Increases in the supply of money from a balance of trade eventually causes prices to rise. This in turn puts pressure on domestic producers and increases imports. The result is that the balance of trade is reduced and eventually is negative. This is Cantillon’s price specie-flow mechanism which demonstrates the reasons for the tendency for equilibrium in international monetary flows. The balance of trade can result in economic power, but this also causes the economy to lapse into luxury and decline.
WE HAVE SEEN THAT THE QUANTITY of money circulating in a state may be increased by working its mines, by subsidies from foreign powers, by the immigration of foreign families, by the residence of ambassadors and travelers, but above all, by a regular and annual balance of trade, from supplying goods to foreigners, and by receiving from them at least part of the price in gold and silver. It is by this last means that a state grows most substantially, especially when its trade is accompanied and supported by ample shipping and by a significant output of the raw materials necessary for the production of exported manufactured goods.
However, the continuation of this commerce gradually introduces a great abundance of money and, little by little, increases consumption. Foreign products must be imported to meet this demand and must be paid for by a reduction in the annual balance of trade. On the other hand, increased expenditures increase the cost of labor and the prices of manufactured goods. It often happens that some foreign countries try to set up the same kinds of factories for themselves, in which case they stop buying those of the state in question. Although these newly established factories and manufactures are not perfect at first, they reduce and even prevent the export of those goods from the neighboring state into their own country, where they can be acquired at a better price.
In this manner, the state begins to lose some branches of its profitable trade and many of its workmen and artisans who lose their jobs will leave the state to find employment in new foreign factories. In spite of this diminution in the balance of trade, the custom of importing various products will continue. If the manufactured products of a state have a great reputation and can be shipped to distant countries at low cost, the state will maintain its advantage over the new foreign manufacturers for many years and will maintain a small balance of trade, or at least keep it even. If, however, some other maritime state tries to perfect the same articles and its navigation at the same time, it will, because of the cheapness of its manufactures, take away several branches of trade from the state in question. Consequently, this state will begin to lose its balance of trade and will be forced to send a part of its money abroad every year in order to pay for its imports.
Moreover, even if the state in question could keep a balance of trade and its greater abundance of money, it is reasonable to suppose that this abundance will plunge many wealthy individuals into luxury. They will buy paintings, precious stones from abroad, they will want silks and rare objects, and they set such an example of luxury in the state that in spite of the advantage of its ordinary trade, its money will flow abroad annually to pay for this luxury. This will gradually impoverish the state and cause it to pass from great power to great weakness.
When a state has arrived at the highest point of wealth, and I always assume that the comparative wealth of states consists mainly in their respective quantities of money, it will inevitably fall back into poverty by the ordinary course of things. The too-great abundance of money, which gives power to states so long as it lasts, throws them back imperceptibly, but naturally, into poverty. Thus it would seem that when a state expands by trade, and the abundance of money raises the price of land and labor, the prince or the legislator ought to withdraw money from circulation, keep it for emergencies, and try to slow down its circulation by every means, except compulsion and bad faith, to prevent its goods from becoming too expensive and avoid the drawbacks of luxury.
However, it is not easy to perceive the opportune time for this, or to know when money has become more abundant than it ought to be for the good and preservation of the advantages of the state. Therefore, princes and heads of republics do not concern themselves much with this sort of knowledge and strive only to make use of the abundance of their state revenues, to extend their power and to insult other countries on the most frivolous pretexts. All things considered, working to perpetuate the glory of their reigns and administration and to leaving monuments of their power and wealth is perhaps the best they can do because according to the natural course of humanity, the state must collapse on its own, they only accelerate its fall a little. Nevertheless, it seems that they should try to make their power last during the time of their own administration.
Few years are needed to raise abundance to the highest point in a state, however still fewer are needed to bring it to poverty for lack of commerce and manufacturing. Without speaking of the rise and fall of the Venice Republic, Hanseatic cities,85 Flanders and Brabant, the Dutch Republic, etc., who have succeeded each other in profitable branches of trade, one may say that France’s power has only been on the rise from 1646 (when factories were established to produce clothing which had previously been imported) to 1684 when a number of Protestant entrepreneurs and artisans were driven out of France.86 That kingdom has done nothing but recede since this last date.
I know no better measure than the leases and rents of property owners to judge the abundance and scarcity of money in circulation. When land is leased at high rates, it is a sign that there is plenty of money in the state; but when land has to be leased at much lower rates, it shows, other things being equal, that money is scarce. I have read in The State of France87 that acres of vineyard near Mantes—not far from the French capital—which leased for 200 livres tournois88 of full weight in 1660, only leased for 100 livres tournois of lighter money in 1700. However, the silver brought from the West Indies in the interval should naturally have raised the price of land in Europe.
The author [of The State of France] attributes this fall in rent to defective consumption. In fact, it seems that he observed a reduction in wine consumption. However, I think he has mistaken the effect for the cause. The cause was a greater rarity of money in France, and the effect of this was naturally a decrease in consumption. In this essay, I have always suggested, on the contrary, that an abundance of money naturally increases consumption and contributes above everything else to a higher valuation of the land. When abundant money raises products to honest prices, the inhabitants eagerly work to acquire them; although they do not show the same eagerness to acquire food and merchandise beyond what is needed for their maintenance.
It is clear that a state with more money in circulation than its neighbors has an advantage over them, so long as it maintains this abundance of money.89
In the first place, given that the price of land and labor are calculated in terms of money, the state where money is most abundant will give up less land and labor than it receives in all areas of trade. Thus the state in question sometimes receives the product of two acres of land in exchange for that of one acre, and the work of two men for that of only one. It is because of this abundance of money in circulation in London that the work of one English embroiderer costs more than that of 10 Chinese embroiderers, though the Chinese embroider much better and turn out more work in a day. In Europe, people are amazed that these people can live by working so cheap and that the wonderful fabrics they send us cost so little.
Secondly, tax revenues are more easily raised in a state where money is plentiful, and in relatively larger amounts. This gives the state, in case of war or dispute, the means to gain all sorts of advantages over its adversaries with whom money is scarce.
If there are two princes at war over the sovereignty or conquest of a state, where one has much money and the other has little money but many estates worth twice the money of his enemy, the first will be better able to attract generals and officers with gifts of money than the second will be by giving twice the value in lands and estates. Grants of land are subject to challenge and revocation and cannot be relied upon like money. With money, munitions of war and food can be bought, even from the enemies of the state. Money can be given for secret services without witnesses, but land, produce and goods would not serve for these purposes, not even jewels or diamonds, because they are easily recognized. After all, it seems to me that the comparative power and wealth of states consist, other things being equal, in the greater or less abundance of money circulating in them hic et nunc.90
I still have to mention two other methods of increasing the amount of money circulating in a state. The first is when entrepreneurs and private individuals borrow money from their foreign correspondents at interest, or when foreigners send their money into the state to buy shares or government stocks. This often amounts to very considerable sums on which the state must annually pay interest to these foreigners. These methods for increasing money in the state do make it more abundant and diminish the rate of interest. With this money, the entrepreneurs in the state find it possible to borrow more cheaply, to provide work, and to establish factories with the anticipation of a profit. The artisans, and all those whose hands this money passes through, consume more than they would have done if they had not been employed by means of this money. This consequently increases prices just as if the money belonged to the state and through the increased consumption or expenditures this causes, public revenues derived from taxes on consumption are increased. Money lent to the state in this manner brings many advantages with it, but in the end, it is always burdensome and harmful. The state must pay the interest to the foreigners every year and, aside from this loss, the state is at the mercy of the foreigners who can always cause trouble if they decide to withdraw their capital. Surely, they will want to withdraw their capital when the state needs it the most, as when preparing for war and defeat is feared. The interest paid to the foreigner is always much more considerable than the increase in pubic revenue caused by this money. One can observe these loans passing from one country to another, according to investors’ confidence in the states to which they are sent. But in reality, states that have paid heavy interest on these loans for many years will often find themselves bankrupt and unable to repay the capital. When trust is shaken, shares or public stocks fall; foreign shareholders do not like to sustain losses, preferring to content themselves with collecting interest, while waiting for confidence to return. But sometimes it does not return. In declining states, the principal objective of public administrators usually is to restore confidence in order to attract foreign loans. If the ministry does not act in bad faith and keeps its obligations, the money of the subjects will circulate without interruption. In this case, money from abroad has the power of increasing the quantity of money in a state.
But the borrowing road, which holds an advantage in the present, leads to a dead end and is but a flash in the pan. To restore a poor state with a shortage of money, a constant and real balance of trade is needed on an annual basis, as is the development, through navigation, of the articles and manufactures produced cheaper and thereby suitable for exportation.91 Merchants are the first to make their fortunes, then the lawyers may get part of it, the prince and tax collectors get a share at the expense of all the others, and distribute their graces as they please. When money becomes too plentiful in the state, luxury will follow and the state will fall into poverty.
This is roughly the cycle that may be experienced by a large state which has both capital and industrious inhabitants. A talented public administrator is always able to begin the cycle over again. Not many years are needed to see it tried and succeed, at least in the beginning, which makes for the most interesting situation. The increased quantity of money in circulation will be brought about by several factors that my argument does not allow me to examine now.
As for states without much capital and where capital can only be increased by accidents or by particular circumstances of the times, it is difficult to find the means that would allow them to flourish by trade. No administrator can restore the Republics of Venice and Holland to the brilliant situation from which they have fallen. But Italy, Spain, France, and England, however poor they may be, are still capable of attaining a high degree of power by trade alone if led by a good administration and if they operate separately. If all these states were equally well administered, they would be great only in proportion to their respective capital and to the greater or lesser industriousness of their people.92
The last method I can think of to increase the quantity of money actually circulating in a state is by violence and arms, and this method is often blended with the others, since in all peace treaties one will try to maintain trading rights and other privileges one could obtain. When a state mandates contributions or makes several other states tributary to it, this is a very sure method of obtaining their money. I will not examine the methods of putting this theory into practice, but I will say that all the nations who have flourished in this manner have not failed to decline, like states that have flourished through their commerce. The ancient Romans were more powerful in this manner than all the other peoples we know of. Nevertheless, these same Romans, before losing an inch of the land of their vast states, fell into decadence through luxury and impoverished themselves by the reduction of money which circulated among them, and it was this luxury that caused their empire to pass into the hands of the eastern nations of the Orient.
So long as Romans’ luxury (which did not begin until after the defeat of Antiochus, King of Asia, around A.U.C. 564)93 came from the product of the land and the labor of all the vast estates of their dominion, the circulation of money only increased instead of decreasing. The public was in possession of all the gold, silver, and copper mines in the empire. They had the gold mines of Asia, Macedonia, Aquileia94 and the rich mines, both gold and silver, of Spain and other countries. They had several mints where gold, silver and copper coins were struck. In Rome, the consumption of all the goods and merchandise drawn from their vast provinces did not diminish the circulation of money, any more than the pictures, statues and jewels themselves. Although the wealthy landlords spent excessive amounts for their feasts, and paid 15,000 ounces of silver for a single fish, all that did not diminish the quantity of money circulating in Rome, given that the provinces made tributes regularly, not to mention the money brought in by lenders and by governors with their extortions. The amounts annually extracted from the mines increased the circulation in Rome during Augustus’ whole reign. However, luxury was already on a very great scale, and there was much eagerness, not only for curiosities produced in the empire, but also for jewels from India, pepper and spices, and all the rarities of Arabia. Silks, which were not made in the empire, began to be in demand there. Nevertheless, the money drawn from the mines still exceeded the sums sent out of the empire to buy all these things. However, under Tiberius, money became scarce when that emperor collected 2.7 billion sesterces95 in his treasury. To restore an abundant circulation, he only needed to borrow 300 million on a mortgage of his estates. After his death, Caligula spent all of Tiberius’ treasure in less than one year, and it was then that the abundance of money in circulation was at its highest in Rome and the wind of luxury kept on blowing. The historian Pliny96 estimated that in his time the empire exported at least 100 million sesterces annually. This was more than was drawn from the mines. Under Trajan, land prices fell by one-third or more, according to the younger Pliny, and money continued to decrease until the time of the Emperor Septimus Severus.97 Money was then so scarce in Rome that the emperor collected enormous quantities of wheat, being unable to collect enough tax money for his enterprises. Thus the Roman Empire declined through the loss of its money before losing any of its estates. That is what luxury brought about, and what it always will bring about in similar circumstances.