Chapter Seven: Continuation of the same subject

Chapter Seven

More on the Increase and Decrease in the Quantity of Money in a State

Abstract: When there is an increase in the quantity of money, prices will increase depending on how the new money holders decide to spend their money. The price changes will also be affected by such things as regulations on trade and the perishability of the products that are traded. In other words the simple quantity theory of money is naïve in proposing that a doubling of the quantity of money would double all prices equally. Changes in the quantity of money will change relative prices and have real effects on the economy, a phenomenon now known as the Cantillon Effects.

WHERE GOLD, SILVER, AND COPPER are extracted from the mines, they have an intrinsic value proportional to the land and labor that enter into their production. States that have no mines have the added cost of importing the metal. The quantity of money, like that of all other commodities, determines its value against all other goods in the bargaining process of the marketplace.

If England begins for the first time to make use of gold, silver, and copper in exchanges, money will be valued according to the quantity in circulation, proportionally to its power of exchange against all other merchandise and products. The bargaining process of the market will determine this estimation of value. On the basis of this estimation, the property owners and entrepreneurs will set the wages of their domestic servants and workmen at so much a day or a year, so that they and their families may be able to live on the wages they receive.

Let us now assume that because of ambassadors and foreign travelers residing in England, as much money has been introduced into circulation as there was before [thereby doubling the quantity of money]. This money will pass first into the hands of various artisans, servants, entrepreneurs and others who have had a share in providing transportation, amusements, etc., for these foreigners. Manufacturers, farmers, and other entrepreneurs will feel the effect of the increased money, which will increase the expenditures of a great number of people, and this will in turn increase market prices. Even the children of these entrepreneurs and artisans will enter into new expenditures. With this abundance of money, their fathers will give them a little money for their petty pleasures and they will buy cakes and meat pies, etc. This new quantity of money will be distributed so that many who lived without using money before will now have some. Many exchanges, which used to be made on credit by valuation, will now be made with cash, and that will increase the pace of the circulation of money in England compared to before.

I conclude from all this that by doubling the quantity of money in a state, the prices of products and merchandise are not always doubled. The river, which runs and winds about in its bed, will not flow with double the speed when the amount of water is doubled.

The change in relative prices,⁸³ introduced by the increased quantity of money in the state, will depend on how this money is directed at consumption and circulation. No matter who obtains the new money, it will naturally increase consumption. However, this consumption will be greater or less, according to circumstances. It will more or less be directed to certain kinds of commodities or merchandise, according to the judgment of those who acquire the money. Market prices will increase more for certain goods than for others, however abundant the money may be. In England, the price of meat might triple, but the price of wheat might increase less than one fourth.

In England, it is still permitted to import wheat from foreign countries, but not cattle. For this reason, however great the increase of money may be in England, the price of wheat can only be raised, above the price in other countries where money is scarce, by the cost and risks of importing wheat from these foreign countries.

It is not the same with the price of cattle, which will necessarily be proportioned to the quantity of money offered for meat, in relation to the quantity of meat and the number of cattle raised there.

An ox weighing 800 pounds sells in Poland and Hungary for two or three ounces of silver, but commonly sells in the London market for more than 40. Yet the bushel of flour does not sell in London for even double the price in Poland and Hungary.

An increase of money only increases the price of commodities and merchandise by the difference of the cost of transport, when this transport is allowed. But in many cases, transportation would cost more than the good is worth, therefore, for example, timber is useless in many places. This cost of transportation is also the reason why milk, fresh butter, lettuce, game, etc., are almost given away in the provinces distant from the capital.

I conclude that an increase of actual money in a state always causes an increase of consumption and a routine of greater expenditures. But the higher prices caused by this money does not affect all commodities and merchandise equally. Prices do not rise proportionally to the quantity of money, unless what has been added continues in the same circulation channels as before. In other words, those who offered one ounce of silver in the market would be the same and only ones to offer two ounces when the amount of money in circulation is doubled, and that is hardly ever the case. I recognize that when a large surplus of money is introduced in a state, the new money gives a new direction to consumption, and even a new speed to circulation. However, it is not possible to say exactly to what extent.⁸⁴

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⁸³ Cantillon used the phrase “proportion of the dearness,” but he is clearly describing what we now refer to as the change in relative prices.

⁸⁴ Here, Cantillon has debunked the naïve Quantity Theory of Money which concludes that the real economy is unaffected by inflation.