One of the most notable features – and certainly the one drawing the most attention from historians – of Cantillon's extensive monetary theory was his pioneering analysis of the tendency towards international monetary equilibrium, or the specie-flow-price mechanism that has been generally attributed to the later writings of David Hume.
Cantillon applied his ‘micro-analysis’ of changes of the money supply within a country to changes in the distribution of money between countries. For over two centuries, mercantilist writers and statesmen in Europe had advocated an increased supply of specie in a country as a means of building up state power, and they were increasingly clear that, short of having gold or silver mines a nation could only increase its stock of money by having a favourable balance of trade. It was clear to the mercantilists that this was not a policy every nation could successfully pursue, for the ‘favourable’ balances of trade of some nations would necessarily have to be offset by the ‘unfavourable’ balances of others. In this disequilibrium situation, it was every nation for itself, as each attempted to benefit at the expense of other nations by restrictionist and warlike policies. But there was a further problem in the background; since most writers were at least roughly familiar with the ‘quantity theory’, or supply–demand analysis of the value of money, an inner contradiction loomed. For if nation A managed to acquire a favourable balance of trade and to accumulate specie, the increase of specie would raise prices in nation A, make the country's products uncompetitive in the world markets, and bring the favourable balance to an end.
No one was more lucid about the problem of money and international payments than Cantillon. He pointed out that specie can either be acquired within a country by mining ore, or through subsidies, warfare, ‘invisible’ payments, borrowing, or a favourable balance of trade with other countries. But then, in the Cantillon process analysis, either the mine owners or the exporters would spend or lend the money. Part of the expenditure of the new money would surely be spent abroad, and furthermore the increased stock of money would raise prices at home, making domestic goods less competitive. Exports would fall and imports of cheaper foreign products would increase, and gold would flow out of the country, reversing the favourable balance of trade.
In this way, Cantillon worked out an international monetary theory integrated with his domestic analysis, and was one of the first to work out a theory of international monetary equilibrium. For the world market managed to frustrate, at least in the long run, governmental attempts to intervene and secure favourable balances of trade. It should be noted, further, that Cantillon's analysis contained the basis of both major parts of the equilibrating specie-flow-price mechanism: the expenditure of new monetary cash balances increasing imports; and the increase of domestic prices caused by a higher money supply, the price effect lowering exports and adding to imports.
Richard Cantillon understood the grave inner contradiction of mercantilism: increased specie raising prices and thereby destroying the favourable balance of payments that brought the specie. His unsatisfactory way out was to advise the king to hoard much of the increased stock so as not to drive up prices; unsatisfactory because money is meant to be spent eventually, and once spent the dreaded price increase would willy-nilly take place.
Professor Salerno, however, has introduced a cautionary note in the encomiums to Cantillon, pointing out that he has been called only a ‘semiequilibrium’ theorist because he did not portray a satisfactory picture of what the equilibrium state would be like, and he did not think of the world economy as tending firmly towards equilibrium. As a result, Cantillon did not present a theory of the international distribution of gold and silver in equilibrium.12 He thought of the economy instead as engaging in endless cycles of disequilibrium rather than as tending towards equilibrium.