Essay on the Nature of Commerce

Richard Cantillon

[Part 6 of 7]

Part Three

Chapter One

On Foreign Trade

When a state exchanges a small product of land for a larger in foreign trade, it seems to have the advantage; and if current money is more abundant there than abroad it will always exchange a smaller product of land for a greater.

When the state exchanges its labour for the produce of foreign land it seems to have the advantage, since its inhabitants are fed at the foreigner's expense.

When a state exchanges its produce conjointly with its labour, for a larger produce of the foreigner conjointly with equal or greater labour, it seems again to have the advantage. ...

This is an example of a branch of trade which strengthens the foreigner, lessen the number of inhabitants of the state, and without causing any circulating money to leave it weakens the same state. I have chosen it to show more strikingly how one state may be the dupe of another in trade, and the method of judging the advantages and disadvantages of foreign trade.

It is by examining the results of each branch of commerce singly that foreign trade can be usefully regulated. It cannot be distinctly apprehended by abstract reasons. It will always be found by examining particular cases that the exportation of all manufactured articles is advantageous to the state, because in this case the foreigner always pays and supports workmen useful to the state: that the best returns or payments imported are specie, and in default of specie the produce of foreign land into which there enters the least labour. By these methods of trading states which have very little raw produce are often seen to support inhabitants in great numbers at the expense of foreigners, and large states maintain their inhabitants in greater ease and abundance.

But as great states have no need to increase the number of their inhabitants it is enough to make those who are in it live there on the raw produce of the state with more comfort and ease and to increase the strength of the state for its defence and security. To do so by foreign trade it is needful to encourage as much as possible the export of goods and manufactures of the state in exchange so far as may be for gold and silver in kind. If by abundant harvest it happened that there was in the state much produce over and above the ordinary annual consumption it would be profitable to encourage the exportation of it in return for its value in gold and silver. These metals do not corrupt and disappear like the produce of the land, and with gold and silver one can always import into the state what is lacking there.

It would not however be profitable to put the state into the annual custom of sending abroad large quantities of its raw produce in return for foreign manufactures. It would be to weaken and diminish the inhabitants and the strength of the state at both ends.

But I have no intention of entering into detail as to the branches of trade which should be encouraged for the good of the state. Enough to say that it should always be endeavoured to import as much silver as possible.

The increase in the quantity of silver circulating in a state gives it great advantages in foreign trade so long as this abundance of money lasts. The state then exchanges a small quantity of produce and labour for greater. It raises its taxes more easily and finds no difficulty in obtaining money in case of public need.

It is true that the continued increase of money will at length by it abundance cause a dearness of land and labour in the state. The goods and manufactures will in the long run cost so much that the foreigner will gradually cease to buy them, and will accustom himself to get them cheaper elsewhere, and this will by imperceptible degrees ruin the work and manufactures of the state. The same cause which will raise the rents of landlords (which is the abundance of money) will draw them into the habit of importing many articles from foreign countries where they can be had cheap. Such are the natural consequences. The wealth acquired by a state through trade, labour and economy will plunge it gradually into luxury. States who rise by trade do not fail to sink afterwards. There are steps which might be, but are not, taken to arrest this decline. But it is always true that when the state is in actual possession of a balance of trade and abundant money it seems powerful, and it is so in reality so long as this abundance continues. ...

An American who sells beaver skins to a European is rightly astonished to learn that woollen hats are as serviceable as those made of beaver, and that all the difference, which causes so long a sea journey, is in the fancy of those who think beaver hats lighter and more agreeable to the eye and the touch. However as these beaver skins are ordinarily paid for to the American in articles of iron, steel, etc. and not in silver, it is a trade which is not injurious to Europe, especially since it supports workmen and particularly sailors, who in the needs of the state are very useful, whilst the trade with the manufactures of the East Indies carries off the money and diminishes the workmen of Europe. ...

Just as it is disadvantageous to a state to encourage foreign manufactures so it is to encourage foreign navigation. When a state sends abroad its articles and manufactures it derives the full advantage if it sends them in its own ships. It then maintains a good number of sailors who are as useful to the state as workmen. But if it leaves the carriage of them to foreign vessels it strengthens the foreign shipping and weakens its own.

Navigation is an essential point in foreign trade. In the whole of Europe the Dutch are those who build ships the cheapest. ...

Owing to these advantages they would be the only sea carriers in Europe if cheapness only were followed. And if they had enough of their own raw material to form an extensive commerce they would doubtless have the most flourishing maritime service in Europe. But the greater number of their seamen does not suffice without the interior strength of the state, for the superiority of their naval power. They would never arm warships nor sailors if the state had large revenues to build the ships and pay the men: they would profit in everything from extended markets.

England, in order to prevent the Dutch from increasing at her expense their advantage on the sea by this cheapness, has forbidden any nation from bringing into England other merchandise than that of their own growth. In this way, the Dutch being unable to serve as carriers for England, the English have strengthened their own shipping. And though they sail at greater costs than the Dutch the wealth of their overseas cargoes renders these costs less considerable.

France and Spain are maritime states which have rich produce sent to the north, whence goods and merchandise are brought to them. It is not surprising that their shipping is inconsiderable in proportion to their produce and the extent of their seaboard, since they leave it to foreign vessels to bring them all they receive from the north and to take away from them the goods which the states of the north receive from them.

These states, France and Spain, do not take into account in their policy the consideration of trade in the way in which it would be advantageous. Most merchants in France and Spain who have to do with the foreigner are rather agents or clerks of foreign merchants than adventurers carrying on the trade on their own account.

It is true that the states of the north are, by their situation and the vicinity of countries which produce all that is needed for building ships, in a position to carry everything cheaper than France and Spain could do. But if these two kingdoms took steps to strengthen their shipping, this obstacle would not prevent them. England has long since partly shown them the example. They have at home and in their colonies all that is needed for the construction of ships, or at least it would not be difficult to get them produced there, and there is an infinity of methods that might be used to make such a policy successful if the legislature or the ministry would concur in it. My subject does not allow me in this essay to examine these methods in detail. I will limit myself to saying that in countries where trade does not regularly support a considerable number of ships and sailors it is almost impossible for the prince to maintain a flourishing navy without such expense as would be capable by itself of ruining the treasure of his state.

I will conclude than by observing that the trade most essential to a state for the increase or decrease of its power is foreign trade, that the home trade is not of equally great importance politically, that foreign trade is only half supported when no care is taken to increase and maintain large merchants who are natives of the country, ships, sailors, workmen and manufacturers, and above all that care must always be taken to maintain the balance against the foreigner.

Chapter II

Of the Exchanges and their Nature

...It is somewhat in this way that the balance of trade is transported from one city to the other through bankers, and generally on a large scale. All those who bear the name of bankers are not accustomed to these transactions and many of them deal only in commissions and bank speculations. I will include among bankers only those who remit money. It is they who always fix the exchange, the charge for which follows the cost and risks of the carriage of specie in the different cases. ...

In all places and cities which use the same money and the same gold and silver specie like Paris and Chalons sur Marne, London and Bristol, the charge for exchange is known and expressed by giving and taking so much per cent above or below par. ...There is no difficulty or mystery in all this.

But when exchange is regulated between two cities or places where the money is quite different, where the coins are of different size, fineness, make, and names, the nature of exchange seems at first more difficult to explain, though at bottom this exchange differs from that between Paris and Chalons only in the jargon of bankers. At Paris one speaks of the Dutch exchange by reckoning the ecu of three livres against so many deniers de gros of Holland, but the parity of exchange between Paris and Amsterdam is always 100 ounces of gold or silver against 100 ounces of gold or silver of the same weight and fineness. 102 ounces paid at Paris to receive 100 ounces at Amsterdam always comes to 2 per cent above par. The banker who effects the remittance of the balance of trade must always know how to calculate parity. But in the language of foreign exchange the price of exchange at London with Amsterdam is made by giving a pound sterling in London to receive 35 Dutch escalins at the bank: with Paris in giving at London 30 deniers or pence sterling to receive at Paris one ecu or three livres tournois. These methods of speech do not say whether exchange is above or below par, but the banker who remits the balance of trade reckons it up well and knows how much foreign money he will receive for the money of his own country which he despatches.

Whether we fix the exchange at London for English silver in Muscovy roubles, in Mark Lubs of Hamburg, in Rixdollars of Germany, in Livres of Flanders, in Ducats of Venice, in Piastres of Genoa or Leghorn, in Millreis or Crusadoes of Portugal, in Pieces of Eight of Spain, or Pistoles, etc. the parity of exchange for all these countries will be always 100 ounces of gold or silver against 100 ounces; and if in the language of exchange it happens that one gives more or less than this parity, it comes to the same in effect as if exchange is said to be so much above or below par, and we shall always know whether or not England owes a balance to the place with which the exchange is settled just as in our example of Paris and Chalons.

Chapter 3

Further explanations of the nature of the Exchanges

We have seen that the exchanges are regulated by the intrinsic value of specie, that is at par, and their variation arises from the costs and risks of transport from one place to another when the valance of trade has to be sent in specie. Argument is unnecessary in a matter which we see in fact and practice. Bankers sometimes introduce refinements into this practice. ...

This is what bankers call speculation, which often causes variations in the exchanges for a short period independently of the balance of trade; but in the long run we must get back to this balance which fixes the constant and uniform rule of exchange. And though the speculations and credits of bankers may sometimes delay the transport of the sums which one city or state owes to another, in the end it is always necessary to pay the debt and send the balance of trade in specie to the place where it is due.

If England gains regularly a balance of trade with Portugal and always loses a balance with Holland the rates of exchange with Holland and Portugal will make this evident: it will be seen that at London the exchange on Lisbon is below par and that Portugal is indebted to England. It will be seen also that the exchange on Amsterdam is above par and that England is indebted to Holland. But the quantity of the debt cannot be seen from the exchanges. It will not be seen whether the balance of silver drawn from Portugal will be greater or less than what has to be sent to Holland.

There is however one thing which will always show at London whether England gains or loses the general balance of her trade (by general balance is understood the difference of the individual balances with all the foreign states which trade with England), and that is the price of gold and silver metal but especially of gold (now that the proportion between gold and silver in coined money differs from the market rate, as will be explained in the next chapter). ...

Though the exchanges rarely vary apart from the balance of trade between one country and others, and though this balance is naturally the mere difference in value of the goods and merchandise which the state sends to other countries and receives from them, yet there are often circumstances and accidental causes which cause considerable sums to be conveyed from one state to another without any question of merchandise or trade, and these causes affect the exchanges just as the balance of trade would do.

Such are the sums of money which one state sends into another for its secret services and political aims, for subsidies to allies, for the upkeep of troops, Ambassadors, noblemen who travel, etc., capital which the inhabitants of one state send to another to invest in public or private funds, the interest which these inhabitants receive annually from such investments, etc. The exchanges vary with all these accidental causes and follow the rule of the transport of silver required. In considering the balance of trade matters of this kind are not separated, and indeed it would be very difficult to separate them. They have very certainly an influence on the increase and decrease of circulating money in a state and on its comparative strength and power.

My subject does not allow me to enlarge on the effects of these accidental causes: I confine myself always to the simple views of commerce lest I should complicate my subject, which is too much encumbered by the multiplicity of the facts which relate to it.

Exchanges rise more or less above par in proportion to the great or small costs and risks of the transport of money and this being granted they naturally rise much more above par in the cities or states where it is forbidden to export money than in those where its export is free. ...

For those who gain by this manoeuvre, whether Jews or others, send their profits abroad, and when they have enough of them or when they take fright they often themselves follow their money. If some of these lawbreakers were taken in the act, their goods confiscated and their lives forfeited, this circumstance and execution instead of stopping the export of money would only increase it, because those who formerly were satisfied with 1 or 2 per cent for exporting money will ask 20 or 50 per cent, and so the export must always go on to pay the balance.

I do not know whether I have succeeded in making these reasons clear to those who have no idea of trade. I know that for those who have practical knowledge of it nothing is easier to understand, and that they are rightly astonished that those who govern states and administer the finances of great kingdoms have so little knowledge of the nature of exchanges as to forbid the export of bullion and specie of gold and silver.

The only way to keep them in a state is so to conduct foreign trade that the balance is not adverse to the state.

Chapter 4

Of the variations in the proportion of values with regard to the metals which serve as money

If metals were as easily found as water commonly is everybody would take what he wanted of them and they would have hardly any value. The metals which are most plentiful and cost the least trouble to produce are also the cheapest. Iron seems the most necessary, but as it is commonly found in Europe with less trouble and labour than copper it is much cheaper.

Copper, silver, and gold are the three metals in general use for money. Copper mines are the most abundant and cost less in land and labour to work. The richest copper mines today are in Sweden. 80 ounces of copper are needed there to pay for an ounce of silver. It is also to be observed that the copper extracted from some mines is more perfect and lustrous than what is obtained from others. The copper of Japan and Sweden is brighter than that of England. That of Spain was, in the time of the Romans, better than that of Cyprus. But gold and silver, from whatever mine extracted, are always of the same perfection when refined.

The value of copper, as of everything else, is proportionable to the land and labour which enter into its production. Beside the ordinary uses to which it is put, like pots and pans, kitchen utensils, locks, etc. it is in nearly all states used as money in small purchases. In Sweden it is used even in large payments when silver is scarce there. During the first five centuries of Rome it was the only money. Silver only began to be employed in exchange in the year 484. ...

Gold and silver, like copper, have a value proportionable to the land and labour necessary for their production; and if the public assumes the cost of minting these metals their value in bars and in coin is identical, their market value and their mint value is the same, their value in the state and in foreign countries is always alike, depending on the weight and fineness, that is on weight alone if the metals are pure and without alloy.

Silver mines have always been found more abundant than those of gold, but not equally in all countries or at all times. Several ounces of silver have always been needed to buy one ounce of gold, sometimes more sometimes less according to the abundance of these metals and the demand for them. ...

... Possibly rich people might prefer to carry gold money in their pockets rather than silver and might develope a taste for gildings and gold ornaments rather than silver, thus increasing the market price of gold.

Neither could the ratio between these metals be arrived at by considering the quantity of them found in a state. ...

To judge then of the ratio between gold and silver the market price is alone decisive: the number of those who need one metal in exchange for the other, and of those who are willing to make such an exchange, determines the ratio. It often depends on the humour of men: the bargaining is done roughly and not geometrically. Still I do not think that one can imagine any rule but this to arrive at it. At least we know that in practice it is the one which decides, as in the price and value of everything else. Foreign markets affect the price of gold and silver more than they do the price of any other goods or merchandise because nothing is transported with greater ease and less injury. If there were a free and regular trade between England and Japan, if a number of ships were regularly employed in this trade and the balance of trade were in all respects equal, i.e. if as much merchandise were always sent from England to Japan, having regard to price and value, as was imported from Japan, it would end in drawing at last all the gold from Japan in exchange for silver, and the ratio between gold and silver in Japan would be made the same as it is in England, subject only to the risks of navigation; for in our hypothesis the costs of the voyage would be supported by the trade in merchandise. ...

It is the market price which decides the ratio of the value of gold to that of silver. The market price is the base of this proportion in the value assigned to coins of gold and silver. If the market price varies considerably, that of the coinage must be reformed to follow the market rate. If this be not done confusion and disorder set in in the circulation, and coins of one or the other metal will be taken above the Mint value. There are an infinity of examples of this in antiquity. ...

It is true that the coinage in England might equally have been adjusted to the market price and ratio by diminishing the nominal value of gold coins. This was the policy adopted by Sir Isaac Newton in his Report, and by Parliament in consequence of this Report. But, as I shall explain, it was the least natural and the most disadvantageous policy. Firstly it was more natural to raise the price of silver coins, because the public had already done so in the market, the ounce of silver which was worth only 62d sterling at the Mint being worth more than 65d in the market, and all the silver money being exported except what the circulation had considerably reduced in weight. On the other hand it was less disadvantageous to the English nation to raise the silver money than to lower the gold money considering the sums which England owes the foreigner. ...

Newton told me in answer to this objection that according to the fundamental laws of the Kingdom silver was the true and only monetary standard and that as such it could not be altered. It is easy to answer that the public having altered this Law by custom and the price of the market it had ceased to be a law, that in these circumstances there was no need to adhere scrupulously to it to the detriment of the nation and to pay to foreigners more than their due. If the gold coins were not considered true money, gold would have supported the variation, as in Holland and China where gold is looked upon rather as merchandise than money. If the silver coins had been raised to their market price without touching gold there would have been no loss to the foreigner, and there would have been plenty of silver coins in circulation. They would have been coined at the Mint, whereas now no more will be coined until some new arrangement is made. ...

In some centuries the value of silver rises slowly against gold, in others the value of gold rises against silver. This was the case in the age of Constantine who reduced all values to that of gold as the more permanent; but the value of silver is generally the more permanent and gold is more subject to variation.

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