Essai sur la Nature du Commerce in Général (Essay on the Nature of Trade in General)

Part II, Chapter IV

Of Further Reflection on the Rapidity or Slowness of the Circulation of Money in Exchange

Let us suppose that the Farmer pays 1300 ounces of silver a quarter to his Landlord, who pays out of it every week 100 ounces to the Baker, Butcher, etc. and that these every week pay the Farmer these hundred ounces, so that the Farmer collects every week as much money as the Landlord spends. In this case there will be only 100 ounces in constant circulation, the other 1200 ounces will remain in hand partly with the Landlord and partly with the Farmer.

But it rarely happens that the Landlords spend their Rents in a fixed and regular proportion. In London as soon as a Landlord receives his Rent he puts most of it into the hands of a Goldsmith or Banker, who lends it at interest, so that this part is in circulation. Or else the Landlord spends a good part of it upon various things needful for his household, and before he gets his next quarter’s Rent he will perhaps borrow money. Thus the money of the first quarter’s Rent will circulate in a thousand ways before it can be brought together again and replaced in the hands of the Farmer to serve to pay his second quarter.

When the time for paying this second quarter has come the Farmer will sell his produce in large amounts, and those who buy his Cattle, Corn, Hay, etc. will already have collected in detail the price of them. The money of the first quarter will thus have circulated in the rivulets of small traffick for nearly three months, before being collected by the retail dealers, and these will give it to the Farmer who will pay his second quarter therewith. It would seem from this that less ready money than we have supposed would suffice for the circulation of a State.

Barters made by evaluation do not all call for much ready cash. If a Brewer supplies a Clothier with the Beer for his family, and if the Clothier in turn supplies the Brewer with the Cloaths he needs, both at the Market price current on the day of delivery, the only ready money needed between these two traders is the amount of the difference between the two transactions.

If a Merchant in a Market Town sends to a correspondent in the City country produce for sale, and if the latter sends back to the former the City merchandise consumed in the Country, the business lasting the whole year between these two dealers, and mutual confidence leading them to place to their accounts their produce and merchandise at their respective Market prices, the only real money needed for this commerce will be the balance which one owes to the other at the end of the year. Even then this balance may be carried forward to the next year, without the actual payment of any money. All the Undertakers of a City, who have continually business with each other, may practise this method. And these exchanges by valuation seem to economise much cash in circulation, or at least to accelerate its movement by making it unnecessary in several hands through which it would need to pass without this confidence and this method of exchange by valuation. It is not without reason that it is commonly said Commercial Credit makes Money less scarce.

The Goldsmiths and public Bankers, whose notes pass current in payment like ready money, contribute also to the speed of circulation, which would be retarded if money were needed in all the payments for which these Notes suffice: and although these Goldsmiths and Bankers always keep in hand a good part of the actual money they have received for their Notes, they also put into circulation a considerable amount of this actual money as I shall explain later in dealing with public Banks.

All these reflections seem to prove that the circulation of a State could be conducted with much less actual money than I have supposed necessary; but the following inductions appear to counterbalance them and to contribute to the slowing down of the circulation.

I will first observe that all Country produce is furnished by Labour which may possibly, as already often suggested, be carried on with little or no actual money. But all Merchandise is made in Cities or Market Towns by the Labour of Men who must be paid in actual money. If a House has cost 100,000 ounces of silver to build, all this sum or the greatest part of it, must have been paid every week in small amounts to the Brickmaker, Masons, Carpenters, etc. directly or indirectly. The expense of the humble Families, who are always the most in number in a City, is necessarily made with actual money. In these small exchanges Credit, Book debts, and Bills cannot have a place. The Merchants or Retailers demand cash for the things they supply: or if they give credit to a Family for a few days or months they require a substantial money payment. A Carriage builder who sells a carriage for 400 ounces of silver in Notes, will have to change them into actual money to pay for all the Materials and the Men who have worked on his carriage if they have worked on credit, or, if he has paid them already, to start a new one. The sale of the Carriage will leave his Profit and he will spend this to maintain his family. He could not be satisfied with Notes unless he can put something aside or lay it out at interest.

The consumption of the Inhabitants of a State is, in a sense, entirely for Food. Lodging, Clothing, Furniture, etc. correspond to the Food of the Men who have worked upon them; and in the Cities all Drink and Food are of necessity paid for in hard cash. In the Families of Landowners in the City food is paid for every day or every week: Wine in their families is paid for every week or every month; Hats, Stockings, Shoes, etc. are ordinarily paid for in actual money, at least the payments correspond to cash for the Men who have worked upon them. All the sums which serve to pay large amounts are divided, distributed, and spread in small payments corresponding to the maintenance of the Workmen, Menservants, etc. and all these sums are necessarily collected and reunited by the Undertakers and Retailers who are employed on the subsistence of the Inhabitants to make large payments when they buy the products of the Farmers. An Ale-house keeper collects by sols and livres the sums he pays to the Brewer, who uses them to pay for all the grain and materials he buys from the Country. One cannot imagine anything is bought for ready money in a State, like Furniture, Merchandise, etc. the value of which does not correspond to the maintenance of those who have worked upon it.

Circulation in the Cities is carried out by Undertakers and always corresponds directly or indirectly to the subsistence of the Menservants, Workmen, etc. It is not conceivable that it can be effected in small detail without cash. Notes may serve as counters in large payments for a certain time; but when the large sums come to be distributed and spread into small transactions, as is always the case sooner or later in the course of circulation in a City, Notes cannot serve the purpose and cash is needed.

All this being presupposed, all the classes in a State who practice some oeconomy, save and keep out of circulation small amounts of cash till they have enough to invest at interest or profit. Many miserly and timid people bury and hoard cash for considerable periods.

Many Landowners, Undertakers and others, always keep some cash in their pockets or safes against unforeseen emergencies and not to be run out of money. If a gentleman makes it his remark that he never had less than 20 louis in his pocket throughout the whole year, it may be said that this pocket has kept 20 louis out of circulation for a year. One does not like to spend up to the last sou, one is glad not be completely denuded, and to receive a new instalment before paying even a debt with the money one has.

The capital of Minors and of Suitors is often deposited in cash and kept out of circulation.

Beside the large payments which pass through the hands of the Farmers in the quarterly terms of the year there are many others from one Undertaker to another in the same terms, and others at different times from Borrowers to Lenders of money. All these sums are collected in retail trade, are spread abroad anew and come back sooner or later to the Farmer: but they seem to require a more considerable amount of cash for circulation than if these large payments were made in different times from those when the Farmers are paid for their produce.

In fine there is so great a variety in the different orders of the Inhabitants of the State and in the corresponding circulation of actual money, that it seems impossible to lay down anything precise or exact as to the proportion of money sufficient for the circulation. I have adduced so many examples and inductions only to make it clear that I am not far out of the truth in my conclusion “that the actual money necessary for the circulation of the State corresponds nearly to the value of the third of all the annual Rents of the Landlords.” When the Landlords have a Rent which amounts to half the produce or more than a third, a greater quantity of actual money is needed for circulation, other things being equal. When there is great confidence in the Banks and in book credits less money will suffice, as also when the rapidity of circulation is accelerated in any other way. But I shall shew later that public banks do not afford so many advantages as is usually supposed.