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Friday, November 23, 2012

On the Inequality of the Circulation of Money in a State

Rural France was impoverished because commodities had to be sent to the capital and major cities to pay taxes to the state and rents to the property owners living there. It is argued here that if factories were permitted in rural areas, basic commodities could be turned into goods, which could then be sent to the cities at a much lower transport cost. This would save resources in transportation and benefit both rural populations and property owners.

THE CITY ALWAYS SUPPLIES various goods to the country, and the property owners who reside in the city should always receive about onethird of the production of their land. The country thus owes to the city more than half the production of the land. This debt would always exceed one-half if all property owners lived in the city, but because most owners with less significant land holdings live in the country, I suppose that the balance or debt, which continually returns from the country to the city, is equal to half the production of the land and is paid to the city with half of the commodities transported from the countryside and sold to pay this debt.
The countryside of a state or kingdom owes a constant balance to the capital to pay rents to the great property owners who reside there, and to pay taxes to the State or crown, most of which are spent in the capital. All the provincial cities owe a constant balance to the capital, for the State’s property and consumption taxes, and for the different goods that they obtain from the capital. It is also the case that several individuals and property owners, who live in the provincial cities, will spend some time in the capital for pleasure, or for the judgment of their lawsuits in final appeal, or because they send their children there for an elite education. Consequently, all these expenses incurred in the capital are drawn from the provincial cities.
It may therefore be said that all the countryside and cities of a state regularly owe an annual balance or debt to the capital. However, because such payments are made in money, it is clear that the provinces always owe considerable sums to the capital. The products and commodities that the provinces send to the capital are sold to pay for these debts and balances.
Now assume that the circulation of money in the provinces and in the capital is equal both in terms of the quantity of money and the speed of circulation. The balance will be first sent to the capital in cash and this will decrease the quantity of money in the provinces and increase it in the capital. Consequently, products and goods will be more expensive in the capital than in the provinces because of the greater abundance of money in the capital. The difference between the prices in the capital and the provinces must pay for the costs and risks of transport, otherwise cash will be sent to the capital to pay the balance and this will continue until the differences in prices between the capital and the provinces cover the costs and risks of transport. Then the merchants and entrepreneurs of the market towns will buy the products of the villages at a low price and will have them transported to the capital to be sold at a higher price. This difference in price will of necessity pay for the maintenance of the horses and employees of the entrepreneur, plus profit, or else he would cease his enterprise.
As a result, the price of farm products of equal quality will always be higher in areas that are closer to the capital than in those more distant in proportion to the costs and risks of transport. In addition, areas that are adjacent to seas and rivers flowing into the capital will get a better price for their products relative to those which are distant (other things being equal), because water transport is considerably less expensive than land transport. On the other hand, there are certain foods and goods that cannot be consumed in the capital because they are not suitable or cannot be sent there on account of their bulk, or because they would be spoiled on the way. These will be infinitely cheaper in the country and distant provinces than in the capital, because of the much smaller amount of money in circulation in the distant provinces.
Therefore fresh eggs, game, fresh butter, firewood, etc., will generally be much cheaper in the province of Poitou,73 while wheat, cattle and horses will be more expensive in Paris, the difference being the cost and risk of transport, and the fees for entering the city.
It would be easy to make an infinite number of inductions of the same kind to justify by experience the necessity of an inequality in the circulation of money in the different provinces of a great state or kingdom, and to show that this inequality is always relative to the balance or debt, which belongs to the capital.
If we assume that the balance owed to the capital amounts to one-fourth of the production of the land of all the provinces of the state, the best use that can be made of the land would be to employ the country bordering on the capital to produce the kinds of products which could not be drawn from distant provinces without much expense or deterioration. This is in fact what always takes place. The market prices in the capital regulate how the farmers employ the land for this or that purpose. They use the closest lands, when suitable, for market gardens, pasture, etc.
Therefore, when possible, factories for cloth, linen, lace, etc., ought to be set up in remote provinces and factories to make tools of iron, tin, copper, etc., should be located in the neighborhood of coal mines or forests, which are otherwise useless because of their distance. In this way, finished manufactured goods could be sent to the capital with much lower transportation cost than by sending the raw materials to be manufactured in the capital, as well as the subsistence of the artisans who manufacture them. This would save a large quantity of horses and transport workers who could be better employed for the benefit of the state. The land could serve to maintain the nearby workmen and useful artisans and a multitude of horses could be saved that are now used for unnecessary transportation. In this way, the remote areas would yield higher rents to property owners and the inequality of circulation between the provinces and the capital would be considerably less and better proportioned.
Nevertheless, to set up manufacturing in this way requires not only much encouragement and capital funds, but also some way to ensure a regular and constant demand, either in the capital itself or in foreign countries. Exports to foreign countries serve the capital by either paying for the goods it imports, or with the money it gets in return.
When these factories are established, perfection is not attained immediately. If some other province produces the goods better or cheaper, or has an advantage in transportation costs because it is closer to the capital or can resort to river and sea transportation, the new manufactures will not succeed. All these circumstances have to be considered when setting up a factory. My intention in this essay is not to explain these issues, but only to suggest that so far as practicable, significant manufacturing should be set up in provinces far from the capital to produce a less unequal distribution of money between rural areas and the capital.74
For when a distant province has no factories and produces only ordinary foodstuffs and is without water communication to the capital or the ocean, it is surprising how scarce money is compared to that which circulates in the capital, and how little revenue the prince and the property owners who reside in the capital receive from even their best lands.
The wines of Provence and Languedoc75 that are sent to the north, must be sent on the long and difficult route around the Straits of Gibraltar and after having passed through the hands of several entrepreneurs, yield very little to the property owners living in Paris.
However, these distant provinces must send their commodities to the capital or elsewhere (either within the state or to foreign countries), despite all the disadvantages of transport and distance, in order to pay the balance owed to the capital. If there were rural factories to pay this balance, the commodities would be mostly consumed locally and in that case, the rural population would be much larger.
When a province pays its balance only with commodities that yield little in the capital because of transport costs, it is clear that the property owners living in the capital give up the production of a large amount of land in the country to receive little in the capital. This arises from the inequality of money, and this inequality results from the constant balance owed to the capital by the province.
Currently, if a state or kingdom supplies foreign countries with goods from its own factories and does enough of this commerce to draw in a constant balance of money from abroad every year, money will be more plentiful and the circulation will become more substantial than in foreign countries, and consequently, land and labor will gradually command a higher price. It therefore follows that in all the branches of commerce, this state will exchange a smaller amount of land and labor with the foreigner for a larger amount, so long as these circumstances continue.76
But if a foreigner resides in the state in question, he will be in roughly the same situation and circumstances as the citizen of Paris who owns land in distant provinces.
Beginning in 1646,77 factories for making cloth and other goods were built in France and it appeared to trade, at least in part, in the way I described. Since the decay of France, England has taken possession of this trade, and all states appear to flourish by it to a larger or lesser extent. The inequality of the circulation of money in the different states represents the inequality of their comparative power, other things being equal, and this inequality of circulation is always related to the balance of foreign trade.78
It is easy to judge from what has been said in this chapter that the assessment of taxes by the royal tithe, as suggested by Mr. de Vauban, would be neither advantageous, nor practicable. If taxes on land were levied in money, in proportion to the rents of the property owners, it would be fairer. But I must not stray from my subject to show the inconveniences and impossibility of Mr. de Vauban’s proposal.

Essay on Economic Theory, An

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