LET US ASSUME THAT THE FARMER pays 1,300 ounces of silver every quarter to the property owner, who pays, every week, 100 ounces to the baker, butcher, etc., and that these, in turn, pay the farmer 100 ounces every week, so that the farmer collects every week as much money as the property owner spends. In this case there will be only 100 ounces in constant circulation; the other 1,200 ounces will remain held partly by the property owner and partly by the farmer.
However, it rarely happens that the property owners spend their rents in a fixed and regular proportion. In London, as soon as a property owner receives his rent, he deposits most of it with a goldsmith or banker, who lends it at interest, so that this part is in circulation. Or else the property owner spends a large part of it on the many things he needs for his household. He may even borrow money before he gets his next quarter’s rent. Thus the money of the first quarter’s rent will circulate in a thousand ways before it is accumulated by the farmer to make his second-quarter payment.
When it comes time to pay the second quarter rent, the farmer will sell his products in large amounts. Those who buy his cattle, wheat, hay, etc., will already have collected the price of these goods from their retail sales. Thus, the money of the first quarter will have circulated in the retail trade for nearly three months before being collected by the retail dealers, and given to the farmer who will use it to make his second-quarter payment. It would seem from this that less money would suffice for the circulation in a state than we have assumed.
Barter does not require much cash because goods can be evaluated at the market price on the day of delivery. If a brewer supplies a tailor with beer for his family, and if the tailor in turn supplies the brewer with the clothes he needs, the only cash needed between these two traders is the amount of the difference between the two transactions.
If a merchant in a market town sends commodities to an entrepreneur in the city, and in return the entrepreneur sends the merchant products from the city to be consumed in the country, throughout the year, business between these two dealers and mutual confidence leads them to account for their commodities and merchandise at their respective market prices, and the only money needed for this commerce will be the balance that 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 entrepreneurs of a city who continually do business with each other may practice this method. Barter exchange by valuation does seem to reduce the cash in circulation, or at least to accelerate its movement by making it unnecessary when people have confidence in each other and can use this method of exchange by valuation. It is not without reason, as is commonly said, that trust in commerce makes money less scarce.
Goldsmiths and bankers, whose tickets71 serve as payment like coin money, also add to the speed of circulation, which would be retarded if money was required for payments where tickets now suffice. And although these goldsmiths and bankers always keep on hand a large part of the coin money they have received for their tickets, they also put into circulation a considerable amount of this effective money, as I shall explain later when dealing with public banks.
All these reflections seem to prove that the circulation in a state could be conducted with much less coin money than what I previously assumed was necessary. However, the following inductions appear to counterbalance them and to contribute to the slowing down of circulation.
I will first observe that all commodities are produced by labor that may possibly—strictly speaking—be carried on with little or no actual money, as I have often suggested. But the workers who make goods in cities or market towns must be paid in coin money. If a house has cost 100,000 ounces of silver to build, all this sum or most of it, must have been paid in small amounts on a weekly basis to the brick maker, masons, carpenters, etc., directly or indirectly. The expenditures of small families, which are always more numerous in cities, must be made with coin money. With such small purchases, credit, barter, and tickets, like banknotes do not work. Merchants and entrepreneurs demand cash for the things they supply, and if they give credit to a family for a few days or months, they require a substantial down payment. A wagon builder, who sells a wagon for 400 ounces of silver in notes, will have to convert them into coin money to pay for all the materials and the men who have worked on the wagon if they have worked on credit. If he has paid them already, the money will be used to pay them to start working on a new one. The sale of the wagon will leave him the profit of his enterprise and he will spend this profit to maintain his family. He could not be satisfied with notes, unless he can afford to put something aside or deposit it to earn 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 beverages and food are necessarily paid for in coin money. In the families of landowners, who live in the city, food is paid for every day or every week. In their families, wine is paid for every week or every month; hats, stockings, shoes, etc. are ordinarily paid for in coin money, at least the payments correspond to cash for the men who have worked upon them. All the sums used to make large payments are divided, distributed, and spread in small payments corresponding to the maintenance of the workmen, servants, etc., and all these sums are necessarily collected and reunited by the entrepreneurs and retailers, who are employed in providing the subsistence of the inhabitants, to make large payments when they buy commodities from the farmers. An alehouse 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 that anything could be purchased for cash in a state, like furniture, merchandise, etc., at a value that does not correspond to the maintenance of those who have produced it.
Circulation in the cities is carried out by entrepreneurs and always corresponds, directly or indirectly, to the subsistence of the servants, workmen, etc. It is inconceivable that the circulation in small retail businesses could be conducted 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 this purpose and cash is needed.
All this presupposes that all the classes in a state who practice some economy, save and keep out of circulation small amounts of cash until they have enough to invest at interest or profit.
Many miserly and timid people will bury and hoard cash for considerable periods of time.
Many property owners, entrepreneurs and others, always keep some cash in their pockets or safes so that they do not run out of money and to protect them against unforeseen emergencies. If a gentleman says that he never had less than 20 louis72 in his pocket throughout the whole year, it may be said that this pocket has kept 20 louis out of circulation for a year. No one likes to spend to their last penny or to be completely without money. People like to receive a new payment before paying debt, even if they have the money.
The funds of minors and of litigants are often deposited in cash and kept out of circulation.
Beside the large quarterly payments that pass through the hands of the farmers, there are wholesale transactions between entrepreneurs and payments from borrowers to lenders that occur at different times. All these sums are collected in the retail trade, are dispersed again, only to come back to the farmer sooner or later. However, they would seem to require a larger amount of cash for circulation than if these large payments were made at times different from those when the farmers are paid for their commodities.
In conclusion, there is such a great a variety in the organization of the inhabitants in the state, and in the corresponding circulation of coin money, that it seems impossible to lay down anything precise or exact about the proportion of money sufficient for circulation. I have produced so many examples and inductions which make it clear that I am not far from 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 property owners.” When the owners have a rent that amounts to half the production, or more than a third, a greater quantity of coin money is needed for circulation, other things being equal. When there is great confidence in the banks and in book credits, or when the speed of circulation is accelerated in any way, less money will suffice. However, I shall show later that public banks do not bring as many advantages as is usually assumed.