Part Three: International Trade and Business Cycles
PART THREE
International Trade and Business Cycles
Chapter One: Foreign Trade
Chapter One
On Foreign Trade
Abstract: Here the circular-flow economy is extended to international trade. Instead of barter or exchange with money, Cantillon explains how international trade takes place on the basis of bills of exchange. He shows that a state which accumulates money will enjoy a temporary gain in international trade, but that states where manufacturing industries develop will enjoy a higher standard of living.
Chapter Two: The Nature of Exchange Rates
Chapter Two
On Bills of Exchanges and their Nature
Abstract: There is an expense associated with transporting money based on the distance, risks, and other transaction costs. Bills of Exchange are a type of contract that can reduce this cost by avoiding shipments that are offsetting between two locations. When money must be sent, bankers charge a fee for arranging the shipment and providing their customers with a bill of exchange, or check, that can be drawn or cashed at a correspondent bank where the money is sent.
Chapter Three: Further explanations of the Nature of Exchange Rates
Chapter Three
Further Explanations on the Nature of Exchanges
Abstract: Exchange rates are explained as a function of the balance of trade and other factors. A trade deficit can cause your money to exchange below par, while a trade surplus will cause it to exchange above par. In fact, the exchange rate, above and below par, is an indicator of the general balance of trade in a country. An attempt to prohibit the export of gold necessary to pay for deficits only hurts the economy.
Chapter Four: The variations in the proportion of values with regard to the Metals which serve as Money
Chapter Four
The Variations in the Proportion of Values with Regard to the Metals Used as Money
Abstract: The price of gold and silver and the ratio between them is determined by markets and is also based on their usefulness, cost of production, and transportation costs. When government mints establish a fixed ratio between gold and silver money that is not based on market prices, the overvalued metal will be driven from circulation. This is commonly referred to as “Gresham’s Law” where bad money drives out good money.
Chapter Five: The augmentation and diminution of coin in denomination
Chapter Five
The Augmentation and Diminution of the Denomination of Money
Abstract: Raising and lowering the nominal value of money is shown not to undermine the theory of the value of money. In contrast, such measures are shown to be methods by which the prince acquires resources by deceiving individuals about the value of money. The process causes chaos in the market.
Chapter Six: Banks and their Credit
Chapter Six
Banks and their Credit
Abstract: Fractional-reserve banking is a system where the banks lend some of their deposits and earn interest. This increases the amount of money in circulation compared to warehouse or 100% reserve banking. This utility of banking comes at the risk of being unable to withdraw your deposits. The amount that can be lent into circulation depends on the type of bank and the needs of the depositors. There are goldsmith-bankers, the typical banker who issues banknotes, and the national bank.
Chapter Seven: Further explanations and enquiries as to the utility of a National Bank
Chapter Seven
Further Explanations and Enquiries as to the Utility of a National Bank
Abstract: National Banks are of little utility and can be the source of economic chaos. The increase in the supply of money that they provide is relatively small and offers the same disadvantages as increases in real money. They are therefore unnecessary and potentially very harmful, as in the cases of the Bank of Venice and the Bank of London. The roles of legal tender laws, fractional reserve banking, and regional trade fairs are described.
Chapter Eight: Refinements of Credit of General Banks
Chapter Eight
The Refinements of Credit of General Banks
Abstract: When the government’s national bank inflates the money supply by increasing the supply of banknotes, it reduces the rate of interest and can increase the price of stocks. This is a corrupt process and when the notes are redeemed, the price of stocks falls and can result in bank runs and economic chaos. This is now known as the business cycle.
Index
Index
A
Artisans. See Skilled workers
B
Balance of payments
bills of exchange, 195–201
price-specie flow mechanism, 150–153
prices and foreign trade, 143
Banking, fractional-reserve banking, 227–230
Barter, and the circular flow of money, 134
Bills of exchange
about, 195–201
use of, 185–193
Business cycle, 241–243
C
Cantillon effects, 155–157
Cantillon, Richard, 13
Capital. See Wealth
