Chapter Five: The augmentation and diminution of coin in denomination

Chapter Five

The Augmentation and Diminution of the Denomination of Money

Abstract: Raising and lowering the nominal value of money is shown not to undermine the theory of the value of money. In contrast, such measures are shown to be methods by which the prince acquires resources by deceiving individuals about the value of money. The process causes chaos in the market.

ACCORDING TO THE PRINCIPLES we have established, the quantity of money in circulation fixes and determines the price of everything in a state, taking into account the speed of circulation.

We often see, however, in the augmentations and diminutions practiced in France, such strange variations that it might be assumed that market prices correspond to the coin’s nominal value rather than to its quantity in exchange; the quantity of livres tournois in money of account¹⁴⁶ rather than the quantity of marks and ounces, and this seems directly opposed to our principles.

Assume, as happened in 1714, that the one-ounce silver coin, the ecu, which was valued at 5 livres is lowered by an order of the king at a rate of one percent per month over a period of 20 months to a nominal value of 4 livres instead of 5. Let us see what will be the natural consequences of this with respect to the genius of the nation.

All those who owe money will quickly pay their debts so as not to lose by the diminutions. Entrepreneurs and merchants find it easy to borrow money so that even the least able and the least creditworthy will expand their business. They borrow money with what they believe is no interest and load themselves with merchandise at current prices. The strength of their demand even causes prices to rise. These merchants then find they have a hard time selling their merchandise for money that is losing its nominal value. They even turn towards foreign merchandise and import considerable quantities of it for the consumption of several years. All this causes money to circulate more rapidly and raises the price of everything. Then, high prices prevent the foreigner from importing 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 exchange rates never fail to show this disadvantage. Exchange rates are commonly seen at six and ten percent against France during these diminutions. Informed people in France hoard their money during these times. The king finds means to borrow a large amount of money on which he willingly loses from the diminution because he plans to compensate himself by an augmentation at the end of the diminutions.

To this end, after several diminutions, they begin to hoard money in the king’s treasury by postponing payments, pensions, and army pay. In these circumstances, money becomes extremely rare at the end of the diminutions both because of the sums hoarded by the king and various individuals, and because the nominal value of the coin is diminished. The amounts sent abroad also contribute greatly to the scarcity of money, and this scarcity gradually reduces the prices of the merchandise (which entrepreneurs had stocked up on) by 50 or 60 percent below the prices prevailing at the time of the first diminutions. Circulation [i.e., the economy] falls into convulsions. Hardly enough money can be found to send to market. Many entrepreneurs and merchants go bankrupt and their merchandise is sold at bargain prices.

Then the king increases anew the coinage, setting the new ecu, or new issue of one ounce silver coins, equal to 5 livres, and begins to use this new coinage to pay the troops and the pensions. The old coins are taken out of circulation and received at the mint at a lower nominal value and therefore the king profits by the difference.

But all the sums of new coinage that 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 that comes from the mint.

The cheapness of goods in France begins to draw in money from foreigners, who find them 50 or 60 or more percent cheaper, so gold and silver are sent to France to buy them. In this way the foreigner who sends his bullion to the mint easily recoups the fees paid at the mint. He finds the double advantage of the low price of the goods he buys, and the loss of the mint charge really falls on the French in the sale of their goods to the foreigners. They have enough merchandise for several years’ consumption. They resell to the Dutch, for example, the spices which they bought from them for two-thirds of what they paid. All this takes place gradually, and the foreigner decides to buy these goods from France only because of their cheapness. The balance of trade, which was against France at the time of the diminutions, turns in her favor at the time of the augmentation, and the king is able to profit by 20 percent or more on all the bullion brought into France and taken to the mint. As foreigners now owe a trade balance to France and do not have 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 goods that 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 and sells them back to the same foreigners at very low prices at the time of the augmentation. She 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 percent which the king has established as the mint charge. The gain goes again to the foreigner, who also profits by the low prices of goods 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 favor of France against the foreigner, the king is able to raise a tax of 20 percent 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 continually send money abroad. But the old ecu is as good as the new in foreign countries. That being so, 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 there. 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 augmentation is made after the diminutions indicated, because then the balance naturally turns in favor of France, as we have explained.

The experience of the augmentation of 1726 may serve to confirm all this. The diminutions that had preceded this augmentation were made suddenly and without warning, which prevented the ordinary operations of diminutions. This prevented the trade balance from turning strongly in favor of France at the augmentation of 1726. Few people took their old coins 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 reasoning of public administrators for lowering the coinage suddenly, nor the reasons that deceived them in their project of the augmentation of 1726. I have mentioned the increases and decreases in France only because their results seem to sometimes clash with the principles I have established in that the abundance or scarcity of money in a state raises or lowers all prices proportionally.

After explaining the effects of lowering and raising the coinage, as practiced in France, I maintain that they neither destroy nor weaken my principles. If I am told that what cost 20 livres or 5 ounces of silver before the lowering described above 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, as I have just explained, there is less money in circulation than there was before the diminutions. The difficulties of exchange during the times of these operations cause variations in the prices of things and the interest rate on money which cannot be taken as a rule in the ordinary principles of circulation and exchange.

The change in the nominal value of money has always been brought about by some disaster or famine in the state, or by the ambition of some prince or individuals. In the year 157 A.U.C. (596 B.C.), Solon increased the nominal value of the drachma of Athens after a sedition and abolition of debt. Between 490 and 512 A.U.C. (263-241 B.C.), the Roman Republic increased the nominal value of its copper coins several times, so that their “as” [i.e., coin] 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 A.U.C. (90 B.C.), Livius Drusus, Tribune of the people, increased the nominal value of coins by one-eighth, reducing its fineness¹⁴⁷ by the same, which gave counterfeiters an occasion to introduce confusion into the economy. In 712 A.U.C. (41 B.C.), Mark Antony increased the nominal of silver by 5 percent by mixing iron with the silver in order to meet the needs of the Triumvirate.¹⁴⁸ Many Emperors subsequently debased or increased the nominal value of their coins. The kings of France at different times have done likewise. This is why the livre tournois, which was once worth one pound of silver, has sunk to so little value. These proceedings have never failed to cause disorder in states. The nominal value of coins matters little or not at all 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 in Venice, 50 livres in Parma. Values are exchanged between these different countries in the same proportion. The price of everything increases gradually when the nominal value of coins increases. The actual quantity in terms of weight and fineness of the coins is the base and regulator of values, taking into account the rapidity of circulation. A state neither gains nor loses by the raising or lowering [of the nominal value] of these coins so long as it keeps the quantity of them the same, though individuals may gain or lose depending on their circumstances. People are full of false prejudices and misconceptions about the nominal value of their coins. We have shown in the chapter on exchanges that the price and fineness of the coins of different countries, marc for marc and ounce for ounce, is what ultimately rules. If an increase or decrease of the nominal value changes this rule for a time in France, it only causes a temporary crisis or time of difficulty in trade. It always returns, little by little, to intrinsic values, on which prices are necessarily established, both in the market and in foreign trade.

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¹⁴⁶ During this time period, they had a money of account and all sorts of money of exchange. Today it would be like buying a Toyota for $30,000 but paying for it with $30,000 worth of Japanese Yen.

¹⁴⁷ Fineness refers to purity or the percentage of precious metal (i.e. gold or silver) in the coin. So here Cantillon is referring to debasement.

¹⁴⁸ The Triumvirate represented the government established in 43 BC when the Empire was divided between Mark Anthony, Octavian, and Lepidus.