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

Part II, Chapter VI

Of the increase and decrease in the quantity of hard money in a State

If Mines of gold or silver be found in a State and considerable quantities of minerals drawn from them, the Proprietors of these Mines, the Undertakers, and all those who work there, will not fail to increase their expenses in proportion to the wealth and profit they make: they will also lend at interest the sums of money which they have over and above what they need to spend.

All this money, whether lent or spent, will enter into circulation and will not fail to raise the price of products and merchandise in all the channels of circulation which it enters. Increased money will bring about increased expenditure and this will cause an increase of Market prices in the highest years of exchange and gradually in the lowest.

Everybody agrees that the abundance of money or its increase in exchange, raises the price of everything. The quantity of money brought from America to Europe for the last two centuries justifies this truth by experience.

M. Locke lays it down as a fundamental maxim that the quantity of produce and merchandise in proportion to the quantity of money serves as the regulator of Market price. I have tried to elucidate his idea in the preceding Chapters: he has clearly seen that the abundance of money makes everything dear, but he has not considered how it does so. The great difficulty of this question consists in knowing in what way and in what proportion the increase of money raises prices.

I have already remarked that an acceleration or greater rapidity in circulation of money in exchange, is equivalent to an increase of actual money up to a point. I have also observed that the increase or decrease of prices in a distant Market, home or Foreign, influences the actual Market prices. On the other hand money flows in detail through so many channels that it seems impossible not to lose sight of it seeing that having been amassed to make large sums it is distributed in little rills of exchange, and then gradually accumulated again to make large payments. For these operations it is constantly necessary to change coins of gold, silver and copper according to the activity of exchange. It is also usually the case that the increase or decrease of actual money in a State is not perceived because it flows abroad, or is brought into the State, by such imperceptible means and proportions that it is impossible to know exactly the quantity which enters or leaves the State.

However all these operations pass under our eyes and everybody takes part in them. I may therefore venture to offer a few observations on the subject, even though I may not be able to give an account which is exact and precise.

I consider in general that an increase of actual money causes in a State a corresponding increase of consumption which gradually brings about increased prices.

If the increase of actual money comes from Mines of gold or silver in the State the Owner of these Mines, the Adventurers, the Smelters, Refiners, and all the other workers will increase their expenses in proportion to their gains. They will consume in their households more Meat, Wine, or Beer than before, will accustom themselves to wear better cloaths, finer linen, to have better furnished Houses and other choicer commodities. They will consequently give employment to several Mechanicks who had not so much to do before and who for the same reason will increase their expenses: all this increase of expense in Meat, Wine, Wool, etc. diminishes of necessity the share of the other inhabitants of the State who do not participate at first in the wealth of the Mines in question. The altercations of the Market, or the demand for Meat, Wine, Wool, etc. being more intense than usual, will not fail to raise their prices. These high prices will determine the Farmers to employ more Land to produce them in another year: these same Farmers will profit by this rise of prices and will increase the expenditure of their Families like the others. Those then who will suffer from this dearness and increased consumption will be first of all the Landowners, during the term of their Leases, then their Domestic Servants and all the Workmen or fixed Wage-earners who support their families on their wages. All these must diminish their expenditure in proportion to the new consumption, which will compel a large number of them to emigrate to seek a living elsewhere. The Landowners will dismiss many of them, and the rest will demand an increase of wages to enable them to live as before. It is thus, approximately, that a considerable increase of Money from the Mines increases consumption, and by diminishing the number of inhabitants entails a greater expense among those who remain.

If more money continues to be drawn from the Mines all prices will owing to this abundance rise to such a point that not only will the Landowners raise their Rents considerably when the leases expire and resume their old style of living, increasing proportionably the wages of their servants, but the Mechanics and Workmen will raise the prices of their articles so high that there will be a considerable profit in buying them from the foreigner who makes them much more cheaply. This will naturally induce several people to import many manufactured articles made in foreign countries, where they will be found very cheap: this will gradually ruin the Mechanics and Manufacturers of the State who will not be able to maintain themselves there by working at such low prices owing to the dearness of living.

When the excessive abundance of money from the Mines has diminished the inhabitants of a State, accustomed those who remain to a too large expenditure, raised the produce of the land and the labour of workmen to excessive prices, ruined the manufactures of the State by the use of foreign productions on the part of Landlords and mine workers, the money produced by the Mines will necessarily go abroad to pay for the imports: this will gradually impoverish the State and render it in some sort dependent on the Foreigner to whom it is obliged to send money every year as it is drawn from the Mines. The great circulation of Money, which was general at the beginning, ceases: poverty and misery follow and the labour of the Mines appears to be only to the advantage of those employed upon them and the Foreigners who profit thereby.

This is approximately what has happened to Spain since the discovery of the Indies. As to the Portuguese, since the discovery of the gold mines of Brazil, they have nearly always made use of foreign articles and manufactures; and it seems that they work at the Mines only for the account and advantage of foreigners. All the gold and silver which these two States extract from the Mines does not supply them in circulation with more precious metal than others. England and France have even more as a rule.

Now if the increase of money in the State proceeds from a balance of foreign trade (i.e. from sending abroad articles and manufactures in greater value and quantity than is imported and consequently receiving the surplus in money) this annual increase of money will enrich a great number of Merchants and Undertakers in the State, and will give employment to numerous Mechanicks and workmen who furnish the commodities sent to the foreigner from whom the money is drawn. This will increase gradually the consumption of these industrial inhabitants and will raise the price of Land and Labour. But the industrious who are eager to acquire property will not at first increase their expense: they will wait till they have accumulated a good sum from which they can draw an assured interest, independently of their trade. When a large number of the inhabitants have acquired considerable fortunes from this money, which enters the State regularly and annually, they will, without fail, increase their consumption and raise the price of everything. Though this dearness involves them in a greater expense than they at first contemplated they will for the most part continue so long as their capital lasts; for nothing is easier or more agreeable than to increase the family expenses, nothing more difficult or disagreeable than to retrench them.

If an annual and continuous balance has brought about in a State a considerable increase of money it will not fail to increase consumption, to raise the price of everything and even to diminish the number of inhabitants unless additional produce is drawn from abroad proportionable to the increased consumption. Moreover it is usual in States which have acquired a considerable abundance of money to draw many things from neighbouring countries where money is rare and consequently everything is cheap: but as money must be sent for this the balance of trade will become smaller. The cheapness of land and labour in the foreign countries where money is rare will naturally cause the erection of Manufactories and works similar to those of the State, but which will not at first be so perfect nor so highly valued.

In this situation the State may subsist in abundance of money, consume all its own produce and also much foreign produce and over and above all this maintain a small balance of trade against the foreigner or at least keep the balance level for many years, that is import in exchange for its work and manufactures as much money from these foreign countries as it has to send them for the commodities or products of the land it takes from them. If the State is a maritime State the facility and cheapness of its shipping for the transport of its work and manufactures into foreign countries may compensate in some sort the high price of labour caused by the too great abundance of money; so that the work and Manufactures of this State, dear though they be, will sell in foreign countries cheaper sometimes than the Manufactures of another State where Labour is less highly paid.

The cost of transport increases a good deal the prices of things sent to distant countries; but these costs are very moderate in maritime States, where there is regular shipping to all foreign ports so that Ships are nearly always found there ready to sail which take on board all cargoes confided to them at a very reasonable freight.

It is not so in States where navigation does not flourish. There it is necessary to build ships expressly for the carrying trade and this sometimes absorbs all the profit; and navigation there is always very expensive, which entirely discourages trade.

England today consumes not only the greatest part of its own small produce but also much foreign produce, such as Silks, Wines, Fruit, Linen in great quantity, etc. while she sends abroad only the produce of her Mines, her work and Manufactures for the most part, and dear though Labour be owing to the abundance of money, she does not fail to sell her articles in distant countries, owing to the advantage of her shipping, at prices as reasonable as in France where these same articles are much cheaper.

The increased quantity of money in circulation in a State may also be caused, without balance of trade, by subsidies paid to this State by foreign powers, by the expenses of several Ambassadors, or of Travellers whom political reasons or curiosity or pleasure may induce to reside there for some time, by the transfer of the property and fortune of some Families who from motives of religious liberty or other causes quit their own country to settle down in this State. In all these cases the sums which come into the State always cause an increased expense and consumption there and consequently raise the prices of all things in the channels of exchange into which money enters.

Suppose a quarter of the inhabitants of the State consume daily Meat, Wine, Beer, etc. and supply themselves frequency with Cloaths, Linen, etc. before the increase in money, but that after the increase a third or half of the inhabitants consume these same things, the prices of them will not fail to rise, and the dearness of Meat will induce several of those who formed a quarter of the State to consume less of it than usual. A Man who eats three pounds of Meat a day will manage with two pounds, but he feels the reduction, while the other half of the inhabitants who ate hardly any meat will not feel the reduction. Bread will in truth go up gradually because of this increased consumption, as I have often suggested, but it will be less dear in proportion than Meat. The increased price of Meat causes diminished consumption on the part of a small section of the People, and so is felt; but the of a small section of the people, and so is felt; but the increased price of bread diminishes the share of all the inhabitants, and so is less felt. If 100,000 extra people come to live in a State of 10 millions of inhabitants, their extra consumption of bread will amount to only 1 pound in 100 which must be subtracted from the old inhabitants; but when a man instead of 100 pounds of bread consumes 99 for his subsistence he hardly feels this reduction.

When the consumption of Meat increases the Farmers add to their pastures to get more Meat, and this diminishes the arable Land and consequently the amount of corn. But what generally causes Meat to become dearer in proportion than Bread is that ordinarily the free import of foreign corn is permitted while the import of Cattle is absolutely forbidden, as in England, or heavy import duties are imposed as in other States. This is the reason why the Rents of meadows and pastures go up in England, in the abundance of money, to three times more than the Rents of arable Land.

There is no doubt that Ambassadors, Travellers, and Families who come to settle in the State, increase consumption there and that prices rise in all the channels of exchange where money is introduced.

As to subsidies which the State has received from foreign powers, either they are hoarded for State necessities or are put into circulation. If we suppose them hoarded they do not concern my argument for I am considering only money in circulation. Hoarded money, plate, Church treasures, etc. are wealth which the State turns to service in extremity, but are of no present utility. If the State puts into circulation the subsidies in question it can only be by spending them and this will very certainly increase consumption and send up all prices. Whoever receives this money will set it in motion in the principal affair of life, which is the food, either of himself or of some other, since to this everything corresponds directly or indirectly.