A Commentary and Review of Montesquieu's "Spirit of Laws"
Of Laws in Relation to the Use of Money.
Silver has a natural value, for which reason it is the measure of other values; which paper could not be, as it is only the sign of value. When silver has an impression stampt upon it, attesting the quantity and quality, it is then money; but two metals cannot both be the fundamental money.
The possessor of money, may consume or keep it, give or lend it, in the same way as other riches.
The business of exchange and banks, consists in converting one kind of money into another, by discounting notes or bills of exchange not yet due.
The large companies which are formed for this purpose, are always dangerous, or their success of little importance.
Public debts encrease the interest of money.
Spirit of Laws, Book XXII.
Money is a very profound subject in the eyes of certain people, who imagine themselves to be men of talents, and who think that fine things may be said upon its use, its circulation, or the means of facilitating its currency, or even supplying its place. I cannot discover any thing mysterious or occult in it, and am persuaded that in this, as in all other things, whatever partakes of subtlety leads us farther from direct reason. I shall, then, confine myself to a small number of observations, in as much as I think I have in the preceding chapter on commerce, noticed what is most essential in the actual possession and the operations of money.
Society essentially consists in commerce, and commerce is exchange: all merchandize, as we have seen, has a natural value; that of the labor required in producing it, and a pecuniary value.... that of other merchandize given in exchange for it: all these different values, are successively measured by each other; but they are liable to fluctuation and destruction; and consequently difficult to measure to fix, and to preserve: among these goods having a value, there is one unmixed, unalterable, divisible, and easily transported; it naturally becomes the measure of all others: this is silver. To specify the quantity and quality with great exactness; that is, the weight and name, the public authority has stamped a mark thereon, and it becomes money. This is the whole system of money.
This short explanation of the nature of money, shews in the first instance, that there can be only one metal which is really money; that is to say, to the value of which all other values may be referred; for in all calculations there can only be an unit for a standard of measure or quality. This metal is silver, because it can be formed into the greatest number of subdivisions we require for the uses of exchange. Gold comes to its aid, for the payment of larger sums; but it is as an auxiliary, the value of the gold being found only by a comparison with that of silver. The proportion in Europe is nearly fifteen or sixteen to one; but it is subject to variation like all other proportions of value, according to the demand. In China, it is generally only as twelve or thirteen for one, which is the reason that there is a profit in carrying silver to that country, for twelve ounces of silver will there procure one of gold, which in Europe is worth fifteen of silver: you consequently have gained three ounces of silver by the exchange. The political authorities may, however, stamp money of gold, and fix its proportion with silver; that is to say.... they may declare by law, that whenever there is no stipulation to the contrary, we shall indifferently receive one ounce of gold, or fifteen or sixteen of silver. It will then be the same, in legal acceptance, as when there are sums due to one party or another, in which no stipulation of interest has been made, the law allows an interest of so much percent. But they cannot, at least should not, prevent individuals from regulating among themselves, how much gold they are willing to give or receive for a certain quantity of silver; nor do more than determine the rate of interest of a sum lent or borrowed. Nay, in despite of all laws, these exchanges subject to variation, are always performed in commerce, because without it business could not be carried on. When there is copper money, it is not a true money, but a spurious one.... if it contained a sufficient quantity of copper to be equal in value to the silver with which its nominal proportions correspond, it would be five or six times more weighty than it usually is, which would render it very incommodious; yet this proportion varies daily, like gold.... nay, more: consequently copper money is only worth the quantity of silver agreed to be given for it in exchange, and therefore, should be made use of for articles of small value only, in which this excess of value is of little consequence; but when authorised, as has sometimes happened, to pay large sums of money in copper, it is an actual robbery; because the one who receives it, can never fairly get the sums realized in silver for their nominal value, but only for their intrinsic value, which is five or six times less.
Secondly: we see that when silver was formed into money the first time, it was very useless to invent names of an arbitrary kind: such as pound, livre, dollar, &c. it would have been much more clear and significant, to have said a part of an ounce, dram, or grain, than as in France, a piece of three livres, or of twenty four, twelve, or fifteen sols: we should then have known what weight of money was required for each article; but when once these arbitrary denominations are admitted, and use has been made of them in all contracts and sales, care should be taken to guard against loss by the difference of intrinsic value between the several denominations of coin. For still supposing myself in France, if I should have received thirty thousand livres, and have promised to return them at such a time, if, meanwhile, the government should order the quantity of silver called three livres, to be called six ounces, which is the same thing as if it should make crowns of livres, which do not contain more than these three, I who pay with these new crowns, pay really only half the silver I had received.... this would be robbery; and yet this is what governments have done to baffle their creditors, so often and with so much boldness, and so little compunction, that what is at present in France called a livre, was really, formerly, a pound of silver, and is at present scarcely the hundredth part, or one hundred and eighth part of a pound. Thus, at different times, they have defrauded their creditors, ninety-nine in an hundred, or one hundred and seven out of one hundred and eight; so that if a perpetual annuity of one livre had been formed in those remote times, for twenty livres received, it would at the present time be paid with the one hundredth and eighth part of what was promised in the original contract. It is true, that when a government has diminished one half of the real value of its money, and are the next day desirous of buying merchandize; to pay for it they must give double the nominal value which was given before the reduction, which will in fact, be only the same real value as before; while the same nominal quantity of taxes being paid, yields only half the actual value of what was before paid. So that taxes are in fact one half reduced; but this affords new causes to encrease taxes, till they at length actually reduce the denomination to the half value. Operations of this kind, are called financiering: but such injustice is rarely attempted in modern times, though what is equivalent thereto is frequent, as when paper is forced upon us as money, as is now the custom of all European governments.
We have said that money is only the means of determining the value of other things, inasmuch as it has one intrinsic value: it is evident that it is a great mistake to call it the sign of money, when in fact it is only a substitute.... this mistake leads to another; that is, the notion that paper may, by public authority, be rendered an equivalent with silver. Paper really has no other intrinsic value, than the price of its fabrication, nor other pecuniary value than what it would bring at a trunk maker's shop. If I am in possession of a note, or any other obligation of a responsible person, to pay to me at sight an hundred ounces of silver, this is only a sign that I shall probably receive an hundred ounces of silver when I shall choose to call for it: if the sign or certificate of public security be satisfactory to me, that is, if I give it full credit, and do not immediately want the silver, I am not in haste to take it up; I may even without this trouble, pass the sign freely to another, who may place the same credit in it as I do myself, and who on account of the convenience, may even prefer it to the silver, which is more cumbersome and not so easily transported; but none of us who have held the paper, have really possessed any value, though we may be as certain of being put in possession of value whenever we require it, as we are of obtaining a dinner for money. But if a government should say, here is a piece of paper, on which is written.... good for an hundred ounces of silver, it is commanded that it be taken for its value, and all persons are forbidden from attempting to realize the value in silver: it is evident that I am then only in possession of a piece of paper, which is not to me a sign that I shall receive the value it declares, nay it offers a possibility that I never shall receive it; that I shall never find any person willing to take it for that value; that it is only the apprehension of the legal penalties on a refusal which forces me to take it, and that in all free transactions, which can escape the notice of a government capable of such oppression, this paper will either be considered of no value, or of much the smallest possible value that is implied by the possibility that at some future day it may obtain the value it declares. So that, though no one will dare to tell me.... "your hundred ounces of silver is mere paper, and as a remote insurance only worth one ounce".... yet ten thousand written ounces will be asked me for an article that I could purchase for one hundred ounces in solid silver. This is the inevitable fate of all forced paper money; for if it be good, it not necessary to resort to force to give it currency; if it be bad, to force the circulation is still to depreciate and deprive it of credit.
Since money, then, has a value peculiar to itself, all useful things have, and since it constitutes a property vested in the owner like all other possessions, it follows that the possessor being the proprietor may dispose of like any other chattel; that he has the right of consuming or keeping it, of bestowing or lending it, letting or selling it in any such manner as he pleases, as we have said in the thirteenth book; to sell it is to make use of it in buying something else; to let or hire it is to give up the use of it for a time, in consideration of a recompense called interest. There is no more reason for obliging the possessor of money, to let it for a compensation less than he can freely obtain for it, than to force him to give for another article of merchandize, more than has been proffered to him for, or than to force the owner of the merchandize to sell it for less money than has been offered him. Every time a government makes attack of this kind upon property, the social obligations are broken and disordered; rigorous means will be required to enforce it, which renders the government odious, while it is evaded by subterfuge, concealment, and every artifice which favors roguery and wounds honesty. We must have been born without faculties for reason, or like certain religious sects who prohibit the use of reason, not to perceive this.*28
As to exchange, which consists in converting the money of one country into that of another, all that is required;, is to know that the quantity of money which a person demands will contain exactly the quantity of silver which he gives, and to pay the commission for performing the service: as for bankers and brokers, it is requisite for them to know the equation, in order to introduce some inequality for their profit, as they by this inequality augment their own income. There is besides this circumstance, that at certain times a great many inhabitants of a town, may have debts to pay to the inhabitants of another town: they come in crowds to the bankers, and bring their money to obtain drafts or notes payable at the other town; this might be somewhat inconvenient for the bankers, if they did not possess sufficient funds at that place; as otherwise, they must either not transact the business, or send money to the place to meet the drafts: this transport of money is liable to some risk and expence; whence it follows, that those who make the deposits of money, are satisfied to receive for every hundred ounces of silver, bills for only ninety-eight ounces, or even ninety-seven ounces; so that they lose two or three per cent. by the transaction. On the contrary, the same kind of operation takes place at the other town, upon which the drafts are drawn: if ninety-eight or ninety-seven ounces of silver are deposited with them, they may give bills payable for one hundred ounces in the first town, and without losing any thing; but they always arrange matters so as to make individual dealings sustain more than the loss, and not to let them profit by their advantages. The same bankers or brokers also at times advance money on good notes or bills of exchange not yet due, deducting from the same the interest for the time that is to elapse before it becomes due; this is called discounting.
Several persons of this description, sometimes unite and form large companies, in order to be possessed of more ample funds to transact one or both branches of business. This may be useful, inasmuch as by doing more business they may be content with less profit on each transaction, thereby obliging their rivals to reduce theirs also, in order that they may be enabled to compete with them, and thus diminish the general rate of the expences of exchange and discount, and in the end, the interest of money itself, which is a great benefit. It is also the practice of such companies, having extensive credit, to issue bills or notes payable on demand for considerable sums; and as they are known to be very good, they are taken as ready money, while the bankers at the same time employ their money also to the best advantage. This encreases the quantity of the circulating medium in the country, which in many respects is a great advantage, though I believe not so considerable as is generally assumed; for whether there be little or much money in a country, circulation goes on in the same manner in both cases; the only difference is, that the same quantity of silver represents more or less merchandize in one case than the other: whatever it may be, this is the nature of the operation of the banks; but in order to produce the good effects we have noticed, they should neither be protected nor privileged more than any other merchants; that competition should be open and free; but that they should always be peremptorily obliged to pay their notes with silver at sight; for without these conditions, instead of diminishing the price of their services, they would augment them very speedily, by means of monopoly; and they would next fix a time more distant at which to pay their notes that were originally payable on demand, which would be a real bankruptcy; and what is still worse, establish in society a forced paper currency. But even if these banks are well conducted, which is very rare, and never has been seen for any great length of time in any country, they are still less entitled to the credit usually given them.
To produce, to manufacture, to transport from the place of production to the place of sale; that is to say.... to cultivate and collect the raw materials with intelligence, to form them with skill, and exchange them with judgment, or in other words, to perform the greatest quantity of useful labor, and dispose of the product in the most advantageous manner, these are the great sources of the riches of nations. All the little profit that can be made by exchange, discount, interest, or any other imaginary sum, and other occupations partaking of the nature of privilege or exclusion, are very trifling to society: they may make the fortunes of a few individuals, which is the reason that they have been so much extolled; but they are of little account in comparison with the fruits of useful industry, acquired by men whose daily occupation is production, and very indifferent to the true prosperity of a country; to attach great importance to them, is a great deception. This, I believe, is all that is essential and true, that can be said on money.
Since Montesquieu has thought proper to speak of public debts in this book, it should be observed, that they have not only the inconvenience of requiring taxes to pay the interest, and with this interest, of supporting a number of people in idleness who otherwise would have been obliged to put their capital to some useful purpose, but also as they have not the advantage of diminishing the current rate of the interest of money, as our author has advanced in the sixth chapter; but on the contrary, has the effect of augmenting the interest of money; for a government whose policy is loans, cannot force any one to lend; it is therefore necessary it should offer an interest sufficient to satisfy the lender, and consequently an interest equal to what men of good credit will give, or the employment of money will produce: now all the loans made to government, would have been made to others.... that is, the money would have circulated in active hands; consequently the demand for loans encrease; or which is the same, the means of satisfying demands are diminished, and in the end, higher premiums are offered for a preference, and thus the rate of interest is augmented; whence it happens frequently, that speculations in agriculture, manufactures, and commerce, which would prosper if money could be had at a low interest, are rendered impracticable, or are devoured by excessive interest: this is a grievous obstacle to the prosperity of a country, and to production in general.
The interest of money borrowed, occasions in all undertakings, the effects produced by land taxes on cultivation; as both encrease, there is always some land, or some industrious enterprize, which cannot be attended to in consequence thereof.
Notes for this chapter
It were to be wished, that those rectors of certain religious communities, who would command me to hire my money to his tenant for half the price he offers me, was obliged to rent the lands of his benefice to the same tenant as a farm, for the half of the price he is willing to give; for the comparison is perfectly equal.... his farm is a capital, the same as money, with which he may buy my money; as with my money I may buy his farm; and it is of very little consequence to the farmer whether it is the field or the money he rents for one half.
End of Notes
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