Here Cantillon uses his price-specie flow mechanism to analyze some of the effects of inflation. Increasing the supply of money by mining hurts some people and benefits others because certain prices and incomes rise faster than others. However, if the new money is accumulated and saved by those who successfully export goods, either because of superior quality or more efficient transportation, it will lead to higher standards of living.
IF GOLD OR SILVER MINES were found in a state, and considerable quantities of minerals were extracted from them, the owners of these mines, the entrepreneurs, and all those who work there, will increase their expenditures in proportion to the wealth and profit they make. They will also lend the money they have over and above what they need for their expenses and earn interest.
All this money, whether lent or spent, will enter into circulation and will not fail to raise the price of commodities and goods in all the channels of circulation it enters. Increased money will bring about increased expenditure, and this will cause an increase of market prices in the good years and to a lesser degree in bad years.
Everybody agrees that the abundance of money, or an increase in its use in exchange, raises the price of everything. This truth is substantiated in experience by the quantity of money brought to Europe from America for the last two centuries.80
Mr. Locke lays it down as a fundamental maxim that the quantity of goods in proportion to the quantity of money is a regulator of market prices. I have tried to elucidate his idea in the preceding chapters: he has clearly seen that the abundance of money makes everything more expensive, but he has not considered how this happens. The great difficulty of this question consists in knowing in what way and in what proportion the increase of money raises the price of things.
I have already noted that acceleration or a greater pace in the circulation of money in exchange, is equivalent to, to a certain degree, an increase of actual money. I have also noted that an increase or decrease of prices in a distant market, domestic or foreign, influences the local market prices. On the other hand, money flows through so many retail channels that it seems impossible not to lose sight of it, seeing that having been amassed to make large sums, it is distributed in small amounts in exchange, and then gradually accumulated again to make large payments. For these operations, it is necessary to constantly exchange between gold, silver and copper money, according to the requirements of exchange. It is also usually the case that the increase or decrease of hard money in a state is not perceived because it comes into a state from foreign countries by such imperceptible means and proportions that it is impossible to know exactly the quantity which enters or leaves the state.
However, all these operations happen before our eyes and everybody takes a direct part in them. I therefore venture to offer a few observations on the subject, even though I may not be able to give an exact and precise account.
In general, an increase of hard money in a state will cause a corresponding increase in consumption and this will gradually produce increased prices.
If the increase of hard money comes from gold and silver mines within the state, the owner of these mines, the entrepreneurs, the smelters, refiners, and all the other workers will increase their expenses in proportion to their profits. Their households will consume more meat, wine, or beer than before. They will become accustomed to wearing better clothes, having finer linens, and to having more ornate houses and other desirable goods. Consequently, they will give employment to several artisans who did not have that much work before and who, for the same reason, will increase their expenditures. All this increased expenditures on meat, wine, wool, etc., necessarily reduces the share of the other inhabitants in the state who do not participate at first in the wealth of the mines in question. The bargaining process of the market, with the demand for meat, wine, wool, etc., being stronger than usual, will not fail to increase their prices. These high prices will encourage farmers to employ more land to produce the following year, and these same farmers will profit from the increased prices and will increase their expenditure on their families like the others. Those who will suffer from these higher prices and increased consumption will be, first of all, the property owners, during the term of their leases, then their domestic servants and all the workmen or fixed wage earners who support their families on a salary. They all must diminish their expenditures in proportion to the new consumption, which will compel a large number of them to emigrate and to seek a living elsewhere. The property owners will dismiss many of them, and the rest will demand a wage increase in order to live as before. It is in this manner that a considerable increase of money from mines increases consumption and, by diminishing the number of inhabitants, greater expenditures result by those who remain.
If money continues to be extracted from the mines, the abundance of money will increase all prices to such a point that not only will the property owners raise their rents considerably when the leases expire and resume their old lifestyle, increasing their servants’ wages proportionally, but the artisans and workmen will increase the prices of the articles they produce so high that there will be a considerable gains in buying them from foreigners who make them much cheaper. This will naturally encourage several people to import products at lower prices from foreign factories, and this will gradually ruin the artisans and manufacturers of the state who will be unable to sustain themselves by working at such low rates because of the high cost of living.
When the overabundance of money from the mines has diminished the number of inhabitants in a state, accustomed those who remain to excessive expenditures, raised the prices of farm products and the wages for labor to high levels, and ruined the manufactures of the state by the purchase of foreign products by property owners and mine workers, the money produced by the mines will necessarily go abroad to pay for the imports. This will gradually impoverish the state and make it, in a way, dependent on foreigners to whom it is obliged to send money every year as it is extracted from the mines. The great circulation of money, which was widespread in the beginning, ceases; poverty and misery follow and the exploitation of the mines appears to be only advantageous to those employed in them and to the foreigners who profit thereby.
This is approximately what has happened to Spain since the discovery of the Indies.81 As for the Portuguese, since the discovery of gold mines in Brazil, they have nearly always used foreign articles and manufactured goods; and it seems that they worked the mines only for the account and advantage of foreigners. All the gold and silver that these two states extract from the mines does not supply them with more precious metal in circulation than others. England and France usually have even more.
Now, if the increase of money in the state comes from a balance of foreign trade (i.e., from sending abroad articles and manufactured goods of greater value and quantity than is imported and consequently receiving the surplus in money), this annual increase of money will enrich a great number of merchants and entrepreneurs in the state, and will give employment to numerous artisans and workmen who provide the goods sent to the foreigner from whom money is drawn. This will gradually increase the consumption of these industrious inhabitants and will raise the price of land and labor. But the industrious people who are eager to acquire property will not at first increase their expenditures, They will wait until they have accumulated a large sum from which they can draw a secure interest income, independent of their occupation. Once a large number of inhabitants have acquired considerable fortunes from this money, which enters the state regularly and annually, they will not fail to increase their consumption and raise the price of everything. Although these higher prices result in greater expenditures than they at first contemplated, they will, for the most part, continue so long as their capital lasts, for nothing is easier or more pleasant than to increase the family expenditures, and nothing is more difficult or unpleasant than to decrease them.
If an annual and continuous balance has caused a considerable increase of money in a state, it will not fail to increase consumption, raise the price of everything and even diminish the number of inhabitants, unless additional products are drawn from abroad proportionate to the increased consumption. Moreover, in states that have acquired a considerable abundance of money, it is natural to import many goods from neighboring countries where money is rare and consequently everything is cheap. However, as money must be exchanged for these products, the balance of trade will become smaller. The cheapness of land and labor in foreign countries where money is rare will naturally cause the building of factories and businesses similar to those of the state, but which will not, at first, be as perfect or as highly valued.
In this situation, the state can retain its abundance of money, consume all its own products and a great deal of foreign products and, over and above all this, maintain a small balance of trade against the foreigner or at least keep the balance leveled for many years. In other words, the state will import, in exchange for its commodities and manufactured goods, as much money from these foreign countries as it sends to them for the goods or products of the land it takes from them. If the state is a maritime state, the easiness and low cost of its shipping for the transport of its commodities and manufactured goods to foreign countries may compensate, in some way, for the high cost of labor caused by the overabundance of money. Therefore, the commodities and manufactured goods of this state, expensive though they may be, will continue to sell in foreign countries, and sometimes will be cheaper than the manufactured goods of another state where labor is paid less.
The cost of transport greatly increases the prices of goods sent to distant countries. However, these costs are very moderate in maritime states, where there is regular shipping to all foreign ports and ships are nearly always found there ready to sail, taking on board all cargoes entrusted to them at a very reasonable freight.
This is not so in states where navigation does not flourish. There, it is necessary to build ships especially for the transportation of goods and this sometimes absorbs all the profit; and transportation there is always very expensive, which entirely discourages commerce.
England today consumes not only most of its own small production, but also a large amount of foreign products, such as silks, wines, fruits, linens in great quantity, etc. Meanwhile, she sends abroad the products of her mines and manufactured goods, for the most part. No matter how expensive labor is due to the abundance of money, she does not fail to sell her products to distant countries, because of her maritime advantage, at prices as reasonable as those of France, where these same products are cheaper.
The increased quantity of money in a state may also be caused, without a balance of trade, by subsidies paid to this state by foreign powers, by the expenditures of several ambassadors or travelers wanting to stay there for political reasons, curiosity, or pleasure, or by the transfer of the property and wealth of families who choose to leave their country to seek religious freedom or for other reasons, and to settle down in this state. In all these cases, the sums entering the state always cause an increase in expenditures and consumption, and consequently increase the prices of all goods in the channels of exchange where money enters.82
Before the increase in the quantity of money, suppose that a quarter of the inhabitants of the state consume meat, wine, beer, etc., on a daily basis and frequently acquire clothes, linens, etc., but that after the increase, a third or half of the inhabitants consume these same things. Prices for these goods will increase and the high price of meat will convince several of those who formed the original quarter, to consume less meat than usual. A man who eats three pounds of meat daily will manage with two pounds, but he feels the reduction. Meanwhile, the other half of the inhabitants who hardly ate any meat at all will not feel the reduction. The price of bread will increase gradually because of increased consumption, as I have often suggested, but it will be proportionally less expensive than meat. The increase in the price of meat is noticeably felt because it causes a reduction in consumption on the part of a small portion of the people, but the increased price of bread is less noticeable because the decreased consumption is spread across the entire population. If 100,000 extra people move to a state with 10 millions inhabitants, their extra consumption of bread will amount to only one pound in 100, which must be subtracted from the old inhabitants. But when a man consumes 99 pounds of bread for his subsistence instead of 100, he hardly feels the reduction.
When the consumption of meat increases, farmers increase the size of their pastures to produce more meat, and this diminishes cropland, and consequently the amount of wheat produced. However, what generally causes meat to become proportionally more expensive than bread is that imports of foreign wheat are usually permitted while imports of beef are absolutely forbidden, as is the case in England, or heavy import duties are imposed as in other states. This is the reason why the rents for meadows and pastures rise in England, with the abundance of money, three times more than the rents of cropland.
There is no doubt that when ambassadors, travelers, and families move to a state, the increased consumption will cause higher prices in all the markets where they spend their money.
As for the subsidies the state has received from foreign powers, they are either hoarded for state necessities or are put into circulation. If we assume they are hoarded, they do not concern my argument for I am considering only money in circulation. Hoarded money, silverware, churches’ money, etc., are resources that the state turns to in emergency situations, but are of no present utility. If the state puts these funds into circulation, it can only do so by spending them and this will certainly increase consumption and raise the price of all goods. Whoever receives this money will set it in motion the principal business of life—which is the food—either for himself or someone else, since everything is connected to this, directly or indirectly.