An Essay on Economic Theory by Richard Cantillon’s

Author:Richard Cantillon’s [Cantillon’s, Richard]
Language: eng
Format: epub
ISBN: 978-1-61016-001-8
Publisher: Ludwig von Mises Institute
Published: 2011-11-06T16:00:00+00:00

Chapter Six

The Increase and Decrease of the Quantity of Money in a State

Abstract: 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.

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