minting is deducted, usually 1˝ per cent, i.e. the price for coin is always higher than for uncoined metal. To know whether France loses in the general valance of her trade, it will suffice to know whether the bankers send French coins abroad. If they do so it is a proof that they do not find bullion to buy for export, since the bullion though at a lower price than coined money in France, is of greater value than these coins in foreign countries by at least 1˝ per cent.

Though the exchanges rarely vary apart from the balance of trade between one country and others, and though this balance is naturally the mere difference in value of the goods and merchandise which the state sends to other countries and receives from them, yet there are often circumstances and accidental causes which cause considerable sums to be conveyed from one state to another without any question of merchandise or trade, and these causes affect the exchanges just as the balance of trade would do.

Such are the sums of money which one state sends into another for its secret services and political aims, for subsidies to allies, for the upkeep of troops, Ambassadors, noblemen who travel, etc., capital which the inhabitants of one state send to another to invest in public or private funds, the interest which these inhabitants receive annually from such investments, etc.

The exchanges vary with all these accidental causes and follow the rule of the transport of silver required. In considering the balance of trade matters of this kind are not separated, and indeed it would be very difficult to separate them. They have very certainly an influence on the increase and decrease of circulating money in a state and on its comparative strength and power.

My subject does not allow me to enlarge on the effects of these accidental causes: I confine myself always to the simple views of commerce lest I should complicate my subject, which is too much encumbered by the multiplicity of the facts which relate to it.

Exchanges rise more or less above par in proportion to the great or small costs and risks of the transport of money and this being granted they naturally rise much more above par in the cities or states where it is forbidden to export money than in those where its export is free.

Suppose that Portugal consumes regularly every year considerable quantities of woollen and other manufactures of England, as well for its own people as for those of Brazil, that it pays for them partly in wine, oils, etc., but for the surplus payment there is a regular balance of trade remitted from Lisbon to London. If the King of Portugal rigorously prohibits under penalty not only of confiscation but of life the transport of any gold or silver metal out of his States, the terror of this prohibition will in the first place stop the Bankers from meddling about sending the balance. The price of the English manufactures will be kept in hand at Lisbon. The English merchants unable to receive their funds from Lisbon will send no more cloth thither. The result will be that cloth will become extraordinarily dear. Though their price has not gone up in England they cease to be sent to Lisbon because their value cannot be recovered. To have these cloths the Portuguese nobility and others who cannot do without them will offer twice the usual price, but as they cannot get enough of them without sending money out of Portugal, the increased price of cloth will become the profit of any one who in spite of the prohibition will export gold or silver. This will encourage various Jews and others to take gold and silver to English vessels in the port of Lisbon, even at the risk of their lives. They will gain at first 100 or 50 per cent in this traffic and this profit is paid by the Portuguese in the high price they give for the cloth. They will gradually familiarise themselves with this manoeuvre after having often practised it successfully, and at length money will be seen to be put on board English ships for a payment of 2 or 1 per cent.

The King of Portugal lays down the law or prohibition. His subjects, even his courtiers, pay the cost of the risk run to circumvent and elude it. No advantage then is gained by such a law, on the contrary it causes a real loss to Portugal since it causes more money of the state to go abroad than if there were no such law.

For those who gain by this manoeuvre, whether Jews or others, send their profits abroad, and when they have enough of them or when they take fright they often themselves follow their money.

If some of these lawbreakers were taken in the act, their goods confiscated and their lives forfeited, this circumstance and execution instead of stopping the export of money would only increase it, because those who formerly were satisfied with 1 or 2 per cent for exporting money will ask 20 or 50 per cent, and so the export must always go on to pay the balance.

I do not know whether I have succeeded in making these reasons clear to those who have no idea of trade. I know that for those who have practical knowledge of it nothing is easier to understand, and that they are rightly astonished that those who govern states and administer the finances of great kingdoms have so little knowledge of the nature of exchanges as to forbid the export of bullion and specie of gold and silver.

The only way to keep them in a state is so to conduct foreign trade that the balance is not adverse to the state.

Chapter 4

Of the variations in the proportion of values with regard to the metals which serve as money

If metals were as easily found as water commonly is everybody would take what he wanted of them and they would have hardly any value. The metals which are most plentiful and cost the least trouble to produce are also the cheapest. Iron seems the most necessary, but as it is commonly found in Europe with less trouble and labour than copper it is much cheaper.

Copper, silver, and gold are the three metals in general use for money. Copper mines are the most abundant and cost less in land and labour to work. The richest copper mines today are in Sweden. 80 ounces of copper are needed there to pay for an ounce of silver. It is also to be observed that the copper extracted from some mines is more perfect and lustrous than what is obtained from others. The copper of Japan and Sweden is brighter than that of England. That of Spain was, in the time of the Romans, better than that of Cyprus. But gold and silver, from whatever mine extracted, are always of the same perfection when refined.

The value of copper, as of everything else, is proportionable to the land and labour which enter into its production. Beside the ordinary uses to which it is put, like pots and pans, kitchen utensils, locks, etc. it is in nearly all states used as money in small purchases. In Sweden it is used even in large payments when silver is scarce there. During the first five centuries of Rome it was the only money. Silver only began to be employed in exchange in the year 484. The ratio of copper to silver was then rated in the mints at 72 to 1: in the coinage of 512 at 80 to 1: in 537, 64 to 1: in 586 at 48 to 1; in 663 by Drusus and 672 by Sulla at 53 to 1: in 712 by Marcus Antonius and 724 by Augustus 56 to 1: in AD 54 under Nero 60 to 1: in 160 AD under Antoninus 64 to 1; in the time of Constantine AD 330, 120 and 125 to 1: in the age of Justinian about AD 550 at 100 to 1. Since then it has always varied below the ratio of 100
to 1 in the European mints.

Today when copper money is only used in small dealings, whether alloyed with calamine to make yellow copper as in England, or with a small portion of silver as in France and Germany it is generally rated in the, proportion of 40 to 1, though the market price of copper is ordinarily to that of silver as 80 or 100 to 1. The reason is that the cost of coining is generally deducted from the weight of the copper. When there is not too much of this small money for effecting the petty exchanges in the state, coins of copper or copper and alloy pass without difficulty in spite of their defect in intrinsic value .

But when it is attempted to pass them in a foreign country they will only be taken at the weight of the copper and the silver alloy. Even in states where through the avarice or ignorance of the governors, currency is given to too great a quantity of this small cash for the transaction of small dealings, and it is ordered that it should be received up to a certain limit in large payments it is unwillingly accepted and small cash is at a discount in silver coin, as in the token money and Ardites in Spain in large, payments. Yet small coins always pass without difficulty in small purchases, the value of the payments being usually small in themselves the loss is still less. This is why they are accepted without difficulty, and that copper is exchanged for small silver coins above the weight and intrinsic value of copper in the state itself, but not in other states, each state having wherewith to carry on its small dealings with its own copper coins.

Gold and silver, like copper, have a value proportionable to the land and labour necessary for their production; and if the public assumes the cost of minting these metals their value in bars and in coin is identical, their market value and their mint value is the same, their value in the state and in foreign countries is always alike, depending on the weight and fineness, that is on weight alone if the metals are pure and without alloy.

Silver mines have always been found more abundant than those of gold, but not equally in all countries or at all times.

Several ounces of silver have always been needed to buy one ounce of gold, sometimes more sometimes less according to the abundance of these metals and the demand for them. In the year AUC 310, 13
ounces of silver were needed in Greece to buy an ounce of gold, i.e. gold was to silver as 1 to 13: AUC 400 or thereabouts 1 to 12, AUC 460 1 to 10 in Greece, Italy and the whole of Europe.

This ratio of 1 to 10 seems to have persisted for 3 centuries to the death of Augustus, AUC 767 or AD 14. Under Tiberius gold became scarce or silver more plentiful, and the ratio gradually rose to 1 to 12, 12˝, and 13. Under Constantine AD 330 and Justinian AD 550 it was 1 to 14. Later history is more obscure.

Some authors think it was 1 to 18 under certain French kings. In AD 840 under Charles the Bald gold and silver coins were struck at 1 to 12. Under St Louis, who died in 1270 the ratio was 1 to 10: in 1361, 1 to 12: in 1421 over 1 to 11: in 1500 under 1 to 12: about 1600, 1 to 12: in 1641, 1 to 14: in 1700, 1 to 15: in 1730, 1 to 14˝.

The quantity of gold and silver brought from Mexico and Peru in the last century has not only made these metals more plentiful but has increased the value of gold compared with silver which has been more abundant, so that in the Spanish mints, following the market prices, the ratio is fixed at 1 to 16. The other States of Europe have followed pretty closely the Spanish price in their Mints, some at 1 to 15, others at 15 7/8, 15 5/8, etc.

following the ideas and views of the Directors of the Mints. But since Portugal has drawn great quantities of gold from Brazil the ratio has commenced to fall again if no in the Mints at least in the markets, and this gives a greater value to silver than in the past. Moreover a good deal of gold is often brought from the East Indies in exchange for the silver taken thither from Europe, because the ratio is much lower in India.

In Japan where there are a good many silver mines the ratio of gold to silver is today 1 to 8: in China 1 to 10: in the other countries of the Indies on this side 1 to 11, 1 to 12, 1 to 13, and 1 to 14 as we get nearer to the West and to Europe. But if the mines of Brazil continue to supply so much gold the ratio may probably fall eventually to 1 to 10 even in Europe which seems to me the most natural if anything but chance is the guide to the ratio. It is quite certain that when all the gold and silver mines in Europe, Asia and Africa were the most exploited for the Roman republic the ratio of 1 to 10 was the most constant. If all the gold mines regularly produced a tenth part of what the silver mines produce, it could not be determined that for that reason the ratio between these two metals would be as 1 to 10. The ratio would always depend on the demand and on the market price.

Possibly rich people might prefer to carry gold money in their pockets rather than silver and might develope a taste for gildings and gold ornaments rather than silver, thus increasing the market price of gold.

Neither could the ratio between these metals be arrived at by considering the quantity of them found in a state. Suppose the ratio 1 to 10 in England and that the quantity of gold and silver in circulation there were 20 million ounces of silver and 2
million ounces of gold, that would be equal to 40 million ounces of silver, and suppose that 1 million ounces of gold be exported from England out of the 2 millions, and 10 million ounces of silver brought in in exchange, there would then be 30 million ounces in of silver and only 1 million ounces of gold, still equivalent in all to 40 million ounces of silver. If the quantity of ounces be considered there are 30 millions of silver and 1
million of gold, and therefore if the quantity of the two metals decided the ratio it would be as 1 to 30, but that is impossible.

The ratio in the neighbouring countries is 1 to 10, and it would therefore cost only 10 million ounces of silver with a trifle for the cost of carriage to bring back to the state 1 million ounces of gold in exchange for 10 million ounces of silver.

To judge then of the ratio between gold and silver the market price is alone decisive: the number of those who need one metal in exchange for the other, and of those who are willing to make such an exchange, determines the ratio. It often depends on the humour of men: the bargaining is done roughly and not geometrically. Still I do not think that one can imagine any rule but this to arrive at it. At least we know that in practice it is the one which decides, as in the price and value of everything else. Foreign markets affect the price of gold and silver more than they do the price of any other goods or merchandise because nothing is transported with greater ease and less injury. If there were a free and regular trade between England and Japan, if a number of ships were regularly employed in this trade and the balance of trade were in all respects equal, i.e. if as much merchandise were always sent from England to Japan, having regard to price and value, as was imported from Japan, it would end in drawing at last all the gold from Japan in exchange for silver, and the ratio between gold and silver in Japan would be made the same as it is in England, subject only to the risks of navigation; for in our hypothesis the costs of the voyage would be supported by the trade in merchandise.

Taking the ratio at 1 to 15 in England and 1 to 8 in Japan there would be more than 87 per cent to gain by carrying silver from England to Japan and bringing back gold. But this difference is not enough in the ordinary course to pay the costs of so long and difficult a voyage.

It pays better to bring back merchandise from Japan rather than gold in exchange for silver. It is only the costs and risks of the transport of gold and silver which can leave a difference in the ratio between these metals in different states: in the nearest state the ratio will differ very little, there will be a difference from one state to another of 1, 2 or 3 per cent and from England to Japan the total of all these differences of ratio will amount to more than 87 per cent.

It is the market price which decides the ratio of the value of gold to that of silver. The market price is the base of this proportion in the value assigned to coins of gold and silver. If the market price varies considerably, that of the coinage must be reformed to follow the market rate. If this be not done confusion and disorder set in in the circulation, and coins of one or the other metal will be taken above the Mint value. There are an infinity of examples of this in antiquity. There is a quite recent one in England under the regulations made at the London Mint. The ounce of silver, eleven twelfths fine, is worth there 5s 2d sterling. Since the ratio of gold to silver (which had been fixed at 1 to 16 in imitation of Spain) has fallen to 1 to 15 and 1 to 14˝, the ounce of silver sold at 5s 6d sterling, while the gold guinea continued to circulate at 2 1s 6d sterling, which caused the export from England of all the silver crowns, shillings and sixpences which were not worn by circulation, silver money became so scarce in 1728 (though only the most worn pieces remained) that people had to change a guinea at a loss of nearly 5 per cent. The trouble and confusion thus produced in trade and circulation obliged the Treasury to request the celebrated Sir Isaac Newton, Master, of the Tower Mint, to make a Report on the measures he thought most suitable to remedy this disorder.

There was nothing easier. It was only necessary to follow the market price of silver in coining silver at the Tower. And whereas the ratio of gold to silver was of old time by the laws and regulations of the Tower Mint 1 to 15ž, it was only necessary to make the silver coins lighter in the proportion of the market price which had fallen below 1 to 15; and, to anticipate the variation which the gold of Brazil brings about annually in the ratio between these two metals, it might even have been possible to fix it on the footing of 1 to 14˝, as was done in 1725 in France and as they will be forced later to do in England itself.

It is true that the coinage in England might equally have been adjusted to the market price and ratio by diminishing the nominal value of gold coins. This was the policy adopted by Sir Isaac Newton in his Report, and by Parliament in consequence of this Report. But, as I shall explain, it was the least natural and the most disadvantageous policy. Firstly it was more natural to raise the price of silver coins, because the public had already done so in the market, the ounce of silver which was worth only 62d sterling at the Mint being worth more than 65d in the market, and all the silver money being exported except what the circulation had considerably reduced in weight. On the other hand it was less disadvantageous to the English nation to raise the silver money than to lower the gold money considering the sums which England owes the foreigner.

If it is supposed that England owes the foreigner 5 millions sterling of capital, invested in the public funds, it may be equally supposed that the Foreigner paid this amount in gold at the rate of 21s 6d a guinea or in silver at 65d sterling the ounce, according to the market price.

These 5 millions have therefore cost the Foreigner at 21s 6d the guinea 4,651,163 guineas; but now that the guinea is reduced to 21s the capital to be repaid is 4,761,904 guineas, a loss to England of 110,741 guineas, without counting the loss on the interest annually paid.

Newton told me in answer to this objection that according to the fundamental laws of the Kingdom silver was the true and only monetary standard and that as such it could not be altered.

It is easy to answer that the public having altered this Law by custom and the price of the market it had ceased to be a law, that in these circumstances there was no need to adhere scrupulously to it to the detriment of the nation and to pay to foreigners more than their due. If the gold coins were not considered true money, gold would have supported the variation, as in Holland and China where gold is looked upon rather as merchandise than money. If the silver coins had been raised to their market price without touching gold there would have been no loss to the foreigner, and there would have been plenty of silver coins in circulation. They would have been coined at the Mint, whereas now no more will be coined until some new arrangement is made.

By reducing the value of gold (brought about by Newton’s Report from 21s 6d to 21s) the ounce of silver which was sold in the London market before at 65 pence and 65˝ pence no longer sold in truth but at 64d. But as it was coined at the Tower the ounce was valued in the market at 64d and if it was taken to the Tower to be coined it would be worth no more than 62d. So no more is taken. A few shillings or fifths of crowns have been struck at the expense of the South Sea Company, losing the difference of the market price; but they disappeared as soon as they were put into circulation. Today no silver coins can be seen in circulation if they are of full mint weight, only coins which are worn and do not exceed in weight the market price.

However the value of silver continues to rise imperceptibly in the market. The ounce which was worth only 64 after the reduction of which we have spoken has risen again to 65˝ and 66
in the market; and in order to have silver coin in circulation and coined at the Tower, it will be necessary again to reduce the value of the gold guinea from 21s to 20s and to lose to the foreigner double of what is lost already unless it is preferred to follow the natural course and to adjust silver coin to the market price. Only the market price can find the ratio of the value of gold and silver as of all other values. Newton’s reduction of the guinea to 21s was devised only to prevent the disappearance of the light and worn coins which remain in circulation, and not to fix in gold and silver coins the true ratio of their price, I mean by their true ratio that which is fixed by market prices. This price is always the touchstone in these matters. Its variations are slow enough to allow time to regulate the mints and prevent disorders in the circulation.

In some centuries the value of silver rises slowly against gold, in others the value of gold rises against silver. This was the case in the age of Constantine who reduced all values to that of gold as the more permanent; but the value of silver is generally the more permanent and gold is more subject to variation.

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, ecu is current for 5 livres and the King Arret which orders the lowering of the ecu for 20
months, viz 1 per cent per month to 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 which decides the least able and the least increase their enterprise. They borrow money, as fancy, without interest and load themselves with violence of their demands.

Vendors have getting rid of their merchandise for money which diminish in their hands in nominal value. They 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 show 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 ecu 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 ecu 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 ecu, 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 amount, and this gave occasion to introduce confusion into exchange. In A.U.C. 712 Antony in his Triumvirate increased the nominal of silver by 5 per cent, mixing iron with the silver, to meet the needs of the Triumvirate. Many Emperors subsequently debased or increased coinage. The Kings of France at different times have done likewise. This is why the livre tournois, which was 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 shown 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.

Chapter VI

Of Banks and their Credit

If a hundred economical gentlemen or proprietors of land, who put by every year money from their savings to buy land on occasion, deposit each one 10,000 ounces of silver with a goldsmith or banker in London, to avoid the trouble of keeping this money in their houses and the thefts which might be made of it, they will take from them notes payable on demand. Often they will leave their money there a long time, and even when they have made some purchase they will give notice to the banker some time in advance to have their money ready when the formalities and legal documents are complete.

In these circumstances the banker will often be able to lend 90,000 ounces of the 100,000 he owes throughout the year and will only need to keep in hand 10,000 ounces to meet all the withdrawals. He has to do with wealthy and economical persons; as fast as one thousand ounces are demanded of him in one direction, a thousand are brought to him from another. It is enough as a rule for him to keep in hand the tenth part of his deposits.

There have been examples and experiences of this in London.

Instead of the individuals in question keeping in hand all the year round the greatest part of 100,000 ounces the custom of depositing it with a banker causes 90,000 ounces of the 100,000
to be put into circulation. This is primarily the idea one can form of the utility of banks of this sort. The bankers or goldsmiths contribute to accelerate the circulation of money.

They lend it out at interest at their own risk and peril, and yet they are or ought to be always ready to cash their notes when desired on demand.

If an individual has 1000 ounces to pay to another he will give him in payment the banker’s note for that amount. This other will perhaps not go and demand the money of the banker. He will keep the note and give it on occasion to a third person in payment, and this note may pass through several hands in large payments without any one going for a long time to demand the money from the banker. It will be only some one who has not complete confidence or has several small sums to pay who will demand the amount of it. In this first example the cash of a banker is only the tenth part of his trade.

If 100 individuals or landowners deposit with a banker their income every six months as it is received, and then demand their money back as and when they have need to spend it, the banker will be in a position to lend much more of the money which he owes and receives at the beginning of the half years, for a short term of some months, than he will be towards the end of these periods. And his experience of the conduct of his clients will teach him that he can hardly lend during the whole year more than about one half of the sums which he owes. Bankers of this kind will be ruined in credit if they fail for one instant to pay their notes on their first presentation, and when they are short of cash in hand they will give anything to have money at once, that is to say a much higher interest than they receive on the sums they have lent. Hence they make it a rule based on their experience to keep always in hand enough to meet demands, and rather more than less. Many Bankers of this kind (and they are the greatest number) always keep in hand half the amount deposited with them and lend the other half at interest and put it into circulation. In this second example the Banker causes his notes of 100,000 ounces or ecus to circulate with 50,000 ecus, If he has a great flow of deposits and great credit this increases confidence in his notes, and makes people less eager to cash them, but only delays, his payments a few days or weeks when the notes fall into the hands of persons who are not accustomed to deal with him, and he ought always to guide himself by those who are accustomed to entrust their money to him. If his notes come into the hands of those of his own business they will have nothing more pressing than to withdraw the money from him.

If those who deposit money with the Banker are Undertakers and Merchants who pay in large sums daily and soon after draw them out it will often happen that if the Banker divert more than one third of his cash he will find himself in difficulty to meet the demands.

It is easy to understand by these examples that the sums of money which a Goldsmith or a Banker can lend at interest or divert from his cash are naturally proportionable to the practice and conduct of his clients; that while we have seen Bankers who were safe with a cash reserve of one-tenth, others can hardly keep less than one half or two-thirds, though their credit be as high as that of the first.

Some trust one Banker, some another. The most fortunate is the Banker who has for clients rich gentlemen who are always looking out for safe employment for their money without wishing to invest it at interest while they wait.

A general national bank has this advantage over the bank of a single Goldsmith that there is always more confidence in it. The largest deposits are willingly brought to it, even from the most remote quarters of the city, and it leaves generally to small Bankers only the deposit of petty sums in their neighbourhood.

Even the revenues of the State are paid in to it in countries where the Prince is not absolute. And this, far from injuring credit and confidence in it, serves only to increase them.

If payments in a national bank are made by transfers or clearings there will be this advantage, that they are not subject to forgeries, but if the Bank gives notes false notes may be made and cause disorder. There will be also this disadvantage that those who are in the quarters of the city at a distance from the Bank will rather pay and receive in money than go thither, especially those in the country. But if the bank notes are dispersed they can be used far and near. In the national Banks of Venice and Amsterdam payment is made only in book credit, but in that of London it is made in credit, in notes, and in money at the choice of the individuals, and it is today the strongest Bank.

It will then be understood that all the advantage of Banks, public or private in a city, is to accelerate the circulation of money and to prevent so much of it from being hoarded as it would naturally be for several intervals.

Chapter VII

Further explanations and enquiries as to the utility of a National Bank

It is of little importance to examine why the Bank of Venice and that of Amsterdam keep their books in moneys of account different from current money, and why there is always an agio on converting these book credits into currency. It is not a point of any service for circulation. The Bank of England has not followed it in this. Its accounts, its notes and its payments are made and are kept in current coin, which seems to me more uniform and more natural and no less useful.

I have not been able to obtain exact information of the quantity of sums ordinarily brought to these Banks, nor the amount of their notes and accounts, loans, and sums kept as reserve. Some one who is better informed on these points will be better able to discuss them. As, however, I know fairly well that these sums are not so huge as commonly supposed I will not omit to give an idea of them.

If the bills and notes of the Bank of England which seems to me the most considerable, amount weekly on an average to 4,000,000 ounces of silver or about 1 million sterling, and if they are content to keep regularly in reserve a quarter or Ł250,000 sterling or 1 million ounces of silver in coin, the utility of this Bank to circulation corresponds to an increase of the money of the State by 3 million ounces or Ł750,000 sterling which is without doubt a very large sum and of very great utility for the circulation when it has need to be speeded up: for I have remarked elsewhere that there are cases where it is better for the welfare of the State to retard the circulation than to accelerate it. I have heard that the notes and bills of the Bank of England have risen in some cases to 2 millions sterling, but it seems to me this can only have been by extraordinary accident.

And I think the utility of this Bank corresponds in general only to about one tenth part of all the money in circulation in England.

If the explanations given to me in round figures in 1719 on the receipts of the Bank of Venice are correct it may be said of national banks generally that their utility never corresponds to the tenth part of the current money circulating in a State. This is approximately what I ascertained there.

The revenues of the State of Venice may amount annually to 4
million ounces of silver, which must be paid in Bank money, and the Collectors set up for that purpose who receive at Bergamo and in the most distant places taxes in money, are obliged to change them into bank money when they make payment of them to the Republic.

All payments at Venice for negociations, purchases and sales above a certain modest sum must by law be made in Bank money. All the retailers who have collected current money in their dealings are compelled to buy Bank money with it to make their payments for large amounts. And those who need for their expenses or for the detail of small circulation to get back current money have to sell their Bank money to obtain it.

It is found that the sellers and buyers of the Bank money are regularly equal when the total of all the credits or inscriptions on the books of the Bank do not exceed the value of 800,000
ounces of silver or thereabout.

Time and experience (according to my informant) have given this knowledge to the Venetians. When the Bank was first set up individuals brought their money to the Bank to have credit at the Bank of the same value. This money deposited at the Bank was later spent for the needs of the Republic and yet the Bank money preserved its original value because there were as many people who had need to buy it as those who had need to sell it. Finally the State being pressed for money gave to the War Contractors credits in Bank money instead of silver and doubled the amount of its credits.

Then the number of sellers of Bank money being much greater than the buyers Bank money began to be at a discount against silver and fell 20 per cent below. By this discredit the revenue of the Republic fell off one fifth and the only remedy found for this disorder was to pledge part of the State revenue to borrow Bank money at interest. By these borrowings of Bank money half of them were cancelled and then the sellers and buyers being about equal the Bank regained its original credit and the total of Bank money was brought back to 800,000 ounces of silver.

It is thus that it has been ascertained that the utility of the Bank of Venice as regards circulation corresponds to about 800,000 ounces of silver: and if it is supposed that all the current money in the States of that Republic amount to 8 million ounces of silver the utility of the Bank corresponds to one tenth of that silver.

A national Bank in the capital of a great Kingdom or State must, it seems, contribute less to the utility of circulation because of the distance of its provinces, than in a small State.

And when money circulates there in greater abundance than among its neighbours a national Bank does more harm than good. An abundance of fictitious and imaginary money causes the same disadvantages as an increase of real money in circulation, by raising the price of land and labour, or by making works and manufactures more expensive at the risk of subsequent loss. But this furtive abundance vanishes at the first gust of discreet and precipitates disorder.

Towards the middle of the reign of Louis XIV there was more money in circulation in France than in neighbouring countries, and the King’s revenue was collected there without the help of a Bank, as easily and conveniently as it is collected today in England with the help of the Bank of England.

If the clearings at Lyons in one of its four fairs amount to 80 millions of livres, if they are begun and finished with a single million of ready money, they are doubtless of great convenience in saving the trouble of an infinity of transports of silver from one house to another. But with that exception it seems that with this same million of cash which began and ended these clearings it would be quite feasible to conduct in three months all the payments of 80 millions.

The Paris bankers have often observed that the same bag of money has come back to them 4 or 5 times in the same day when they had a good deal to pay out and receive.

I think pubic banks of very great utility in small States and those where silver is rather scarce, but of little service for the solid advantage of a great State.

The Emperor Tiberius, a Prince strict and economical, had saved up in the Imperial Treasury 2700 millions of sesterces, equal to 25 millions sterling or 100 million ounces of silver, an enormous sum in coin for those times and even for today. It is true that in tying up so much money he embarrassed the circulation and that silver became scarcer at Rome than it had been.

Tiberius, who attributed this scarcity to the monopoly of Contractors and Financiers who farmed the Imperial revenues, ordered by an edict that they should buy land up to at least two thirds of their capital. This Edict, instead of animating the circulation threw it completely into disorder. All the Financiers hoarded and called in their capital under the pretext of putting themselves into a position to obey the Edict by buying land, which instead of rising in value sunk to a much lower price owing to the scarcity, of silver in circulation. Tiberius remedied this scarcity by lending to individuals on good security only 300
million sesterces, a ninth part of the money which he had in his Treasury.

If the ninth part of the Treasury sufficed at Rome to re-establish the circulation it would seem that the establishment of a general Bank in a great Kingdom where its utility would never correspond to the tenth part of the money in circulation when it is not hoarded, would be of no real and permanent advantage, and that considered in its intrinsic value it can only be regarded as an expedient for gaining time.

But a real increase in the quantity of circulating money is of a different nature. We have already spoken of it and the Treasure of Tiberius gives us again occasion to say a word of it here, This treasure of 2700 millions of sesterces, left at the death of Tiberius, was squandered by the Emperor Caligula his successor in less than a year. Money was never seen so abundant at Rome, What was the result? This mass of money plunged the Romans into luxury and into all sorts of crimes to pay for it.

More than 60,000 pounds sterling left the Empire every year for the merchandise of the Indies, and in less than 30 years the Empire grew poor and silver became very scarce there without any dismemberment or loss of a Province.

Though I consider a general Bank is in reality of very little solid service in a great State I allow that there are circumstances in which a Bank may have effects which seem astonishing.

In a city where there are public debts for considerable amounts the facility of a Bank enables one to buy and sell capital stock in a moment for enormous sums without causing any disturbance in the circulation. If at London a person sells his South Sea stock to buy stock in the Bank or in the East India Company, or hoping that in a short time he will be able to buy at a lower price stock in the same South Sea Company, he always takes Banknotes, and generally money is not asked for in respect of these notes but only for the interest on them. As one hardly spends one’s capital there is no need to change it into coin, but one is always forced to ask the Bank for money for subsistence since cash is needed for small dealings.

If a Landowner who has 1000 ounces of silver pays 200 of them for the interest of public stock and spends 800 ounces of them himself, the thousand ounces will always require coinage. This proprietor will spend 800 and the Owners of the funds will spend 200 of them. But when these Proprietors are in the habit of speculation, selling and buying public stock, no ready silver is needed for these operations, bank notes suffice. If it were necessary to draw hard cash out of circulation to serve in these purchases and sales it would amount to a great sum and would often impede the circulation, or rather it would happen in that case that the stocks could not be sold and bought so often.

It is doubtless the origin of these capitals or money deposited in the Bank and drawn out only on rare occasions, such as when an owner of capital engages in some transaction or needs cash for small purchases, which explains why the Bank keeps in reserve only the fourth or sixth part of the silver against which it issues notes. If the Bank had not the funds of many of these capitals it wonld in the ordinary course of circulation find itself would in the ordinary course of circulation find itself compelled like private banks to keep half its deposits in hand to be solvent. It is true that the Bank books and its dealings do not distinguish those capitals which pass through several hands in the sales and purchases made in Change Alley. These notes are often renewed at the Bank and changed against others in purchases. But the experience of purchases and sales of stock show clearly that the total of them is considerable, and without these purchases and sales the sums deposited at the Bank would be certainly smaller.

This means that when a State is not in debt and has no need of purchases and sales of stock the help of a Bank will be less necessary and less important.

In 1720 the capital of public stock and of bubbles which were snares and enterprises of private companies at London, rose to the value of 800 millions sterling, yet the purchases and sales of such pestilential stock were carried on without difficulty through the quantity of notes of all kinds which were issued, while the same paper money was accepted in payment of interest.

But as soon as the idea of great fortunes induced many individuals to increase their expenses, to buy carriages, foreign linen and silk, cash was needed for all that, I mean for the expenditure of the interest, and this broke up all the systems, This example shows that the paper and credit of public and private Banks may cause surprising results in everything which does not concern ordinary expenditure for drink and food, clothing, and other family requirements, but that in the regular course of the circulation the help of Banks and credit of this kind is much smaller and less solid than is generally supposed.

Silver alone is the true sinews of circulation.

Chapter VIII

Of the Refinements of Credit of General Banks The national Bank of London is composed of a large number of shareholders who make choice of Directors to govern its operations. Their primitive advantage consisted in making a yearly distribution of the profits made by interest on the money lent out of the Bank deposits. Later the public debt was incorporated with it, on which the State pays an annual interest.

In spite of such a solid foundation when the Bank had made large advances to the State and the holders of notes were apprehensive that the Bank was in difficulties, a run on the Bank has been seen and holders of notes went in crowds to the Bank to draw out money. The same thing happened on the collapse of the South Sea Company in 1720.

The refinements introduced to support the Bank and moderate its discredit were first to set up a number of clerks to count out the money to those bringing notes, to pay out large amounts in sixpences and shillings to gain time, to pay some part to individual holders who had been waiting whole days to take their turn; but the most considerable sums were paid to friends who took them away and brought them back secretly to the Bank to repeat the same manoeuvre the next day. In this way the Bank saved its appearance and gained time until the panic should abate. But when that did not suffice the Bank opened a subscription engaging trusty and solvent people to join as guarantors of large amounts to maintain the credit and circulation of the Bank notes.

It was by this last refinement that the credit of the Bank was maintained in 1720 when the South Sea Company collapsed. As soon as it was publicly known that the subscription list was filled by wealthy and powerful people, the run on the Bank ceased and deposits were brought in as usual.

If a Minister of State in England, seeking to lower the rate of interest or for other reasons, forces up the price of public stock in London and if he has enough credit with the Directors of the Bank (under the obligation of indemnifying them in case of loss) to get them to issue a quantity of bank notes without backing, begging them to use these notes themselves to buy several blocks and capitals of the public stock, this stock will not fail to rise in price through these operations, And those who have sold stock, seeing the high price continue, will perhaps decide (so as not to leave their bank notes idle and thinking from the rumours spread about that the rate of interest will fall and the stock go up further in price) to buy it back at a higher price than they sold it for, If several people seeing the agents of the Banks buy this stock step in and do likewise thinking to profit like them, the public funds will increase in price to the point which the Minister wishes. And it may happen that the Bank will cleverly resell at a higher price all the stock it has purchased at the Minister’s request, and will not only make a large profit on it but will retire and cancel all the extraordinary banknotes which it had issued.

If the Bank alone raises the price of public stock by buying it, it will by so much depress it when it resells to cancel its excess issue of notes. But it always happens that many people wishing to follow the Agents of the Bank in their operations help to keep up the price. Some of them get caught for want of understanding these operations, in which there enter infinite refinements or rather trickery which lie outside my subject.

It is then undoubted that a Bank with the complicity of a Minister is able to raise and support the price of public stock and to lower the rate of interest in the State at the pleasure of this Minister when the steps are taken discreetly, and thus pay off the State debt. But these refinements which open the door to making large fortunes are rarely carried out for the sole advantage of the State, and those who take part in them are generally corrupted. The excess banknotes, made and issued on these occasions, do not upset the circulation, because being used for the buying and selling of stock they do not serve for household expenses and are not changed into silver. But if some panic or unforeseen crisis drove the holders to demand silver from the Bank the bomb would burst and it would be seen that these are dangerous operations.

Table of Contents

- Part Three
- Chapter II
- Chapter 3
- Chapter 4
- Chapter V
- Chapter VI
- Chapter VII
- Chapter VIII