An Outline of International Price Theories

CHAPTER II

THE MERCANTILISTIC THEORIES

1. Mercantilism

In order to trace the origin of the theory of international price relationships we are forced to go as far back as the sixteenth century. From about the year 1500 there were many important political and economic changes. The oversea discoveries in the last decades of the fifteenth century had widened the boundaries of international trade and had given rise to a change in its nature and an expansion of its volume. As a result of the opening of new silver mines between 1540 and 1600 in America, Europe was supplied with an abundance of money metals and thus the establishment of a real price economy was facilitated. That change in commerce together with the extension in the use of money accelerated the development of the new spirit of private enterprise and paved the way for the triumph of the moneyed classes. In fact, the time had come for a transition from a number of local economies to a national economy, from feudalism to commercial capitalism, from a state of comparatively little trade to an epoch of extensive international commerce. That change in the economic structure is sometimes called by economic historians the “Commercial Revolution”.

In the world of thought that change in the economic structure found its expression in what is known as “Mercantilism”. But as mercantilism had been developed during a long period of changing economic conditions, it naturally absorbed a great variety of ideas from the epochs through which it had passed. Therefore, mercantilistic theories are by no means a set of rigid doctrines. They may be grouped together as a body of thought simply because they are based on fundamental conceptions, which possess some degree of similarity. First of all, all mercantilists considered the benefit of the State as the end and object of economic activities, and in their view the interests of the State had always to take precedence to the interests of the individual. The aim of all mercantilistic doctrines is to increase the economic power of the State. Moreover, the interests of the State were, in their eyes, by no means necessarily in harmony with the interests of the individual. Consequently, the mercantilists stood for the regulation of the activities of the individual. According to them, wages, interest, industry, and trade should be regulated so as to benefit the State. Finally, the importance of “treasure” to a State was greatly emphasized. The reasons given in support of their advocacy of the accumulation of the precious metals changed from one time to another, but all mercantilists agreed that a nation must try by all means to increase its “treasure”. In general, they recognized that countries which did not possess gold or silver mines could not increase their stocks of the precious metals except by an annually recurring favourable balance of trade (if peaceful means alone were adopted). Consequently, they gave foreign trade the foremost place among the industries of a nation.

Apart from those conceptions, there was nothing that was held in common by the mercantilists. The subject of international price relationships in particular gave rise to great differences of opinion among them. Originally they had no views of any kind on it. Subsequently, they developed many definite theories.

Mercantilistic thought passed through four stages of development. They are (1) the stage before 1550 or the rudimentary stage; (2) the stage from 1550 to 1620, which witnessed the formulation of what might be called Malynesian doctrine; (3) the stage from 1620 to 1680, which was dominated by the doctrines of Thomas Mun; and (4) the stage from 1680 to 1750, which marks, on the one hand, the highest development of mercantilistism and, on the other hand, the transition from the mercantilistic to the classical school of thought.

The work before the middle of the sixteenth century has only antigarian value. Hence, we start the present survey with the second stage, that is, the period from 1550 to 1620. During that period the development of the theory of international price relationships was associated with two important controversies: that in regard to the price revolution and that in regard to foreign exchanges. We shall describe them separately.

2. The Controversy concerning the Price Revolution

In the Middle Ages, the erroneous doctrine that the prince had both the right and the ability to fix the value of money (known sometimes as the valor-impositus theory of money) was very popular. In the early decades of the sixteenth century, however, that theory of money was already on the way to its fall, and people generally tended to think of the valor-intrinsecus of money and identify the value of a coin with the value of the metal in it. That was a natural reaction to the debasement of coins, which had been common in the sixteenth century and the centuries that preceded it. So, when the great supply of the precious metals from the New to the Old World had by the middle of the century worked out its effects in raising prices, many writers attributed the increase in prices to the debasement of the coins. John Hales and de Malestroit were among the ablest writers who held that view.

About the autumn of 1549, Hales1 put forth the question, “What should be the cause of this dearth (of all things); seinge all thinges are so plentifull?” After refuting some of the possible causes he said:

And now I must come to that thinge . . . which I take to be the chiefe cause of all this dearth of thinges, and of the manifest impoverishment of this Realme, and might in breife time be the destruction of the same, yf it be not the [rathere remedyede], that is the basinge or rather corruptinge of oure coine and treasure.2

Since it was the debasement of coins that caused the nominal rise of prices, the real prices of commodities, according to Hales, would have been unchanged, “ffor an ounce of oure silver or golde as much stuffe as ever was gyven for the same.”3 As the value of money was supposed to be stationary, would it not naturally follow that the nation could not gain nor lose from this state of things? His answer was in the negative. His ground was that different classes of people would be affected differently. The receivers of fixed incomes would lose, and the tenants and others would gain, while the position of the merchant class would be unaffected. Among the former, the King was said to be the heaviest loser, because he did not receive in payment of his revenues such a quantity of gold and silver as before.4 The other disadvantage of debased coinage was, he said, that by it, “we have devised a waie for the strangers not onlie to bie our gould and silver for brasse, and not onlie to exhause this Realme of treasure, but also to bie oure cheife commodities in manor for nothinge.”5 So he suggested the remedying of the situation by the restoration of coins “to the old rate and goodness”.6

While it is not to be denied that the debasement of coins was one of the causes of the rise of prices, Hales’s explanation of the price revolution is incomplete, because, on the one hand, he neglected an important cause of the change in prices and, on the other, he failed to realize that the values of the precious metals were liable to fluctuate. Yet his theory of the disproportionate effects of the rises in prices that are produced by the debasement of coins is on the whole satisfactory. Although he was not the original author of the theory, he deserves to be remembered for his presentation of it.7

Hales reflected in his work thought on money and international trade in the sixteenth century. To him money was a different problem to an isolated state and to a state that was a unit in a commercial world. In the former, the problem hardly existed, while in the latter, only gold and silver could be used as money.8 He gave in detail the reasons why gold and silver should be used and why they were to be preferred to any other commodity. Briefly, his view rests on the function of money as a store of value.9 According to him, the precious metals acquired a special position from their durability and their capacity to serve as a store of wealth.10 The “senows of warre” is another argument that he advanced in favour of the accumulation of the precious metals,11 for he considered it a great danger “if his grace [the King] should wante treasure to purchase the sayde habylimentes and necessaries for warre, or to fynde soldiers in time of need”.12 But how could precious metals be acquired? His answer, which was typical of the economic thought of the time, was by the country selling more to the foreigner than it bought.13 He fully realized that if buying and selling were not equal, the balance must be paid in specie.14 He suggested two means of effecting an excess of exports over imports. They are: (a) by protective policies such as the prohibition of the importation of goods that could be manufactured at home and the encouragement of exporting industries15; and (b) by “selling dear and buying good cheap”.16

In considering the problem whether the “universal dearth of all things” could have been remedied by a general reduction of rents and other prices, he said that it would be impossible because the foreign merchants would not reduce the prices of their wares accordingly.

They be strangers, and not within obedience of oure soueraigne lord, that dve sell such wares; as yron, tar, flax and other. Then consider me, if youe cannot compell them, wether yt were expedient for us to leue strangers to sell theire commodities deare, and we oures good cheape; yf it weare so, then weare it a great enrichinge of [other Countryes] and impouerishinge of oure owne; for they should have much treasure for theires, and have oure commodities [from us for a very lyttyl; except yee coulde devyce to make one price of oure comodytyes] emonst oure selfes, and an other outwarde, which I cannot se howe yt may be.17

In other words, he believed, first, that the domestic level of prices could not influence the prices of imported goods, and second, that the precious metals would flow in if the domestic level of prices was higher than the foreign level, because the country could “sell dear and buy cheap”, and selling dear and buying cheap would, according to him, cause a more favourable balance of trade. His description of the connection between high prices and the inflow of the precious metals is clearly erroneous. Normally we should expect selling dear and buying cheap to cause a less favourable balance of trade and, consequently, an outflow of specie. It would, of course, be correct if both the foreign demand for exported goods as a whole and the domestic demand for imported goods were inelastic.18 But that assumption was neither stated nor implied.

The Discourse of Hales exercises an influence upon economic thought only after it had been revised and published by a man, whose identity was concealed under the initials W. S. It was, however, rather the work of a French contemporary, whose arguments were essentially the same as those of Hales, that attracted the most general attention. That work was the Paradoxes that Malestroit19 presented to the French king in 1566. Like Hales, he was mercantilistic, and like Hales he did not recognize the liability of gold and silver to fluctuate in value. He attributed the “dearth” to the debasement of coins. He thus came to the same conclusion as Hales that “for buying of all things we do not give now more gold or silver than we did before” and then argued that the complaint of the “general dearth” of all things “is without cause”.20 For practically the same reasons as those given by Hales he concluded that the King and other receivers of fixed incomes would lose from the debasement of coins.21 Unlike Hales, Malestroit said nothing about foreign trade and, as a whole, his work is much inferior to that of Hales.

In opposition to the views of Hales and Malestroit there arose the theory that the general rise of prices had been brought about by the American supplies of the precious metals. Among the writers who put forward the theory, the ablest and the most influential was Jean Bodin.22 In his Réponse to Malestroit (1568) he, first of all, proved that prices did rise during the period under consideration23 and then gave five causes for the rise, of which “the principal and almost the only one is the abundance of gold and silver, which is to-day much greater in the Kingdom [France] than it was four hundred years ago, to go no further back”.24 But where did so much gold and silver come from? From foreign trade, on the one hand, with Arabia, the Levant, the New World, and other European nations, and, on the other hand, from the exploitation of mines in America.25 The high profits in France were another cause of the inflow of gold and silver.26 His essay marked a great advance in both the theory of money and the theory of international price relationships. In his study of the former he showed that the values of the precious metals were themselves subject to change. He was one of the first writers, if not the first,27 to recognize that truth. He thus blazed the trail for the formulation of the Quantity Theory of Money.28 In his study of international price relationships he showed very clearly the relationship of foreign trade, the movement of specie, and the domestic price level to each other. He pointed out that by foreign trade gold and silver would be brought into the country and that the inflow of the precious metals would cause a general rise of prices. The causal sequence runs as follows: “Trade—specie flow—internal prices.” He did not, however, explain whether the internal price level had any effect on foreign trade or not. It was not until the beginning of the seventeenth century that an Englishman, Malynes, attacked the subject and produced a thesis, which was a curious combination of Bodin’s doctrines with those of Hales.

In the general theory of international trade he, like Hales, was mercantilistic. It is interesting, however, to note that in the writings of Bodin as well as Hales, we find that the authors had taken great pains to refute the isolationist argument against foreign trade.29 That shows that in the middle of the sixteenth century that school of thought, which put foreign trade in the foremost place, had not been fully established. It was only after the controversies of this period that the importance of the precious metals and of foreign trade was generally accepted in economic thought.

Before we take up the exchange controversy, we should perhaps take note of two important contributions to monetary theory during the latter part of the same period. The first was that of an Italian writer, Bernardo Davanzati, in his lecture on money delivered in Florence in 1582. Like writers before him, he discussed such problems as the importance of money and the causal connection between the supply of the precious metals and changes in prices. With regard to the part played by money he considered that money was important because of its position as the “blood of the nation”.30 In other words, he emphasizes rather the function of money as a circulating medium than its function as a store of value. In connection with the problem of the relation between the supply of money and prices he stated, probably for the first time, the quantity theory of money in the sense of equating the national stock of goods with the stock of money:

Now all these [earthly things which satisfy men’s wants] by the Consents of Nations are worth all the Gold (comprehending also the Silver and Copper) that is wrought in the World. All men then do passionately covert all the Gold, to buy up all things for the Satisfaction of all their Wants and Desires, and so to become happy.31

The author’s conclusions on the two problems, if combined and logically developed, might imply a new line of approach. He was not, however, quite aware of their full significance, and he failed to go so far.

The other contribution is that of Montchrétien in his Traicté which was published in 1615. While accepting Bodin’s doctrine that the inflow of a large quantity of the precious metals from the New to the Old World had caused a general rise in prices, he made the important qualification that the rise had not always been in proportion to the increase in the quantity of money.32

3. The Foreign Exchanges Controversy

The other question which aroused much interest during this period was foreign exchanges.33 That was due to two circumstances. They were the confused conditions in currency and finance and the reaction against the growth of financial capitalism. During this period repeated depreciations of currencies in several countries, adverse balances of payments, and manipulations by speculators in foreign exchange had created abnormal conditions in foreign exchange. Countries like England, the currencies of which were depreciated, were naturally greatly interested in the foreign exchanges.34 Furthermore, the expansion of international trade in the sixteenth century had brought the international financier into existence. That was partly because of the need of capital for the financing of large shipments of goods and partly because of the fact that “dry exchange”, i.e. exchange for the purpose of financing trade, was one of the best available means of evading the usury laws. As lending money at rates of interest was not in keeping with the ideas of the time, protests were naturally made against the financing of international trade.

Protests against foreign exchange dealings were based on either or both of the following arguments: (a) the usury argument and (b) what we might call the bullionistic argument. The best specimen of the former is Thomas Wilson’s Discourse (1572) which we need not consider in this essay. The champions of the bullionistic view held that “unlawful” exchange dealings were injurious to the state, because they caused an outflow of bullion. They all, of course, agreed that foreign trade had to be paid for either in bullion or through the foreign exchanges, and “if the carriage of money from one realme to another is forbidden, it is necessary for the trade of merchants that there should be an exchange Exchanges for such a purpose they called real or legitimate exchanges. What they objected to was the so-called dry exchange or “merchandizing exchange”.35 By means of those “unlawful” exchanges, they contended, bankers and rich merchants were able to make the rates of exchange rise or fall for their own private gain at the expense of the State. By undervaluing the money of a country they were able to procure it cheap and sell it abroad at a profit, and the transaction would mean a loss of gold and silver by the country.36 Furthermore, such exchange dealings caused not only an international movement of specie but also a rise or fall in the prices of all commodities.37 The remedies suggested were (a) the authoritative determination of the exchange rates according to the just prices; (b) the prevention of the lowering of exchange by “pegging” or other means; (c) the monopolizing of exchange business by the Crown or by persons licensed by it; and (d) as a necessary corollary of control by the Crown the prohibition of exchange dealings by private individuals. Those measures, together with the then generally accepted doctrine of the prohibition of the export of bullion, it was believed, would have served to purge the foreign exchanges of the existing abuses.38

The exchange dealers naturally sought to rebut the charges brought against them.39 Three important arguments that they advanced in their own defence might be noted. The first was that state intervention in exchange business would prove a very serious hindrance to trade. The second was that, as a result of the decline in trade, the revenues from customs duties would greatly decline. The third and most important argument took the form of an attack upon the theory of foreign exchange of their opponents and the presentation of a theory of their own:

Towchinge the standarde of the English monye, that you complayne of is kept lowe by reason of the free exchaunge, we can saye nothing but that our exchaunges are made with a mutuall consente betwene merchaunte and merchaunte, and that the abondance of the deliverers or of the takers make the exchange rise or fall.40

In spite of those theoretical arguments and of the fact that, in the last quarter of the century, the financial power of the financiers was strong enough to secure the repeal of the usury laws and the rejection of the proposal to nationalize foreign exchange transactions, the bullionistic view of foreign exchange prevailed in the domain of thought as the orthodox view until the end of the second decade of the next century. The bullionistic theory of foreign exchange was, for instance, restated early in the sixteenth century by Thomas Milles.41

The net practical result of the foreign exchange controversy was that it had called attention to the importance of the role played by foreign exchange in international trade.42 The bullionists had made it clear that the rate of exchange influenced the movement of specie, the state of trade, and the prices of goods. The mere recognition of a relationship among those factors was an important advance in economic thought, although the views that the bullionists held were largely unsound. This controversy deserves, moreover, to be remembered as having led to the formulation of definite proposals for the control of foreign exchange.

4. Gerrard de Malynes

The last writer of importance in this period was de Malynes. He refined and restated the bullionistic view of foreign exchange with great ability and combined with it the ideas which sprang from the controversy over the price revolution.43

His starting point was the mercantilistic proposition that “the Prince (being as it were the father of the family) ought to keep a certain equality in the trade or traffick betwixt his realms and other countries, not suffering an over-ballancing of forreine commodities with his home commodities”.44 Two causes might contribute to such an overbalance, namely, the export of bullion from the realm and the practice of “selling cheap and buying dear”.45 It is in connection with the former that he restated the bullionistic view of foreign exchange and it is in connection with the latter that he re-examined the doctrine of John Bodin and his contemporaries.

He attributed the export of bullion from the realm to the manipulation of the foreign exchanges and other abuses.46 He argued that if the foreign exchanges were not “abused”, that is, if the moneys were valued at par, according to weight and fineness, no bullion would be exported.47 It followed as a logical corollary that the debasement of coins would not cause the transportation of bullion, so long as the moneys were exchanged “value for value”.48 It was “the abuse of the exchange for money” that constituted “the very efficient cause of this disease”,49 for:

[A] If the exchange with us here be low, so that more will bee given for our money being carried in specie, then by bill of exchange can be had, then our money is transported.50

[B] If the exchange with us here be high . . . then

[a] every man is desirous to make over money by exchange, and that money which should be employed upon the commodities of the realme, is delivered by exchange to the great hindrance of the vent and advancement of our home commodities: and yet the forrein commodities not any way therefore sold the better cheap51; [and]

[b] . . . our merchants are inclined to buy forreine commodities, or to barter their commodities for the same, which opportunitie is not only obserued by the Bankers, but also procured.52

The remedy he suggested was “that the exchange for all places ought to be kept at a certaintie in price, according to value for value”.53

In re-examining the theories regarding the price revolution he criticized both Malestroit and Bodin. He agreed with the former that the alteration of the money itself would cause a general rise in prices,54 but he considered it merely a nominal rise55 and rejected even the doctrine of disproportionate rises in the prices of commodities as the result of such a change.56 The real cause of high prices must be found somewhere else. He accepted the explanation of Bodin57 and so rejected Hales and Malestroit’s erroneous view that the values of gold and silver were unchangeable.58 He was, however, of the opinion “that to shew the alternation of the price of things and the causes thereof, is of small moment, the true ground of the matter . . . must be by making a comparison of the enhauncing of the price of the Commodities of one countrie, with the price of the Commodities of other countries: and thereby to find out, whether things are grown deare with us in effect; and whether we pay more proportionably for the forraine Commodities . . . then we do receiuve for the price of our home Commodities”.59 The examination of that problem was of great importance in his system of thought, because the condition might constitute the alternative cause of an overbalance of trade. The conclusion to which he came, however, was not new. It was simply the second proposition of Hales’s doctrine of international price relationships (that is, a country with relatively low prices would sell cheap and buy dear and thereby turn its balance of trade against itself).60 The value of his contribution lies in the fact that he combined all preceding theories into a comprehensive theory of international price relationships. He started from the bullionistic theory of foreign exchange, went through Bodin’s theory of money and prices and reached Hales’s doctrine. For instance, he said:

[Low rates of exchange would cause] our monies to be transported and maketh scarcitie thereof, which abateth the price of our home commodities, and on the contrary advanceth the price of the forreine commodities beyond the seas, where our money concurring with the monies of other countries causeth plenty, whereby the prices of forrein commodities is advanced. . . .61

If we sell our Commodities dearer, and buy our victuals dearer then heretofore; and that over and above the price thereof, we must pay farre dearer for the forraine Commodities, then proportionably the price of our Commodities is risen: this causeth us to be a loser in particular, and bringeth by an over-ballancing of forraine Commodities with our Home Commodities, a general losse to the Commonwealth: which to supply, causeth us to make up the inequalitie with money, which is the treasure of the realm.62

Over-ballaunce [of trade] . . . must be made up and ballanced with the treasure or money of the realme.63

If we might be permitted to connect those passages together and express them in the form of causal sequence, we could present a theory of international price relationships which would run as follows:

Low exchange—outflow of specie—relative scarcity of money at home (and plenty of money in foreign countries)—fall of domestic prices (and rise of prices abroad)—“buying dear and selling cheap”—overbalance of trade—outflow of specie.64

We cannot help thinking that the above attribution of a relation between “buying dear and selling cheap” and the balance of trade is erroneous, because normally we should expect the former to cause an “under-balance” instead of an “over-balance”. Malynes seemed to have been conscious of that objection, when he said:

To the general objection, that selling our commodities dearer, would be an interruption to the traffique, we have already shewed how necessarie our commodities are, and what request thereof is in all places.65

That might be interpreted as that he was assuming an inelastic demand for the exported products. He was, however, not consistent on that point.66 Therefore, it would be too liberal to say with certainty that he was actually making that assumption. Even if that be granted and if the rate of exchange or the movement of specie itself be considered as a sufficient initial cause of disturbance, Malynes’s theory is still subject to another important criticism. That is that he neglected the demand of England for her own imports. It is only if one makes the assumption that both the demand of England for her imports and the demand of other countries for her exports were inelastic that Malynes’s theory applies.

For more than a decade after Malynes had published his earlier works, no publication of importance appeared in this field. Then came the second exchange controversy or the “balance of trade controversy”, which opened a new page in the history of mercantilistic thought.

5. The Balance of Trade Controversy

The view of the bullionists in England that unfavourable rates of exchange were the initial cause of the outflow of specie had supporters in other European countries. Mark Antony de Santis was one of them.67 In the early decades of the seventeenth century there emerged, however, a school of thinkers who refuted the views of the bullionists. The new theory has been somewhat inaccurately called the balance-of-trade theory. The first systematic work of this school of thought was Antonio Serra’s Treatise.68 The purpose of the treatise was to refute Santis’s doctrine that an unfavourable rate of exchange “is the sole cause of the scarcity of money in the Kingdom”, for it “does not permit remittance to be made in cash for the commodities exported from the Kingdom, rather than by exchange; while remittance for commodities imported is made in cash instead of exchange, because of the profit to be made in each case”.69 The argument given by Serra is simple and convincing. He said that if anyone obtained funds through the exchanges instead of in bullion, “funds either came into the Kingdom in cash before exchange was resorted to, or must do so later, since otherwise they would be paid into the Kingdom in some way.”70 In other words, the rates of exchange themselves were governed by independent factors and could not be the initial cause of international specie movements. The causes of those movements had, therefore, to be looked for elsewhere. He enumerated the “causes which can make gold and silver plentiful in Kingdoms where there are no mines”. Firstly, there were, according to him, particular factors which could occur only in one country, namely, (a) “a surplus of products grown in a nation in excess of its own need”, and (b) “a superior geographical situation”. Secondly, there were those factors which were common to all countries, including (a) magnitude of industry, (b) quality of population, (c) extent of trading operations, and (d) regulation by the sovereign.71 Those common and special factors together determined the volume of a country’s exports (and imports). It was the excess of exports over imports (or excess of imports over exports) due to the relative advantages or disadvantages of countries and not to the rates of exchange that constituted the initial cause of specie movements.72 Serra’s work, however, attracted very little attention among his contemporaries. It was in the second foreign exchange controversy or the balance of trade controversy, which arose in England in the twenties of the seventeenth century, that mercantilism really reached a new phase and the balance of trade theory exerted a definite influence upon both thought and policy.

The balance of trade controversy73 differed from the foreign exchange controversy in that the latter was concerned only with foreign exchange, while the former included the consideration of the merits of the East India Trade. The East India Trade had a unique character, because, although India had very valuable muslins and choice spices to sell to the countries of Europe, she imported very few goods from them. European traders had, therefore, to send gold or silver to India in exchange for her goods. To export gold or silver was, however, contrary to the accepted economic doctrines of those days, and it so happened that in the second decade of the seventeenth century there was great economic distress in England. Naturally, people in England jumped to the conclusion that the drain of specie to the East was one of the most important causes, and they consequently attacked the East India Company. The ablest advocates of that view were Milles and Malynes. The East India Company had naturally to defend itself, and it found two brilliant champions of its interests in its own ranks.74 They were Edward Misselden75 and Thomas Mun,76 who not only refuted the specific charge that the company was draining the country of treasure but also the theoretical foundations of the arguments of Milles and Malynes, especially their views on foreign exchange.

Misselden and Mun agreed with their opponents that a country should try its best to increase its treasure, but they emphasized the importance of gold rather as a circulating medium than as a store of value.77 Mun spoke of a favourable balance of payments as “affording much wealth and employments to maintain a great number of poor, and to encrease our decaying trade”.78 Misselden even went so far as to advocate the “raising of money” or inflation.79

But how was national treasure to be increased? Misselden stated his answer in both a positive and a negative form. His positive answer was a favourable balance of trade, which was to him “the centre of the circle”,80 and free trade in the sense of moderate regulation of imports.81 His negative answer was an attack upon the bullionistic theory of foreign exchange. Firstly, the par pro pari exchange was merely the “natural exchange”, and “if you should so limit or restraine Exchanges, that no man should so take or deliver any money, but according to just fineness: then the use of Exchanges in all places would bee taken away”.82 That argument is certainly unsound, for he omitted to take into account the benefit derived by the saving of the costs of transporting bullion. Secondly, in the actual course of exchange, “money is exchanged value for value, according to the extrinsique or outward valuation . . . [which] is greater or lesse, according to the circumstances of time, and place, and persons.”83 In that connection he emphasized the part that the bill of exchange played in the financing of international trade.84 Thirdly, the rates of exchange were not by themselves sufficient to cause a movement of specie. He said:

There is neither Parity, nor Purity. For it is not the rate of Exchanges, but the value of monies, here low, elsewhere high, which cause their Exportation: nor does the Exchanges, but the plenty or scarcity of monies cause their value.85

Finally, “it is not the rate of Exchange, whether it be higher or lower, that maketh the price of Commodities deare or cheape, as Malynes would here infere; but it is the plenty or scarcitie of Commodities, their use or Non-use, that maketh them rise and fall in price.”86

The main thesis of the writings of Thomas Mun was practically the same as that of Misselden but it was better stated. Positively, he argued that a favourable balance of trade was the only necessary and entirely sufficient condition of an inflow of specie.87 He described as many as twelve ways “to encrease the exportation of our commodities, and to decrease our Consumption of foreign wares”.88 Negatively, he refuted one by one the most important current objections to the East India Trade,89 and argued against such artificial expedients as the prohibition of the exports of specie,90 the enhancing of the value of local moneys,91 or the acceptance of foreign coins at high rates.92

To the theory of international price relationships he made valuable contributions. First, he refuted the bullionistic theory of foreign exchange and expressed the opinion that exchanges “are not contracted at the equal value of the moneys, according to their respective weights and fineness . . . because he that delivereth his money doth respect the venture of the debt, and the time of forebearance”.93 According to him, the rate of exchange could not be considered as the initial cause, and the causal sequence would run as follows:

“Balance of trade—the volume of bills demanded and supplied—the rate of exchange.”94

That is just the reverse of that advanced by Malynes. Secondly, in opposition to Malynes and others he pointed out that it was “selling cheap”, instead of “selling dear”, which would bring the precious metals home.95 Therein we find the germ of a new theory of international price relationships, which has sometimes been called the classical theory. The significance of the contribution he thus made to the subject was clearly shown when he combined it with his own doctrines and formed his somewhat complete theory of international price relationships. His views might be indicated by the following quotations:

Plenty or Scarcity of mony makes all things dear or good cheap; and this money is either gotten or lost in forraign trade by the over or under ballancing of the same.96

If wee were once poor, and now having gain some store of mony by trade with resolution to keep it still in the Realm; shall this cause other Nations to spend more of our commodities than formerly they have done, whereby we might say that our trade is Quickned and Enlarged? no verily, it will produce no such good effect: but rather according to the alteration of times by their true causes wee may expect the contrary; for all men do consent that plenty of mony in a Kingdom doth make the native commodities dearer, which as it is to the profit of some private men in their revenues, so is it directly against the benefit of the Publique in the quantity of the trade; for as plenty of mony makes wares dearer, so dear wares decline their use and consumption.97

Those ideas might be expressed in terms of causal sequence as follows:

Favourable balance of trade (—volume of bills—rates of exchange)—inflow of specie—plenty of money—rise of domestic prices—“selling dear and buying cheap”—unfavourable balance of trade.

We may note that that differs from Malynes’s theory in two respects: first, the initial cause is the balance of trade; second, the consequence of “selling dear and buying cheap” is an unfavourable, instead of a favourable, balance of trade.98 Had he gone a step further, he would have arrived at a theory substantially the same as that advanced by David Hume more than a century later; but he stopped short and failed to see the contradiction between his theory of international price relationships and his adherence to the policy of increasing national treasure.

The controversy ended with the complete triumph of the balance of trade school, whose theory was the dominant doctrine up to about 1680. In the intervening period, although a vast number of pamphlets was published, there was no real advance beyond the theory of Mun. Yet we cannot pass over the contributions of three writers, namely, Rice Vaughan, William Petty, and William Potter.

6. Vaughan, Petty, and Potter

The Discourse of Rice Vaughan,99 important though it might be in connection with other studies, is of interest to the present study only in two respects. Firstly, he was probably the first English economist who stated the quantity theory of money in the sense of a proportion between money and commodities, for he clearly said: “the price of all things . . . is the Proportion between Money and the things valued by Money.”100 He, moreover, pointed out that the proportion was governed by “Rarity and Abundance”.101 Secondly, his description of how the “raising of money” would raise the price of all things accordingly is worthy of note. He said:

When the Merchant stranger brings his Commodities, whether he intends to make his return in Moneys or in Commodities, he maketh his own sale by the measure of the Money here, and then examines how much this Money will amount to in the Moneys of his own Country, where he bought his Commodities, and if he find the Money here diminished in intrinsical value, he must then demand so much the higher price, or else he cannot make his Accompt . . . [Therefore] when Money is raised, the price of forein Commodities doth first rise, And the price of forein Commodities being once raised, the price of Domestick Commodities will of necessitie be raised also; for the price of forein Commodities will make great plenty of them to be imported, and the high price of Money will inforce that they must be returned in domestick Commodities; By which means domestick Commodities being much sought for, will of necessity be raised in price, and, the price of both these being raised, it follows that the rate of all mans sallaries and hire of Labourers and Endeavorers must rise in Proportion, or else men shall be forced to defer Trade and Endeavours, and then scarcity will encrease the price.102

Perhaps it might be added that he anticipated the concept of a due proportion between the national stock of money and the monetary needs of the nation.103 He was, however, of the opinion that the problem of “too much money” had only philosophical significance and that the sole problem before the business world was the rarity of money.

The first economist who presented a definite and clear doctrine of a due proportion of money was Petty.104 He said, “There is a certain measure, and due proportion of money requisite to drive the trade of a Nation, more or less then which would prejudice the same.”105 The proportion of money requisite to the trade of any nation was to be taken from the frequency of commutations, and from the bigness of the payments”. In other words, it depended on the requirements of trade on the one hand and the rapidity of the “revolution and circulation of money” on the other.106 Suppose in a country, “the Expense being 40 Millions, if the revolutions were in such short Circles, viz. weekly, as happens among poorer artisans and labourers, who receive and pay every Saturday, then 40/52 parts of 1 Million of Money would answer those ends: But if the Circles be quarterly, according to our Custom of Paying rent, and gathering Taxes, then 10 Millions were requisite. Wherefore supposing payments in general to be of a mixed Circle between One week and 13, then add 10 Millions to 40/52, the half of the which will be 5 1/2, so as if we have 5 1/2 millions we have enough.”107 That is one of the earliest statements of a doctrine in regard to the velocity of the circulation of money in economic literature.108 Although it is undoubtedly an important contribution to the theory of the value of money, Petty did not explicitly109 or directly connect his discussion of the velocity of circulation with the problem of the value of money. He was primarily interested in the question of the quantity of money required by a nation and found it to be determined by the payments to be made in money and its velocity of circulation. In case there was “too little money”, we must try either to increase it by trade110 or to economize its use. The best way to economize the use of money was to establish banks, because “where there are Banks . . . there less money is necessary to drive a Trade”.111 In case there was “too much money”, he would deal with it as follows:

We may melt down the heaviest, and turn it into the Splendour of Plate, in Vessels or Utensils of Gold and Silver; or send it out, as a Commodity, where the same is wanting or desired; or let it out at Interest, where Interest is high.112

In other words, hoarding, exportation, and lending abroad are the three remedies recommended.

The other contribution of Petty was a theory of the foreign exchanges. “As for the natural measures of Exchange,” he said, “that in times of Peace, the greatest Exchange can be but the labour of carrying the money in specie, but where are hazards [and] emergent uses for money more in one place than another, etc., or opinions of these true or false, the Exchange will be governed by them.”113 Therein we find probably the first clear statement of the so-called “specie-points mechanism”.114

The last economist of the period 1620 to 1680 that we have to consider is William Potter,115 a paper money mercantilist. Like Davanzati, Misselden, and Mun, he emphasized the function of money rather as a circulating medium than as a store of value, and he seemed to be the first writer to favour the policy of increasing the national stock of money on the ground that money stimulates trade and to try to refute the quantity theory of money on the same ground. His starting point was the proposition “that the effect of all Trading, is but the parting with Commodities for such Money, Credit, or valuable Consideration, as procures other Commodities or Necessaries instead thereof”.116 It followed, according to him, that the larger the volume of “Money, Credit or valuable Consideration”, the more were the commodities parted with in trade. In other words, an increase of money would increase the volume of trade on the one hand117 and quicken it on the other.118 Quick and large trade would mean prosperity. So he advocated the multiplication of the money of the nation and opposed hoarding in any form. The best way to multiply money and prevent hoarding was to use paper currency, because paper currency would increase trade just as metallic money did and at the same time was “not like to be hoarded up as Money is”.119

He was aware of the possible objection from exponents of the quantity theory that “an increase of money would occasion an increase in the prices of Commodities, proportionable to such increase of money and consequently would not occasion any increase in the sale of Commodity; then not any increase of Trade”. So he attempted to refute the quantity theory.120 His arguments were, however, on the whole rather confusing and unintelligible. Liberally interpreted, his main argument is that if the volume of money was increased, commodities would be correspondingly increased and the tendency of prices to rise as a sequence to the increase of money would be offset. Nevertheless, he conceded that if the increase in commodities was proportionately less than the increase in money, prices would rise accordingly. For example, he said, “if there be now ten times more money, in the World then formerly, seeing it cannot be conceived, that the whole world is capable of affording, ten times more Commodity then formerly, it must be granted, that an increase of money in the whole World, may occasion an increase in the price of Commodities (though not fully proportionable . . .).”121

7. The First Protectionist Controversy

In the last two decades of the seventeenth century, the balance of trade theory began to be questioned, and, as a result, much progress was made in the theory of international trade. The first two steps forward were taken in connection with two controversies, namely the protectionist controversy and the controversy between John Locke and Nicholas Barbon.

The protection versus “free trade” controversy122 at the end of the seventeenth century was connected with the East India trade. In the latter half of that century the imports of Indian textiles into England were increasing, especially in the last two decades. Owing to the high costs of production, the English textile industries could not withstand the competition of the Indian imports. The result was that in the last decade of the century the English woollen and silk industries faced a grave crisis. Those industries were experiencing depression and unemployment, and complaints were made by the weavers and the public in general against the East India trade. The East India Company naturally replied to the attacks that were made on its trade, and the result was the protectionist controversy.

The best spokesmen of the weavers’ interests were John Cary123 and John Pollexfen.124 Like other mercantilists, they based their contention upon the conception of the state as an economic entity and stood for a definite national economic policy for the benefit of the state, but they differed from the balance of trade school in regard to the criterion to be applied in judging the foreign trade of a country. To the latter a country was said to gain or lose according as it had an under or an overbalance of trade. Cary and Pollexfen, on the contrary, judged the benefit of trade rather by the nature of the exports and imports than by their quantity and value. In other words, “that Trade is advantageous to the Kingdom . . . which Exports our Product and Manufactures; which Imports to us such Commodities as may be manufactured here, or to be used in making our manufactures; which supplies us with such things, without which we cannot carry on our Foreign Trade; [and] which encourages our Navigation, and increases our Seamen.”125 Judged by those criteria, the East India trade was said to be harmful and not beneficial to England. Nevertheless, they did not abandon the mercantilistic idea of increasing the national stock of money. They differed from their predecessors only in this: they no longer valued foreign trade and the treasure brought by it for their own sakes but for the effects upon home industries and trade. It was, moreover, by raising the question of how the national stock of money could be increased that Pollexfen had contributed something to the theory of international price relationships.

Pollexfen, following Mun, pointed out that cheapness was an essential factor in increasing the sale of home products. He said, “As the goodness of Commodities is absolutely necessary to introduce, incourage, or preserve the Consumption of them, so is the price.”126 How could the prices of commodities in the country be lowered? The answer was the reduction of the prices of raw materials and the wages of labour. By the prohibition of the exportation of raw materials (for example, wool) which were used for manufactures at home, and the importation of cheap raw materials, the cost of raw materials would be reduced.127 More important was the labour factor, and it was necessary to increase the supply of labourers and reduce their wages.128 He disapproved, however, of the suggestion of forcing down interest rates by law. He conceded that low rates of interest and prosperity in trade always came together, but “the increase of Trade is rather the cause of the falling of Interest, than that lowering Interest by Law should occasion the increase of Trade”.129 Therefore, any attempt to lower the rate of interest by law would be futile.130

The ablest upholders of the East India Company were Josiah Child131 and Charles Davenant.132 They did not deny the obvious fact that the Indian trade was detrimental to certain industries, but they maintained that the fact was not a sufficient condemnation of the East India trade. Nor did they accept Mun’s criteria in judging the benefit of trade, namely, the general balance and the exchange rates.133 In place of those criteria, they tried to establish a new rule for testing whether a trade is beneficial to a state or not:

The best and most certain discovery . . . is to be made from the encrease or diminution of our Trade and Shipping in general; for if our Trade and Shipping diminish, whatever profit particular men may make, the Nation undoubtedly loseth. . . . Where-ever Trade is great and continuous so, and grows daily more great and encreaseth in Shipping, and . . . for a succession not of a few years, but of Ages, that Trade must be nationally profitable.134

Using that criterion and facts that they had adduced to show that the East India trade had promoted the general prosperity of the nation, they were able to make out a case for the view that the East India trade was beneficial to the country.

Negatively, they tried to show that the proposal to prohibit the wearing of all Indian imported textiles in England would be detrimental to the nation.135 However, they could not do so without sacrificing some part of their mercantilistic doctrines and approaching the doctrine of free trade. The following quotations perhaps sufficiently reveal their main arguments:

Trade is in its nature free, finds its own channel, and best directeth its own course: and all laws to give it rules and directions, and to limit and circumscribe it, may serve the particular ends of private men, but are seldom advantageous to the public.136

For all trades have a mutual dependence one upon the other, and one begets another, and the loss of one frequently loses half the rest.137

It should be noted they they were not free traders at heart. They advocated leaving trade free from restraints only in so far as the argument served the purpose of their Company and their views constitute a mere case of special pleading.

As to the question how trade might be promoted, they agreed with Pollexfen that cheapness was essential to the expansion of sales.138 They also agreed with the latter that a large population was necessary to the enlargement of national wealth and trade, but Child held an opposite view on the questions of wages and interest. As already explained, Pollexfen thought that high wages would spoil trade and low wages would encourage trade. Child was of the opinion that high wages were by no means harmful to trade. On the contrary,

where-ever Wages are high universally throughout the whole World, it is an infallible evidence of the Riches of that Country; and where-ever Wages for Labour runs low, it is a proof of the Poverty of that place.139

On the question of interest his view was also the opposite to that of Pollexfen, for he stood for the lowering of interest by law as a method of promoting trade.140

Davenant advanced a theory of a due proportion of money to the monetary needs of the nation similar to that of Petty. He said, “It is not the taking in a great deal of food, but it is good digestion and distribution that nourishes the body and keeps it healthy. The same thing holds in the body politic; so that gold and silver are often a surfeiting diet to a nation; and there may be as well too much as too little of this kind of treasure, if it be not turned to proper uses.”141 Later, following the line of reasoning and the methods of Petty, he made an estimate of the quantity of money required.142

Before we come to Locke and Barbon, it is perhaps best that we should mention the works of Dudley North.143 North was perhaps the only thoroughgoing free trader before 1700. One quotation will be sufficient to show his free trade views:—

The whole World as to Trade, is but as one Nation or People, and therein Nations are as Persons. . . . There can be no Trade unprofitable to the Publick; for if any prove so, men leave it off; and wherever the Traders thrive, the Publick, of which they are a part, thrives also. To force Men to deal in any prescrib’d manner, may profit such as happen to serve them; but the Publick gains not, because it is taking from one Subject, to give to another.144

North also differed from his contemporaries in attaching less importance to the role of money.145 He even went so far as to say that “no Man is richer for having his Estate all in Money, Plate, etc. lying by him, but on the contrary, he is for that reason the poorer”. What was important for a man was not money but the things that money bought.146

To the theory of international price relationships he also made some contributions. Firstly, together with Petty and Davenant, he was one of the first advocates of the doctrine of a due proportion between money and the monetary needs of a nation. He said:—

There is required for carrying on the Trade of the Nation, a determinate Sum of Specifick Money, which varies, and is sometimes more, sometimes less, as the Circumstances we are in require. [For example] war time calls for more Money than time of Peace.147

Money is a Merchandise, whereof there may be a glut, as well as a scarcity, and that even to an Inconvenience.148

Secondly, he seemed to have held a doctrine of the natural distribution of the precious metals among nations, for he said:—

In this course of Trade [between Nations] Gold and Silver are in no sort different from other Commodities, but are taken from them who have Plenty, and carried to them who want, or desire them, with as good profit as other Merchandises. So that an active prudent Nation groweth rich, and the sluggish Drones grow poor; and there cannot be any Policy other than this, which being introduc’d and practis’d, shall avail to increase Trade and Riches.149

He did not, however, explain how the precious metals are taken from those who have them in plenty and given to those who are in want of them, although there is the following passage in his essay:—

This ebbing and flowing of Money, supplies and accommodates itself, without any aid of Politicians. For when Money grows scarce, and begins to be hoarded, then forthwith the Mint works, till the occasion be filled up again. And on the other side, when Peace brings out the Hoards, and Money abounds, the Mint not only ceaseth, but the surplus of Money will be presently melted down, either to supply the Home Trade, or for Transportation. Thus the Buckets work alternatively, when Money is scarce, Bullion is coyn’d; when Bullion is scarce, Money is melted.150

But that is not an explanation of “the world distribution of money It is essentially a doctrine concerning the automatic adjustment of the monetary and non-monetary uses of the precious metals within a closed community. It amounts to this: If the monetary stock of a community is “abundant”, the value of the precious metals as coins would be less than their value as bullion. Then people would melt down the coins and turn them to non-monetary uses. In other words, “When Money grows up to a greater quantity than Commerce requires, it comes to be of no greater value, than uncoyned silver, and will occasionally be melted down again.”151 The opposite is true of a relative scarcity of money.

Finally, North rejected the doctrine that low rates of interest would encourage trade with an argument similar to that of Pollexfen:—

As plenty makes cheapness in other things, as Coin, Wool, etc., when they came to Market in greater Quantities than there are Buyers to deal for, the Price will fall; so if there be more Lenders than Borrowers, Interest will also fall; whereof it is not low Interest makes Trade, but Trade increasing the Stock of the Nation makes Interest low.152

8. John Locke and Nicholas Barbon

In connection with the English recoinage problem in the last decade of the seventeenth century there arose a controversy regarding the raising of the value of silver crowns between Locke on the one side and Lowndes153 and Barbon on the other. This controversy is of interest to us, because the former has given us a refined re-statement of many of the then accepted doctrines of money and trade and the latter presented us with one of the earliest systematic criticisms of the same. On the subject of money, Locke,154 like most of his predecessors, identified money with the money metals and thought that the only difference between money and uncoined silver was that, while money had a public voucher, which testified to its weight and fineness, uncoined silver did not possess one. So money was considered by him as being “perfectly in the same Condition with other Commodities, and subject to all the same Laws of Value”.155 According to those laws, value was determined by “nothing else but their Quantity in Proportion to their vent”.156 The term, “vent” of money, is peculiar and therefore deserves special attention:—

He that will justly estimate the value of any thing, must consider its Quantity, in proportion to its vent, for this alone regulates the Price. . . . But because the desire of Money is constantly, almost everywhere the same, its vent varies very little; but as its greater scarcity enhances in price, and increases the scramble, there being nothing else that does easily supply the want of it. The lessening its Quantity, therefore, always increases its Price, and make an equal portion of it exchange for a greater of any other thing.157

In other words, the value of money was determined more by the supply of money than by the demand for it or it depended only upon its plenty or scarcity.158 That is one of the most refined presentations of the quantity theory up to the time. Like Petty, Locke said that a certain proportion of money was necessary to trade,159 and the reason he gave is the following:—

Every man must have at least so much money, or so timely recruits, as may in hand, or in a short distance of time, satisfy his creditor who supplies him with the necessaries of life, or of his trade. For no-body has any longer these necessary supplies, than he has money, or credit, which is nothing else but an assurance of money, in some short time. So that it is requisite to trade, that there should be so much money, as to keep up the landholder’s, labourer’s and brokers’ credit: and therefore ready money must be constantly exchang’d for wares and labour, or follow within a short time after. This shows the necessity of some proportion of money to trade.160

In other words, it is because of the need of the inhabitants of a country for a cash-balance that it has to preserve a certain proportion of money to the value of trade. If the money were “insufficient”, there would be a “decay of trade”.161 But what is the proportion of money to trade that would be sufficient for a nation? He said:—

What proportion that is, is hard to determine; because it depends not barely on the quantity of money, but the quickness of its circulation. The very same shilling may, at one time, pay twenty men in twenty days: at another, rest in the same hands one hundred days together. This makes it impossible exactly to estimate the quantity of money needful in trade; but to make some probable guess, we are to consider, how much money it is necessary to suppose must rest constantly in each man’s hand, as requisite to the carrying on of trade.162

It is interesting to note the difference between Locke’s doctrine of the proportion of money required by a nation and the doctrine of Petty on the same subject Both are of the opinion that the proportion depends on the rapidity of the circulation of money as well as on its quantity. Petty sees money as it is in motion and measures the rapidity of its circulation by the time required by an average unit of money to effect a transaction of trade, while Locke sees money as it is at rest and measures the velocity of its circulation by the amount of it held by the average man in the carrying on of his trade. We must not, however, attach importance to the difference between Locke and Petty, because the two approaches to the question are perfectly reconcilable. Finally, like Petty, Locke did not discuss the problem of the velocity of the circulation, at least directly, in connection with the problem of the value of money, although it cannot be denied that his analysis of the velocity of circulation, like that of Petty, is an important contribution to the theory of the value of money.

He next went a step further and considered the problem of proportion from the standpoint of international trade. He said:—

In a country that hath open Commerce with the rest of the World, and uses Money made of the same Materials with their Neighbours, any quantity of that Money will not serve to drive any quantity of Trade, but that there must be a certain proportion between Money and Trade. The reason whereof is this, because to keep your Trade going without loss, your Commodities amongst you, must keep an equal, or, at least, near the Price of the same Species of Commodities in the Neighbour Countries, which they cannot do, if your Money be far less than in other Countries; for then, either your Commodities must be sold very cheap, or a great part of your Trade must stand still; there not being Money enough in the Country to pay for them (in their shifting of hands) at that high price which the Plenty, and consequently low value of Money makes them in another Country.163

That is nothing but a clarified restatement of the theory advanced by Malynes. What is really new in Locke is his emphasis on the fact that an insufficient quantity of money depressed trade and had the effect of “drawing away our People . . . who are apt to go where their Pay is best”.164 As a certain amount of money was necessary to every state, there remained the question as to how a country without mines of gold and silver could increase its stock of the precious metals and in order to answer the question he introduced the main thesis of the balance of trade school that an abundance of money in a country could be ensured only by the balance of trade.165 Like Mun, he used the balance of trade to explain the foreign exchanges and expressed the view that “it is the present balance of trade on which the exchange immediately and chiefly depends”. But he made two important advances over Mun and his school. Firstly, he saw that international loans would have the same effect upon the exchanges as the commodity balance.166 Secondly, he gave an exposition of the specie-point mechanism with considerable clearness.167

Upon the theoretical foundation outlined above he came to the conclusion that, since money passes only according to its metallic content and since trade was the only peaceful means to obtain the precious metals, to “raise” the value of money was futile. In case its value was “raised”, the consequences would be—

(a) the prices of all things would rise accordingly;

(b) foreign exchanges would rise to the same extent; and

(c) the landlords and other receivers of fixed incomes would lose proportionately.

In most respects Barbon’s view168 was antithetical to that of Locke. First of all, he attacked Locke’s doctrine on the value of money. Barbon started from a use theory of value,169 and thought that “nothing can have an Intrinsick value”.170 The same was true of silver, which was but a commodity and would rise and fall in value as other commodities did. Then he argued that as money was the measure of value and should itself be constant in value, silver, being itself “uncertain in its own Value, can never be a certain Measure of another Value”.171 Silver was but the material which happened to be used in coining money and must not be identified with money itself.172 Money, on the contrary, “has some Valuation from the authority of the Government where ’tis Coin’d, and not its sole Value from the quantity of Silver in each piece.”173 In other words, by the stamp of the state, a coin might be given value above the value of the silver in it. For instance, he said,

Mony is a Value made by a Law; and the Difference of its Value is known by the Stamp, and Size of the Piece. . . . It is not absolutely necessary, Mony should be made of Gold or Silver; for having its sole Value from the Law, it is not Material upon what Metal the Stamp be set. Mony hath the same value, and performs the same Uses, if it be make of Brass, Copper, Tin or anything else. The Brass Mony of Spain, the Copper Mony of Sweeden, and Tin Farthings of England, have the same Value in Exchange, according to the Rate they are set at and perform the same Uses, to Cast up the Value of things, as the Gold and Silver Mony does.174

The doctrine of Barbon, probably the best statement of the “legal theory of money” in the seventeenth century, is rather inaccurate. It is only if the Government has a monopoly in coining metals into money175 and limits the quantity of money coined that coins would pass current at higher values than those of their metallic contents. Just as “Plenty and Scarcity, in respect to their occasion, makes things of greater or less Value”, plenty and scarcity determines also the value of money. Barbon, in stressing the importance of the legal stamp on the coin and neglecting the factor of the relative scarcity of money, evolved a proposition, which is misleading, if not erroneous.

His use of the legal theory of money in support of the advocacy of the “raising of the value of money” is certainly erroneous. According to him, the raising of the value of money would cause neither a general rise of prices nor any disproportional effects upon prices. His argument is that “the Mony, having its Value from the Authority of the Government, is always of the same Goodness and Value”.176 By such a dogmatic proposition he relieved himself of the obligation of considering the factor of the quantity of money, but his view was, of course, quite mistaken.

He turned next to Locke’s argument that, since trade was the only peaceful means of obtaining bullion, to “raise” the value of money was futile. To begin with, he agreed that a nation should preserve its stock of money, but he evidently did not hold the view that a nation should also preserve its stock of gold and silver. On the contrary, he declared that “gold and silver are but commodities” and were by no means superior to any other kind of commodities.177 Thus he criticized Locke for having based his opinion “upon this Supposition, That Gold and Silver are the only Riches”.178 Furthermore, according to Barbon, Locke was mistaken in thinking that a favourable balance of trade brought about an inflow of money. Barbon, moreover, raised two important objections to the balance of trade theory and thus anticipated some of the propositions of a later generation. He denied the actual existence of a balance in the trade of any nation, “for a Nation, as a Nation, never Trades; ’tis only the Inhabitants and Subjects of each Nation that Trade: And there are no set days or times for making up of a general Accompt.”179 He declared that there was no necessary relationship between the balance of trade (if there was one) and the international flow of money. While he denied that a trade balance could not be settled but by a transfer of money,180 he held the following opinion:—

Money is never carried out of any Country where it is Coin’d, except it be to those Countries where the Bullion bears a higher price than what the Money is currant at: Or when the Exchange runs so high to any Country, as it will be more profit to the Merchant to melt down the money, and send it over in Bullion, than by Bills of Exchange. And in both these Cases it may often fall out, that the money may be sent over to a Country, and yet no Debt contracted in that Country. And therefore the Balancing of Accompt, can’t be the reason of drawing the money out of a Nation.181

In short, it was not the balance of trade, but the difference between the price of bullion abroad and the value of money at home that made money flow from one nation to another. It followed that the best way to increase “the species of the Mony and to preserve it “in the Country where ’tis Coin’d” was to raise the value of money at home.182 Those views were, of course, consistent with his erroneous theory of the value of money.

9. John Law and Others

Apart from the contributions of the participants of the two controversies described in the two preceding sections to the theory of international price relationships, this period, i.e. the period from 1680 to about 1750, is noteworthy also for other important advances in the study of the subject. Those advances arose from two important series of attempts to reconcile some of the conflicting doctrines in the mercantile system of thought. Previous to this period, as already explained, there were two different theories of international price relationships: that of Malynes and that of Mun. The difference between those two writers included a conflict of opinion on the question whether a rise in prices in a country would result in a more or less favourable balance of trade. Both had supporters in a later period. We find, for example, a restatement of Malynes’s theory in the writings of Locke. But the view of Mun seemed to be more generally accepted at the time, especially by the leading participants of the protectionist controversy. In the system of thought of Mun, however, there were the contradictory doctrines that a nation should increase its stock of money and that an increase of money would necessarily cause a rise in prices and hence bring about an unfavourable balance of trade. That contradiction could not long remain unnoticed.183 As early as the year 1650, Potter had made what was probably the first attempt to reconcile the contradiction. Later, Petty, Davenant, and North clearly pointed out that there might be too much as well as too little money in a country. Furthermore, Petty recommended some remedies for an excess of money, while North suggested that the excess would automatically be turned to non-monetary uses. None of them offered, however, a complete reconciliation of the contradictions or advanced a comprehensive alternative theory of international price relationships. Those tasks were left to the authors with whose works we are going to deal in the pages that follow. Those authors might be classified in two groups, those who stood for the doctrine that money stimulates trade or production and those who stood for what we might call the “semi-equilibrium” doctrine. By the former doctrine we mean the doctrine, according to which an increase of the volume of money encourages trade and a decrease of the volume of money depresses trade,184 thus an increase or a decrease of money is necessarily accompanied by an increase or a decrease in the demand for money, and consequently a change in the volume of money would not affect prices or the balance of trade. In other words, the exponents of that theory tried to escape the difficulty created by Mun’s two contradictory doctrines by refusing to accept the second of Mun’s doctrines. The second group of authors, on the other hand, accepted both of Mun’s conflicting doctrines but insisted that, if the government of a country adopted some artificial means to prevent the precious metals imported from entering into circulation as money and hence from influencing prices and trade, the country could continue freely to import those metals. Thus, unlike the first group of authors, these writers did not try to solve the problem by formulating a new doctrine. On the contrary, they carried Mun’s system a step further to its logical conclusion, that if prices and trade are left to adjust themselves, there is a tendency of prices and trade to establish equilibrium, even though they did not desire to leave things alone. That is the reason why we designate their doctrines as “the semi-equilibrium doctrine”. The whole argument of the first group was based upon the denial of any necessary relationship between the increase of the national stock of money and the rise in prices,185 while the whole argument of the second group rested upon the denial of a causal relationship between an increase of bullion and an increase of money. The germs of the arguments of the former are found in Potter and of the latter in Petty.

The first advocate of the doctrine that money stimulates trade we are going to consider is John Law,186 another paper money mercantilist. He recognized that the value of money depended upon its quantity in proportion to the demand for it,187 but he, nevertheless, advocated an increase of the national stock of money. He saw no contradiction in those views. In the presentation of his thesis he started, like Potter, from the proposition that trade depended on money. Expressing himself with great clarity, he said:—

Trade depends on the Money. A greater Quantity employs more People than a lesser quantity. A limited Sum can only set a number of People to Work proportion’d to it, and ’tis with little success Laws are made, for Employing the Poor and Idle in Countries where Money is scarce: Good Laws may bring the Money to the full circulation ’tis capable of, and force it to those Employments that are most profitable to the Country: But no Laws can make it go further, nor can more people be set to Work, without more Money to circulate so as to pay the Wages of a greater number. They may be brought to Work on Credit, and that is not practicable, unless the Credit have a Circulation, so as to supply the Workman with necessaries; If that’s suppos’d, then that Credit is Money, and will have the same effects, on Home, and Forreign Trade.188

In other words, when money was increased, trade would be promoted and the production of commodities stimulated. “But as Trade and Manufacture increase, the Demand for Money will be greater.”189 That increase in demand for money would neutralize its increase in quantity and prevent the price from rising. Particularizing his argument, he said that as the quantity of money increased, “Money being easier borrowed, Merchants would deal for a greater value . . . and [be] able to Sell at less Profit” and “all sorts of Manufacture would be cheaper, because in greater quantity”.190 Therefore, there would be no rise in prices, and the value of money would not fall. Accordingly, an increase in the national stock of money would not bring about an outflow of specie. On the contrary:—

If one half of the People are employ’d, and the whole Product and Manufacture consum’d; More Money, by employing more People, will make an Overplus to Export: If then the Goods imported ballance the Goods exported, a greater Addition to the Money will imploy yet more People, or the same People before employed to more Advantage; which by making a greater, or more valuable Export, will make a Ballance due. So if the Money lessens, a part of the People then imployed are set idle, or imployed to less advantage; the Product and Manufacture is less, or less valuable, the Export of Consequence less, and a Ballance due to Forreigners.191

So he came to the following conclusion:—

Most people think scarcity of Money is only the Consequence of a Ballance due; but ’tis the Cause als well as the Consequence, and the effectual way to bring the Ballance to our side, is to add to the Money.192

He conceded that in a country with a metallic standard, an increase of the stock of money beyond the due proportion would produce a rise in prices.193 But in case a country adopted a paper standard, especially of the form advocated by Law, that is, a paper money issued on the security of the land, “this Paper-Money will not fall in value as Silver-money has fallen, or may fall: Goods or Money fall in value, if they increase in Quantity, or if the Demand lessens. But the Commission [that is, the issuer of the notes] giving out what Sums are demanded, and taking back what Sums are offer’d to be return’d; This Paper-money will keep its value, and there will always be als much Money as there is occasion, or imployment for, and no more.”194 For that reason chiefly he advocated a paper money.

Some of Law’s minor contributions may also be noted. He pointed out that an increase in the expenditure of the consumers would turn the balance of trade against the country under consideration and lead to an outflow of specie. Furthermore, he saw clearly that an increase of expenditure on domestic products would ultimately have similar effects on the balance of trade as an increase of expenditure on foreign products. “The too great consumption of the Product and Manufacture of the Country,” he said, “may be als hurtful as that of Forreign Goods; For, if so much is consumed, that the remainder Exported won’t pay the Consumption of Forreign Goods, a Ballance will be due, and that Ballance will be sent out in Money or Bullion.”195 Apart from that, he seemed to have made some statements which are very suggestive. In one place he said that silver money “was the same value in one Place that it was in another; or differ’d little, being easie of carriage.”196 In another place, when he tried to answer the objection that paper money, though current within the issuing country, say, Scotland, would not be accepted abroad at the same value that it had at home, he said, “The Goods of Scotland will always be valued Abroad, equal to Goods of the same kind and goodness; and that Money tho of Paper, which buys Goods in Scotland, will buy Goods or Money in other places.”197

About thirty years later, J. F. Melon, a French economist, published his Essai198 in which he embodied many of Law’s doctrines. It was, however, in the hands of another Frenchman, Forbonnais,199 who wrote a little after the middle of the eighteenth century that we find the ablest and the most convincing formulation of the doctrine that money stimulates trade. Being a mercantilist, he was opposed to any reduction in the national stock of money and advocated an increase of it, but he recognized that the absolute volume of money was in itself of little significance.200 What was of great importance was this: whenever a certain amount of money was put into circulation it should not be taken out, for the money that had been issued as a medium of exchange for goods would, after a time, set up for the industrial world its levels of wages and prices. Those wages and prices would soon become conventional. If in the conditions thus established the volume of money were reduced, the inevitable result would be a reduction of production and employment, since a large number of wages would not be susceptible of reduction.201 Therefore, a decrease in the national stock of money would mean considerable misery and suffering. In contrast, an increase of money—especially a gradual increase202—was always beneficial, for it would stimulate work and production. Moreover, an increase of money would not raise the prices of things. He then presented the proposition that money stimulates production in the following form:—

When there enters into the circulation of commodities a considerable quantity of silver which was not there before, it is inevitable after a time that the commodities rise in prices. This increase of the profitableness of labour multiplies the working men and the production; and the new competition offsets, by the diminution in profits as well as by the lowering of interest rates, the rise in prices.203

Generally, such an increase in money was due to a favourable balance of trade.204 If so, “its increase first benefits the commodities which have contributed to its introduction” and then the people who had produced those commodities, that is, those who had engaged in exporting industries, would, as a result of increased profits, increase their consumption and thus give rise to new production.205 The expansion in production would in turn check the rising tendency of prices.206

The increase of the circulation, which was due to a favourable balance of trade, had the beneficial effects, mainly because it was a gradual increase. If, however, the increase was not a gradual one and it was due, say, to the discovery of a new mine of silver in the country, the increase in the volume of money would raise prices and not increase employment and production.

The doctrine that money stimulates trade has a measure or truth, but it applies mainly to the transitional period. It would be wrong, however, to think that a large increase of the national stock of money would have no effect upon prices. Nor do the authors of the doctrine refute the fact that the mercantilists would defeat their own aim by increasing the national stock of money.207

10. Cantillon and Others

The principal features of the “semi-equilibrium theory” or “semi-disequilibrium theory” have been described in the preceding section. It resolves itself into four propositions. First, there is the mercantilistic doctrine that a nation should increase its stock of the precious metals by foreign trade. Next, there is the quantity theory of money and the recognition that a rise in prices at home would discourage exportation and encourage importation and thus turn the balance of trade against the country. The third is a corollary of the second proposition, namely a concept of the existence of a due proportion between money and goods. The second and the third propositions, however, are not in harmony with the first, for if we consider an equality between imports and exports as the condition of equilibrium in international trade, the demand for a continuous inflow of the precious metals amounts to a demand for a continuous disequilibrium. In the second and the third propositions, there is at least the implied recognition of the tendency of money and trade to establish equilibrium. Clearly that view is contradictory of the view embodied in the first proposition. The attempt to reconcile the contradiction brings us to the last proposition, that is that the employment of some artificial means could prevent the theoretically surplus bullion from entering into effective circulation and thus preserve the state of disequilibrium. The first proposition is common to all mercantilists. The second proposition is found partly in Mun and partly in the leading participants in the protectionist controversy. The third and the fourth propositions, as already explained, originate with Petty. But the credit for putting all those elements together and formulating a complete semi-equilibrium theory of international price relationships must be given to three eminent mercantilists—Jacob Vanderlint, Richard Cantillon, and Joseph Harris.208

Vanderlint subscribed to the quantity theory of money but in a somewhat different form. He equated the national stock of money not to the volume of commodities but to the number of people inhabiting the country.209 Moreover, he saw clearly that with the possible exception of a country with silver mines,210 a country which trades with others could not have a price level permanently higher than that of foreign countries. For example, if we were to open trade with those who could produce everything cheaper than we did, “they would bring us all sorts of Goods so cheap, that our Manufacture would be at an End, till the Money they would by this means get of us rais’d the Prices of their Things so much, and our Want of Money should fall ours to such a Degree, that we could go on with our Manufacture as cheap as they; and then Trade would stand between that Nation to us, as it doth between us and other Nations who mutually take Goods of each other.”211 In other words, among trading nations there was a tendency for prices to establish an equilibrium. That being so, was it possible for a nation to increase its stock of the precious metals? He pointed out that there were two ways out of the dilemma. The first was that the nation could hoard the stocks of the precious metals obtained from trade, for—

by thus keeping so much of those Metals out of Trade . . . it will give so much greater Employment . . . and prevent our Markets from rising so high, as to hinder the Exportation of our Commodities, or give too great Encouragement to the Importation of foreign Goods.212

He accordingly cited with approval the East Indian practice of hoarding silver and argued that it enabled the Indians permanently to maintain a state of low prices and a favourable balance of trade. The second method was to bring more land under cultivation and increase the production of the country so as to create greater abundance and thus check the rise in prices. The mere increase in production would act directly upon prices, while the subsistence thereby afforded to a larger population would act indirectly to the same effect, because the larger population, according to Vanderlint, implied an increase in the demand for money.213 However, we must distinguish the latter proposition from the proposition that money stimulates trade, for in Vanderlint’s theory the increase in the demand for money is produced by an extraneous factor, while in the theory that money stimulates trade the compensation is automatic and incidental.

Vanderlint’s view of the functions of banking is very suggestive. He considered that banknotes produced the same effects as metallic money:—

Banking, so far as one is paid with the Money of another, that is, where more Cash Notes are circulated, than all the Cash the Bankers are really possessed of will immediately answer and make good; I say, so long as this Credit is maintained, it hath the same Effect, as if there was so much more Cash really circulating and divided amongst the People; and will be attended with these Consequences, that as the Price of things will hence be rais’d, it must and will make us the Market, to receive the Commodities of every Country whose Prices of Things are cheaper than ours . . . [and hence] turn the Balance of Trade against us, which will diminish the Cash of the Nation.214

If that were so, in order to maintain our stock of money, we must discourage the establishment of institutions of banking.215

At about the same time (1734), Cantillon completed his famous Essai.216 The practical value of the work and the influence that it exercised upon economic thought were very great. It has sometimes been called “the most important work on economics before the Wealth of Nations”. It is of importance in the study of the theory of international price relationships, because we find in it the best formulation of the semi-equilibrium theory.

Before examining his doctrine on international trade it is desirable that we should briefly describe his theory of value and production. He was probably the first economist who drew a sharp distinction between intrinsic value and market value.217 According to him, the real or intrinsic value of a commodity was “proportionable to the Land and Labour that enters into their production It was only the market value of things which “varies with their plenty or scarcity according to the demand”.218 Silver was no exception. Therefore, he criticized Locke and other English writers for neglecting the real values of commodities and taking account of only their market prices. The quantity theory of money, he argued, applied only to market prices.219 Even so, in relating the quantity of money to the quantity of commodities three important factors had to be taken into consideration. First, as some commodities in the market could be, or had to be, sold in other markets, the quantity of the commodities was by no means an absolute factor.220 Secondly, allowance had to be made for the rapidity of the circulation, for “an acceleration or greater rapidity in circulation of money in exchange, is equivalent to an increase of actual money up to a point”.221 Finally, it was necessary to bear in mind that “the Bankers or Goldsmiths contribute to accelerate the circulation of money”.222 The second point is of interest as one of the first direct association of the velocity of money with the problem of the value of money. It is true that the concept of the velocity of circulation of money is found in the writings of Potter, Petty, and Locke. But Potter’s concept of “revolution of money” is not very clearly stated. The formulations of the concept by Petty and Locke, though excellent, are not directly related to the problem of the value of money.

What was more important, however, was the problem of the actual path through which a change in the volume of money led to changes in the price and income structure, or, to put the same thing in other words, the question “in what way and in what proportion the increase of money raises prices”. His answer to that question is so excellent that we must quote it at some length:—

I consider in general that an increase of actual money causes in a State a corresponding increase of consumption which gradually brings about increased prices. If the increase of actual money comes from Mines of gold and silver in the State the Owner of these Mines, the Adventurers, the Smelters, the Refiners, and all the other workers will increase their expenses in proportion to their gains. They will consume . . . more . . . commodities. They will consequently give employment to several Mechanicks who had not so much to do before and who for the same reason will increase their expenses: all this increase of expense in Meat, Wine, Wool, etc., diminishes of necessity the share of the other inhabitants of the State who do not participate at first in the wealth of the Mines in question. The altercation of the Market, or the demand for Meat, Wine, Wool, etc., being more intense than usual, will not fail to raise their prices. These high prices will determine the Farmers to employ more land to produce them in another year: these same Farmers will profit by this rise of prices and will increase the expenditure of their Families like the others. Those then who will suffer from this dearness and increased consumption will be first of all the Landowners, during the term of their Leases, then their Domestic Servants and all the Workmen or fixed Wage-earners who support their families on their wages. All these must diminish their expenditure in proportion to the new consumption, which will compel a large number of them to emigrate to seek a living elsewhere. The Landowners will dismiss many of them, and the rest will demand an increase of wages to enable them to live as before. It is thus, approximately, that a considerable increase of Money from the Mines increases consumption, and by diminishing the number of inhabitants entails a greater expense among those who remain.223

To the relationship between an increase of money and a rise in prices he gave two important qualifications. The first was a proposition of Montchrétien that the rise in prices is not always in proportion to the increase in money.224 The second was that since the increased expenditure arising out of the increase in money was “directed more or less to certain kinds of products or merchandise according to the idea of those who acquire the money, market prices will rise more for certain things than for others, however abundant the money may be”.225 He accordingly presented the quantity theory in the following modified form:—

An increase of money circulating in a State always causes there an increase of consumption and a higher standard of expenses. But the dearness caused by this money does not affect equally all the kinds of products and merchandise proportionably to the quantity of money, unless what is added continues in the same circulation as the money before, that is to say unless those who offered in the Market one ounce of silver be the same and only ones who now offer two ounces when the amount of money in circulation is doubled in quantity, and that is hardly ever the case. I conceive that when a large surplus of money is brought into a State the new money gives a new turn to consumption and even a new speed to circulation. But it is not possible to say exactly to what extent.226

We may now take up his theory of international price relationships. He pointed out that the quantity of money circulating in a trading country might be increased in one of the following ways: (a) exploitation of mines; (b) subsidies from foreign powers; (c) invisible items, such as travellers’ expenses, etc.; (d) a favourable balance of trade; (e) borrowing; and (f) violence and arms.227 He then gave the first detailed explanation of the mechanism by which an increase in money would bring about changes in the balance of trade. In case the increase of the precious metals was due to the first cause, the income of the owners and the labourers connected with the mines would be augmented proportionately. They might either lend the additional income at interest or increase their expenditures. “All this money, whether lent or spent, will enter into circulation and will not fail to raise the prices of products and merchandise in all these channels of circulation which it enters.” As market prices rise, “this will naturally induce several people to import many manufactured articles made in foreign countries, where they will be found very cheap” and exportation would, moreover, be checked. The balance of trade would then turn against the country with the silver mines, the new money obtained from the mines would then be drained out of the country, and it would find itself in a state of “poverty and misery”. Spain was cited as a typical example of such a country.228 The second, third, fifth and sixth, methods of increasing the quantity of money would also prove disastrous. But if the increase of money proceeded from the balance of foreign trade, the situation of the country would be somewhat different, because, for a time at least, “this annual increase of money will enrich a great number of Merchants and Undertakers in the State, and will give employment to numerous Mechanicks and workmen who furnish the commodities sent to foreigner, from whom the money is drawn.”229 Nevertheless, should an increase of money from the balance of trade be considerable, it would not fail to increase consumption, raise the price of everything, to overturn the balance and drain off the money that was in excess.230

From the doctrines laid down in the preceding paragraphs, it logically follows that there is an optimum amount for the stock of money circulating in a country and that any sum in excess of it would automatically flow out. Those doctrines include (a) a balance of trade theory that postulates that a favourable balance of trade would cause an inflow of metals, (b) a quantity theory of money that postulates that an inflow of money metals would bring about a rise in prices, and (c) the theory that a rise in prices would turn the balance of trade against the country. For those reasons a country could not continue for long to import bullion upon a very large scale and there was consequently a tendency for prices and trade to establish an equilibrium.231 He was, however, of the opinion that the leaders of the state should not allow economic factors to take their own course but should intervene to preserve the abundance of money. He gave two arguments in favour of the retention of plenty of money in a state. The first is that a country with plenty of money and a higher level of prices, could, by selling dear and buying cheap, enjoy more advantageous barter terms of trade. For instance, he said:—

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 a greater.232

He considered that condition as being maintainable only during a transitional period. His second argument is that “the revenues of the State where money abounds, are raised more easily and in comparatively much larger amount. This gives the State in case of war or dispute, the means to gain all sorts of advantages over its adversaries with whom money is scarce”.233

How, then, is the money obtained to be preserved? His reply to the question is very clear:—

When a State expands by trade and the abundance of money raises the price of Land and Labour, the Prince or the Legislator ought to withdraw money from circulation, keep it for emergencies, and try to retard its circulation by every means except compulsion and bad faith, so as to forestall the too great dearness of its articles and prevent the drawbacks of luxury.234

Furthermore, the circulation of banknotes should be discouraged.235

In the main, the views of Harris236 are similar to those of Cantillon. Like the latter, he declared that “things in general are valued . . . in proportion to the land, labour, and skill that are requisite to produce them”.237 He, too, subscribed to the quantity theory of money but made some modifications of a minor character.238 He held that there must be a due proportion of money to the monetary needs of a nation:—

Where money is grown into great plenty, whatever be the causes of that over-plenty; labour and all sorts of manufactures will grow dear, too dear for foreign markets: And at the same time that the exportation of home-commodities is decreasing, that of bullion for foreign goods will be increasing; till at length the tide of the over-plenty of money hath spent its self. . . . Commerce will settle the due proportion of money every-where . . . in respect to the whole wealth and traffic of any country.239

He adhered, nevertheless, to the mercantilistic doctrine that a state should preserve its stock of bullion and gave three reasons for that view. The first is that “if the tide of money is a running out; during this ebb, trade will stagnate, some merchants and shopkeepers will break, some manufacturers will be laid aside, many hands will be unemployed, and murmurs and complaints will be heard among all sorts of people concerned in trade”.240 The second is the barter terms argument that a nation whose money is decreasing “would be under a great disadvantage, in the purchasing of foreign commodities for ready cash”241 But those two reasons would not operate long, because the factors are merely of a transitional nature. Therefore, his case rests mostly upon the third reason that the retention would mean “a real increase of wealth”.242 The way out of the situation created was “to keep that bullion in a dead stock, either by turning it into plate or any other method, so as to prevent its getting into trade as money”. If that was done, “it may continue to go on increasing in more bullion.”243

11. Summary

The period during which mercantilism was the basis of economic thought witnessed, on the one hand, important speculations upon such problems as money and foreign exchange, a knowledge of which is essential to an understanding of the subject of international price relationships and, on the other hand, the gradual emergence of many important doctrines in the theory of international price relationships. Progress in regard to the latter was in connection with the discussion of such problems as why the national stock of money should be increased, how it might be increased and what would be the effects of its being increased. First in examining the effect of an enormous flow of specie from the New to the Old World, Bodin discovered a causal relation between an increase of the money metals in a country and a rise in its prices. Both Hales and the bullionists made contributions to the subject when they were investigating how the precious metals of a country might be increased or decreased. Hales presented the doctrine that a country with relatively low prices would sell cheap and buy dear and thereby turn the balance of trade against itself. The bullionists rightly recognized the existence of certain relationships between the rates of exchange and the international movement of specie, but they went too far in concluding that the rates of exchange were the initial cause of the latter. In the hands of Malynes, the doctrines of Hales, Bodin and the bullionists were combined to form the theory of international price relationships, with which his name is associated. Mun and other members of the balance of trade school also were concerned with the means of increasing the stock of precious metals of a country. They were of the opinion that a favourable balance of trade alone would be the true cause of an inflow of specie. Furthermore, Mun pointed out that selling cheap and buying dear would turn the balance of trade of a country in its favour and not against it. Therein lies the germ of the theory of equilibrium in international price relationships. The origin of the equilibrium theory might also be traced in the doctrine of the existence of a due proportion between the national stock of money and the monetary needs of a country. That doctrine was first found in the work of Petty. Both the views of Mun and the doctrine of Petty were repeated by the participants in the Protectionist controversy and were finally combined by Vanderlint, Cantillon, and Harris to form what we call the “semi-equilibrium theory”. There was still a third theory, i.e. the theory that money stimulates trade and production, with Potter, Law, and Forbonnais as its advocates. Unlike Malynes, Mun, or Cantillon, the advocates of that doctrine refused to accept the quantity theory of money. They argued that an increase in the volume of money encouraged trade and that an increase in trade would involve an increase in the demand for money and consequently the increase in the volume of money would not affect prices or the balance of trade.

Those are the three dominant mercantilistic doctrines of international price relationships. Each of them in its right place contains an element of truth. The doctrine that money stimulates trade is correct in the short run, especially when it is applied to a country where there is great unemployment of resources. It is erroneous, however, to suppose that a continuous inflow of the money metals could permanently stimulate trade and production to the extent that the consequential increase of the demand for money would be enough to offset entirely the increase in the supply of money. In the long run there is always a casual relationship between money and prices. Furthermore, it might be possible that the very stimulation of trade and production causes the rise in prices and incomes. The Malynesian theory is true only of a country in such exceptional circumstances that both its demand for its imports and the foreign demand for its exports are inelastic. It is only when the elasticity of both those two demands were, to use the terminology of mathematical economics, less than unity that a lowering of the general level of prices would cause an unfavourable and not a favourable balance of trade. The Vanderlint-Cantillon theory is fundamentally sound in principle. Had its advocates been willing to agree to freedom of trade, they would have come to the same conclusion as the classical economists. But as to the policy of artificially keeping the imported specie from going into active circulation, it is questionable to what extent it is correct. Moreover, that policy is no guarantee that there would be no decrease in the stock of the money metals in foreign countries and a consequent fall in their levels of prices, followed by a change of the balance of trade in their favour.

Unlike Mun and his school, Barbon considered the difference between the price of bullion abroad and the value of money at home as the sole cause of the movement of specie from one country to other countries. He objected to the theory of Mun on the ground that the very notion of a balance of trade was obscure, if not fictitious.

The problem of the relative rates of interest and wages of labour had also been raised during the mercantilistic period. Pollexfen thought that high wages would injure trade and low wages maintain a favourable balance of trade. Child, on the other hand, pointed out that high wages were a proof of the prosperity of the country and were by no means harmful to trade.

On the subject of money mercantilistic writers divide themselves into advocates of the “legal theory”, which was so vigorously presented by Barbon, and what might be called “catallactic theorists”, that is, those whose theory of the value of money can be fitted into some theory of the values of commodities. Most of the latter subscribe to the quantity theory of money. The quantity theory, however, usually implies the assumption of ceteris paribus or the supposition that things other than prices were not bound to change as a result of the change in the volume of money. The permissibility of making that assumption was questioned by Law and his school, who went so far as to reject entirely the quantity theory. Although Law’s doctrine of money must to a large extent be discarded, he must be remembered for having called attention to the importance of the dynamic aspects of the problem of money. The question how an increase of money, consequential on an inflow of specie, would work out its effects upon the price structure of a country was investigated by Cantillon and Forbonnais. The indirect chain of effects connecting money and prices through changes in the interest rates and the volume of borrowing was more or less suggested by Law, who declared that as the quantity of money increased, “Money being easier borrowed, Merchants would deal for a greater Value,” etc. But unlike the descriptions of the indirect mechanism by the writers of the nineteenth century, Law was of the opinion that the result of an increase of borrowing was a fall and not a rise in prices.

Considering the mercantilistic writers as a whole, it must be noted that they furnished most of the materials, out of which the classical theory that we are going to deal with in the next chapter was evolved. For example, they provided a quantity theory of money, a doctrine of a due proportion between the national stock of money and the monetary needs of a nation, doctrines of international specie movements, etc. Moreover, the doctrine that “raising the money” would raise the prices of all things accordingly and also force up the rates of foreign exchange to the same extent—a doctrine which has a very close resemblance to the Ricardian theory of foreign exchange—was promulgated by Locke and others. But none of them, with perhaps one possible exception,244 attacked the real aspects of the problem. They were left to be faced by Ricardo and his school.

money x velocity = price x trade.

The above formula implies not only the proposition that an increase in the volume of money raises prices (i.e. the quantity theory in the sense we use it) but also such propositions as the doctrine that money stimulates trade and the doctrine that changes in the velocity of the circulation of money may lead to changes in prices and/or trade. From the historical point of view, the mercantilists notice both the effects of an increasing circulation on prices and those on trade. Taking their position as a whole, they emphasized more the latter effects than the former. During the nineteenth century, most economists put more emphasis on the effects of money in changing prices than on its effects on the volume of trade and production. It is from them that we have the above or the narrower definition of the “quantity theory of money”. It should, however, be made clear at the outset that the term, quantity theory, may be used in the broader sense.

It should be further noted that we do not assign the credit of first formulating the quantity theory of money to either Bodin or any one writer. Bodin was simply one of the earliest writers who had a quantity theory.

As early as 1526, Copernicus had noticed that “money loses its value when it has been too much multiplied”.

(a) Malynes, Lex Mercatoria (London, 1622).

(b) Malynes, The Maintenance of Free Trade (London, 1622).

(c) Malynes, The Center of the Circle of Commerce (London, 1623).

In the above writings of Malynes there is nothing new in the theoretical foundation of his arguments. We need not, therefore, concern ourselves with them and may go straight to the examination of the views of the balance-of-trade school.

(d) Misselden, Free Trade (London, 1622).

(e) Misselden, The Circle of Commerce (London, 1623).

(f) Mun, A Discourse of Trade from England unto the East Indies (London, 2nd ed., 1621), McCulloch’s reprint used.

(g) Mun, England’s Treasure by Foreign Trade, written about 1630 and first published in 1664. We have used the reprint in McCulloch, Early English Tracts in Commerce, pp. 115–209.

“All human commodities which are in commerce taken together have a value equal to that of gold and silver, and coined copper which may circulate among them in trade.”

Therein he introduced the concept of money in circulation to take the place of the quantity of gold and silver. Secondly he pointed out that while the prices of goods in one isolated country and those in another were unconnected, the opening of commerce approximated the prices of the products of the trading countries to a general level. Before the establishment of communications between one country and the rest of the world, the general price of goods in the former country, like a sea separated from other waters, had its independent level. Prices in the different countries of the commercial world, on the contrary, must be in the same manner as those waters which are in communication and must “level themselves in an equal distance from the center to which they are tending”. See J. St. Lewidski, Money, Credit and Prices, London, 1929, pp. 86–7.

money x velocity = price x trade.

“Notes and Bills may serve as a Cordinal in Cases of Necessity, but as they have not any intrinsick value, they . . . [are] not fit to support the Body Politick longer, then we have Silver or Gold Coins to answer for them” (Preface).

“Such [paper] Credit, as far as it may be necessary to supply the want of Coyn, may be very useful, but if it should jostle out the use of Coyn, then most dangerous” (p. 67).

“We should . . . not depend too much on Paper Money, least we consume what we have, by forcing it out of the Nation; as Paper Money may increase, Silver Money must decrease, according to the fortuitous Course of Trade” (p. 79).

That view anticipated the main argument of the currency school.

(a) Some Considerations of the Consequences of the Lowering of Interest and Raising the Value of Money, 1691 (edition used, London, 1692).

(b) Further Considerations concerning Raising the Value of Money, London, 1695 (reprinted in his Several Papers relating to Money, London, 1696).

“People do not currently Receive or Esteem Foreign Coins according to the Value or Computation that Foreigners put upon them; but according to the Weight that the Silver and Gold will yield, reduced to the Standard of their own Country.” (p. 7.)

“The Exchanger also takes such a Consideration from the Remitter, as may not only pay his Charge and Hazard, but also redound to his Profit. Yet this Praemio, or Advance on the Exchanges cannot be great, unless upon some extra-ordinary Emergencies. Because People would then rather chuse to send their own Bullion to answer their particular Occasion.” (p. 9.)

“[Within the limits set by the specie-point mechanism the rate of exchange] is wholly influenced by the Balance of Trade between Nation and Nation; and when that falls short, it must be supplied by the sending of Bullion.” (p. 17.)

“But whensoever the Demands for Bills to any place is greater, than that these Exchangers can find other Remittances to imburse their Correspondents, they are then necessitated to transport so much in Bullion as will make the Balance.” (p. 9.)

“Things rare and difficult to be obtained, are General Badges of Honour: From this Use, Pearls, Diamonds, and Precious Stones, have their Value; Things Rare are proper Ensigns of Honour, because it is Honourable to acquire Things Difficult. The Price of Wares is the Present Value; And ariseth by Computing the occasions or use for them, with the Quantity to serve that Occasion; for the Value of things depending on the use of them, the Overplus of Those Wares, which are more than can be used, become worth nothing; So that Plenty, in respect of the occasion, makes things cheap; and scarcity dear.” (Discourse of Trade, pp. 17 f.)

Professor Jacob Viner, in his recent book, has pointed out that “stress on the importance of an abundance of money in circulation if trade was to flourish is already found in very early writers”. He called attention to Thomas More’s Utopia, which was published in 1516 (Reed’s ed., 1929, p. 44). Viner’s book, Studies in the Theory of International Trade (1937), became available too late to permit me to make use of it extensively. For Viner’s description of the doctrine that money stimulates trade and production, see ibid., pp. 36–40.

It should be noted that this essay, which was prepared by me before Professor Viner’s book was published, must not be considered in any way as a rival to that excellent work.

Money x Its Velocity = Price x Trade.

During the period under consideration came the question whether an increase of money would lead to an increase of price or trade. The quantity theorists insisted that money raises prices, while Law and others stood for the doctrine that money stimulates trade.

For the mercantilistic argument that a favourable balance of trade would increase the employment of the country see Viner, Studies, pp. 51 ff.

According to Forbonnais, “l’objet du Commerce dans un état est d’entretenir dans l’aisance par le travail le plus grand nombre d’hommes qu’il est possible.” (Elemens du Commerce, 2nd ed., Leydon, 1754, i, p. 47.) For that reason, he thought that a favourable balance of trade was advantageous to a country, because, for the reasons that we are going to explain, a favourable balance would increase employment.

He also strove for independent nationhood. “La richesse réelle d’un état est le plus grand degré d’independence où il est des autres états pour ses besoins, & le plus grand superflu qu’il a à exporter.” (Elemens, 2nd ed., i, p. 48.)

Like Cary and Pollexfen, Forbonnais was of the opinion that that trade was advantageous to the state which exported superfluous products, manufactured goods, etc., and which imported raw materials and goods which would be re-exported. (Ibid., i, pp. 52–4.)

He also explained how the mint or “real” par of exchange was determined (ibid., ii, pp. 74 ff.) and discussed the causes of the deviation of the current rate of the exchanges from the par. Public confidence and alteration of coins apart, the state of the balance of commerce was the main cause. (Ibid., ii, pp. 95 ff.) See also ii, pp. 314 ff.

• 1It is the practice of some economists to divide economic analysis into three departments, viz., statics, comparative statics, and dynamics. Economic statics deals with the conditions of equilibrium, if they exist at all. By conditions of equilibrium we mean those positions in which the price system will remain at rest, once it reaches them, provided that there is no fresh disturbance. That, however, does not imply that conditions of equilibrium must necessarily be reached ultimately by the price system. Comparative statics is concerned with the differences in the conditions of equilibrium in two or more price systems that are due to differences in the given data in the different systems. Economic dynamics deals with the problem, how a change in the fundamental data disturbs the price system and how the disturbances are corrected. It shows us, as Professor Robbins has pointed out, “the actual process of change—the path followed through time between one equilibrium position and the other.” In economic dynamics we have to see whether it is necessary or likely that the original change in data would lead to secondary changes in data. It is mainly because of those secondary changes in data that we have to differentiate between a doctrine of dynamics and one of comparative statics. In the latter we always suppose that when the original data change all other things will remain the same. In dynamics, however, we are not allowed to make the assumption of ceteris paribus.
• 2In dividing history into periods, we find it convenient to use certain dates, but the selected dates are only approximately accurate indicators. Nobody can point to a certain date as marking the exact point of time at which a historical stage or period either terminated or began. Nevertheless, we have to draw some lines of demarcation, however inexact they may be.
• 3The term, quantity theory of money, is sometimes defined as the theory that, in a given period of time, the product of the total volume of goods bought and sold multiplied by the average price of those goods is equal to the volume of the circulation of the medium of exchange. In such general terms, the theory does not indicate whether an increase in the circulation of money would lead to an increase in the volume of the goods or to a rise in their average price. The causal sequence may run either from the volume of the circulation to the average price of the goods transacted, or from the circulation to the volume of those goods. In the strict sense of the term, however, the quantity theory of money assumes the causal relation to run only from the circulation to the average price. We shall, in this essay, use the term in that strict sense. As to the theory that an increase (or decrease) of money would lead to an increase (or decrease) of the volume of goods and transactions, we shall call it “the doctrine that money stimulates trade and production”.
• 4Ibid., p. 34.
• 5Ibid., p. 69.
• 6Ibid., p. 105.
• 7For example, St. Thomas Acquinas, Nicholas Oresme, and Molinæus had developed, or at least indicated, a similar theory.
• 8Hales, op. cit., pp. 87, 115 f.
• 9That “theory of the store of value”, as it might be called, has been wrongly credited to Petty by Suviranta (The Theory of the Balance of Trade, 1923, pp. 52 f.). That theory is the natural outcome of the financial conditions in the sixteenth century and the greater part of the seventeenth century when gold and silver were alone easily exchangeable values, because foreign investment was practically unknown in those days and goods were not so easily exportable as at later periods.
• 10People having “plentie of things” and wanting to store up the surplus would naturally be willing to exchange these things for such wares as would lie in lesse Romes, and contineweth longest with out perishinge, and be carried to and fro with lesse charge, and be most currant at all times and at all places”. Gold and silver were “most of that sort” (Hales, op. cit., p. 72). See also p. 73.
• 11Discourse, Lamond’s ed., pp. 86–7; see also p. 113.
• 12Ibid., p. 35.
• 13That is in essence what has been called after Thomas Mun the balance of trade theory. The theory, in fact, had a long process of development. As early as the last quarter of the fourteenth century we find very definite statements of it in English by one of the officers of the Mint in his evidence before Parliament. The statement is as follows: “. . . As to the fact that gold and silver come not to England, whilst that which is in England is carried abroad, . . . if the merchandise exported from England be well and justly governed, the money which is in England will remain, and great plenty of money will come from abroad. It must be ascertained that no more foreign merchandise come within the realm than the value of the merchandise of this country that goes out of the realm.” However, the exact term balance of trade itself seems to have been coined in 1615 and the term favourable balance of trade in as late as 1767. See W. H. Price, “The Origin of the Phrase ‘Balance of Trade’,” Quarterly Journ. of Economics, xx (1905), pp. 157–167.
• 14Hales, op. cit., p. 102.
• 15Discourse, Lamond’s ed., pp. 88, 65.
• 16Ibid., pp. 47, 51 passim.
• 17Ibid., p. 40, see also pp. 43 ff., 47 f.
• 18It should be noted that the domestic demand for imported goods could not be permanently inelastic. When the balance of payments of the country turns unfavourable and specie flows out, then, other things being equal, the total income of consumers falls. The fall in consumers’ income will sooner or later lead to a reduction in the total value of its imports.
• 19Seigneur de Malestroit (second half of the sixteenth century) was a “member of the royal council of France and comptroller of the Mint”.
• 20“Lon ne peut dire qu’vne chose soit maintenant plus chere qu’elle n’estroit il y a trois cens ans, sinon que pour l’achepter il faille maintenant bailler plus d’or ou d’argent que l’on n’en bailloit alors. Or, est-il que pour l’achapt de toutes choses, lon ne baille point maintenant plus d’or n’y d’argent que Ion en bailloit alors. Doncques puis ledict temps rien n’est encbery en France. Les maxims sont clairs.” (Les Paradoxes sur le faict des Monnyes, Paris, 1578 ed. used, p. 4). Compare Paul Raveau, Précédé d’un Étude sur le Pouvoir d’Achat de la Livre, Paris, 1926.
• 21Les Paradoxes sur le faict de Monnyes, Paris, 1578, p. 15.
• 22Other writers, especially Spanish writers, must have more or less noticed the effects of the influx of the American treasure in raising prices. But there can be no doubt that Bodin is entitled to the credit for first giving due emphasis to the importance of the supply of the money metals and that it was from Bodin and not from others that later writers got that explanation of the price revolution. For that reason we feel ourselves justified in choosing Bodin as the representative exponent of that view. See Earl J. Hamilton, American Treasure and the Price Revolution in Spain, 1501–1650 (Cambridge, Mass., 1934), pp. 283–306 and Bernard W. Dempsey, “The Historical Emergence of Quantity Theory,” Q.J.E., 1935.
• 23Jean Bodin (1530–1596) was bora and educated at Angers. He spent his college days in studying law; became, after his graduation, a lecturer on jurisprudence and later practised law in Paris. Not being very successful at the bar, he entered government service. In 1568 he published his famous Reponse aux paradoxes de M. de Malestroit touchant l’encherissement de toutes les choses et des monnaies, which was followed in 1578 by his Discours sur le rehaussement et diminution des monnaies, pour reponse aux paradoxes de sieur de Malestroit. It is, however, as political philosopher that he is chiefly noted. In political theory he was sometimes considered as “one of the most important figures after Aristotle”. His famous work, Les six livres de la République, was published in 1576. In it he incorporated the substance of his Réponse. The Réponse has an English translation in A. E. Monroe’s Early Economic Thought. The reference is to Monroe’s edition, pp. 123–6.
• 24Ibid., p. 127.
• 25Ibid., pp. 128–131.
• 26Ibid., p. 131.
• 27As early as the Saxon coinage controversy around 1530, the opponents of depreciation put forward arguments suggestive of the quantity theory.
• 28By the Quantity Theory of Money we mean the doctrine according to which, to use the words of Wicksell, “the value or purchasing power of money varies in inverse proportion to its quantity, so that an increase or decrease in the quantity of money, other things being equal, will cause a proportionate decrease or increase in its purchasing power in terms of other goods, and thus a corresponding increase or decrease in all commodity prices.” One may, of course, use the term, quantity theory of money in a broader sense, viz. in the sense that
• 29Réponse (Monroe’s ed.), pp. 138 ff.
• 30Bernardo Davanzati (1529–1606), A Discourse upon Coins (1582). We have used the English translation by John Toland (London, 1696), p. 18.
• 31Ibid., p. 15.
• 32Antoyne de Montchrétien, Traicté de l’économie politique, 1615, Funck-Brentano ed. (Paris, 1889) used, p. 257.
• 33See Professor R. H. Tawney, Introduction to a new edition of Thomas Wilson’s “Discourse upon Usury” (London, 1925).
• 34Ibid., p. 60.
• 35See Memorandum prepared for the Royal Commission on the Exchanges, London, 1564, reprinted in Tudor Economic Documents (edited by Tawney and Power, London, 1924), vol. iii, pp. 346–359.
• 36Ibid., p. 350.
• 37“The Exchange is the gouernere of prices of all warres enterchangablye vented betweene this Realme and the Low Contreyes, because the greateste quantetye of wares transported ether outeward or inwarde is boughte by money taken vppe by Exchange, and also because, althoughe the wares he boughte with his owne moneye, in sellinge of his hondred poundes worthe of wares he Consydered what gaynes he myght have made by Exchange of so muche moneye, and he maketh the price of his wares accordingly or to some Convenyent overpluse.” (Ibid., p. 347.)
• 38See Tawney, op. cit., pp. 138–154.
• 39“Protest against the State Control of Exchange Business,” 1576, reprinted in Tudor Economic Documents, vol. ii, pp. 169–173.
• 40Tudor Economic Documents, p. 172.
• 41See Thomas Milles, The Customers Replie or Second Apologie (London, 1604); The Customers Apologie (London, (1601) 2nd ed., 1609); An out-port-Customers Accompt (London, 1609); and especially Customers Replie, pp. 4–5; ch. x, pp. 14–32.
• 42Thomas Gresham went even so far as to say: “As the exchainge is the thinge that eatts ought [eats out] all princes, to the wholl destruction of ther common well [weal], if itt be nott substantially looked unto, so likewise the exchainge is the cheffest [chief] and richest thinge only above all other, to restore your Majestie and your reallme to fine gowld and sillvar . . .” (“Letter to Queen Elizabeth on the Fall of the Exchanges,” 1558—quoted from Tudor Economic Documents, ii, p. 148). Gresham, it may be noted, has been known for his excellent exposition of the doctrine that bad money drives out good. The doctrine was given the name “Gresham’s Law” by H. D. Macleod in 1858. It had, however, been formulated also by other writers.
• 43Gerrard de Malynes (fl. 1586–1641), the son of an English Mint-master, himself became an Assay Master of the Mint and in 1609 was appointed commissioner on Mint affairs. He had wide experience in trade and was frequently employed by Elizabeth and James I as an adviser on commercial questions. His writings, which bear on the present section, are: A Treatise of the Caker of England’s Commonwealth (London, 1601) and England’s View in Unmasking of two Paradoxes (by De Malestroit) with a Replication unto the answer of Jean Bodin (London, 1603). For his later writings see Sec. 5.
• 44Treatise of the Caker, p. 2.
• 45Ibid., p. 3.
• 46To him the causal sequence ran as follows: “Foreign exchanges—money—commodities.” See also The Maintenance of Free Trade, p. 2.
• 47See Lex Mercatoria, p. 415; The Maintenance of Free Trade, pp. 14–15; The Center of the Circle, pp. 41 f.
• 48Caker, p. 35; see also The Maintenance of Free Trade, p. 61.
• 49Caker, p. 18.
• 50Caker, p. 34.
• 51Ibid., pp. 38–9.
• 52Ibid., pp. 42–3.
• 53Ibid., p. 99.
• 54Ibid., p. 10.
• 55Ibid., p. 11.
• 56England’s View, pp. 55, 60.
• 57“The property of the money . . . is, that plentie of money maketh generally things deare, and scarcitie of money maketh likewise generally things good cheape. Whereas things particularly are also deare or good cheape, according to plentie or scarcitie of the things themselves, or the use of them” (Caker, p. 10). See also England’s View, pp. 7 and 9. In discussing the value of “money” Malynes and his contemporaries (e.g. Mun) had used the term “money” in two senses: firstly in the modern sense, and secondly in the sense of money delivered to (or taken from) foreign countries, i.e. bills of exchange. But in the quotation cited the word “money” is unmistakably used in the modern sense.
• 58Professor J. W. Angell has said of Malynes that he was one who considered the value of money as “something absolute and unchanging” (The Theory of International Prices, p. 18). That is certainly incorrect.
• 59England’s View, p. 65.
• 60Ibid., pp. 65 f.
• 61Caker, p. 35.
• 62England’s View, pp. 65–6.
• 63Ibid., p. 70.
• 64Although he recognized that an inflow of specie could produce opposite results, he was of the opinion that a high rate of exchange did not necessarily cause an inflow of specie. He said that “it would be so, were it not for the tolleration of the monies to go currant farre above their value beyond the seas” (Caker, p. 48). In other words, his theory would apply to countries, the value of whose coins were identical with their metallic contents.
• 65Caker, pp. 117–118.
• 66See, for example, ibid., pp. 106 f.
• 67Discorso intorno allieffett. . . . (1605). See A. E. Monroe, Early Economic Thought (Cambridge, U.S.A., 1927), p. 154. De Santis also stood for an embargo on the exportation of money and for some legal tarif. See Luigi Cossa, An Introduction to the Study of Political Economy (London, 1893), p. 180.
• 68A Brief Treatise on the Causes which can make Gold and Silver Plentiful in Kingdoms where there are no mines (1613, Naples). We have used the English translation in A. E. Monroe, op. cit., pp. 143–167.
• 69Ibid., p. 154.
• 70Ibid., p. 156.
• 71Ibid, pp. 146–153.
• 72It follows that such remedies as the regulation or prohibition of the movement of gold would, according to him, be useless or even harmful. See p. 161.
• 73See P. J. Thomas, Mercantilism and the East India Trade (London, 1926), pp. 8–16.
• 74The following are the most important works in connection with that controversy:—
• 75Edward Misselden (fl. 1608–1654), a prominent merchant, was connected with the East India Company at about the time during which he wrote on economic matters. His economic writings were primarily called forth by the appointment of the standing commission on trade in 1622 and were published, as shown in the preceding note, between 1622 and 1623. In October, 1623, he left England, and “the East India Company invited him to act as one of their commissioners at Amsterdam to negotiate a private treaty with the Dutch”. It is believed that during these negotiations he “must have been brought into close relations with” Thomas Mun. Misselden became deputy-governor of the Merchant Adventurers’ Company at Delft in 1623. He held that post until 1633.
• 76Thomas Mun (1571–1641) “appears to have been early engaged in mercantile affairs in the Mediterranean, especially in Italy and the Levant”. He was very successful and gained a high reputation among merchants. In July, 1615, he was elected a member of the committee or a director of the East India Company, and “he spent his life in actively promoting its interests”.
• 77See, however, Mun, England’s Treasure, ch. xviii, especially pp. 189–190.
• 78Ibid., p. 130 and passim. See also Lewes Roberts, The Treasure of Traffike, 1641 (E.E.T. reprint), p. 110; England’s Great Happiness, 1677 (E.E.T. reprint), p. 262.
• 79Raising of money would have the advantages, he said, of “plenty of money and quickening of Trade in euery mans hand” (Free Trade, p. 106). And when Trade flourisheth, the King’s Revenue is augmented, Lands and Rents improoued, Navigation is encreased, the poor employed” (p. 4).
• 80See The Circle, p. 116, and passim.
• 81In this respect Misselden’s view is not so consistent a balance of trade theorist as Serra and Mun. See Free Trade, chs. i and ii.
• 82The Circle, p. 97.
• 83The Circle, p. 98.
• 84Ibid., p. 100.
• 85Free Trade, p. 104. Too much importance should not be attached to that quotation, significant as it might be, because the term “monies” is here rather ambiguously used.
• 86The Circle, p. 21.
• 87Mun, England’s Treasure, p. 157. See also pp. 143–6, 186, 208, and passim.
• 88Ibid., ch. iii (pp. 127 ff.). It is interesting to note that he had taken into consideration the factor of fishing (p. 130) and that of freight charges (p. 129). That is one of the earliest, if not the earliest, instance of the recognition of the invisible items.
• 89Discourse of Trade, pp. 7–41.
• 90England’s Treasure, chs. 4, 6.
• 91Ibid., ch. 8.
• 92Ibid., ch. 9.
• 93England’s Treasure, p. 158.
• 94“As plenty or scarcity of money [in exchange] do make the price of the exchange high or low, so the over or under balance of our trade doth effectively cause the plenty or scarcity of money.” (Ibid., p. 159.)
• 95Ibid., pp. 128, 133.
• 96Ibid., p. 141 (and also passim).
• 97Ibid., p. 138.
• 98That is not a question of opinion but simply a question whether the elasticity of demand for imports at home and that for exports abroad are greater or less than unity.
• 99Rice Vaughan (fl. 1650), legal writer, son of Henry Vaughan of Machynlleth, Montgomeryshire, barrister of Gray’s Inn from 1638, etc. He died in or shortly before 1672. A Discourse of Coin and Coinage, which “was written while Charles I, Louis XIII, and Ferdinand II reigned and before certain Dutch and French proclamations were repealed”, was published posthumously in London in 1675.
• 100Discourse of Coin, p. 101.
• 101Ibid., p. 19 and passim.
• 102Discourse of Coin, pp. 148–9.
• 103Ibid., pp. 58 f.
• 104The Economic Writings of Sir William Petty, ed. by C. H. Hull (Cambridge, 1899). He held to the mercantilistic doctrine that “the great and ultimate effect of Trade is not Wealth at large, but particularly abundance of Silver, Gold and Jewels, which are not perishable, nor so mutable as other Commodities, but are Wealth at all times, and all places”. (Political Arithmetick, ca. 1676, Writings, pp. 259 f.) For an account of the life of Petty (1623–1687) see Hull’s edition of his works, pp. xiii-xxxiii.
• 105A Treatise of Taxes and Contribution, 1662 (Writings, p. 35). See also Writings, pp. 113, 446.
• 106Ibid. (Writings, p. 36).
• 107Verbum Sapienti, ca. 1664 (Writings, pp. 112–13).
• 108Two of the other earliest statements were found in the works of G. Montanari and Pierre de Boisguilbert. The contributions of Boisguilbert will be described in a footnote below. Other contributions of Montanari may be noted here. Firstly, his statement of the quantity theory was as follows:—
• 109Implicitly, Petty’s doctrine means the recognition of the relation that
• 110“If the largeness of a public Exhibition should leave less money then is necessary to drive the Nations Trade, then the mischief thereof would be the doing of less work, which is the same thing as lessening the people, or their Art and Industry; for a hundred pounds passing a hundred hands for Wages, causes a 10000 1. worth of Commodities to be produced, which hands would have been idle and useless, had there not been this continual motive to their employment” (Writings, p. 36). He agreed, however, with the view that “to prohibit the Exportation of Money . . . is a thing almost impracticable . . . and vain” (ibid., p. 57).
• 111A Treatise of Taxes, Writings, p. 36; see also Writings, p. 446.
• 112Quantulumcunque (1682), Writings, p. 446.
• 113Treatise (Writings, p. 48).
• 114The meaning of the term “specie-points mechanism” or “gold-points mechanism” can be given in the words of George Clare. “By buying gold in one country or shipping it for sale in another, a certain rate of exchange is yielded, which is called a gold-point—the rate produced by buying at home and selling abroad being the export-point, and that produced by buying abroad and selling at home being the import-point. . . . It is of course obvious that, if the price of London paper rises to the export gold-point, and if the remitter is free to export gold, it is immaterial to him whether he buys a draft or sends gold, but that he would never think of paying more; on the other hand, if the price falls to the import point . . . the seller of a bill . . . would certainly refuse to take less; and, provided that the import and export of gold is free, the gold points thus mark the highest level to which an exchange may rise, and the lowest to which it may fall” (The A.B.C. of the Foreign Exchanges, 9th ed., London, 1931, pp. 25–6).
• 115William Potter (fl. 1656) was appointed in 1656 registrar of debentures on “the act for the sale of the late king’s lands”. He was one of the earliest writers on paper currency. He recommended the issue, by means of a land bank, of bills payable at sight to the bearer, under a guarantee of land mortgages. It was to give an account of his scheme that he published the works mentioned in this essay.
• 116Potter, The Key of Wealth (London, 1650), p. 2.
• 117“Let it be supposed, that there is a people amongst whom there is now, ten times as much money as formerly. . . then I say the consequence will be, that both trading and riches will encrease amongst them, much more than proportionable to such increase of money” (ibid., p. 6).
• 118“The Advancement of Trade, consisteth chiefly in the great and quick Revolution of Commodity from Sea or Land, through the hands of Tradesmen, to each particular person for his private life. This Revolution of Commodity, is proportionable to the Revolution of Money, or that which goeth for such. Such Revolution of Money is according to the plenty thereof not hoarded up” (The Tradesmen’s Jewel, London, 1650, p. 5).
• 119Ibid., p. 7.
• 120See The Key, p. 13.
• 121Ibid., p. 14.
• 122See P. J. Thomas, Mercantilism and the East India Trade (London, 1926), especially chaps. 1 and 4.
• 123John Cary (?-c. 1720) was a prominent Bristol merchant. He was engaged in the West Indian sugar trade and took a political interest in commercial matters. The most important of his economic writings is An Essay on the State of England in relation to its Trade, its Poor, and its Taxes, for carrying on the Present War against France, 1695. That essay attracted attention and brought him into correspondence with Locke, who wrote that it “is the best discourse I ever read on that subject”. Its second edition was published in 1719 under the title An Essay towards regulating the Trade and employing the Poor of this Kingdom; and its third edition, after his death, in 1745 as A Discourse on Trade and other matters relative to it. The latter editions differ considerably from the first one. In that work is found his plan for providing workhouses for the poor, which through his efforts was brought into operation in Bristol by an Act in 1697. Although his scheme was a financial failure, it was the model for several local experiments in the eighteenth century. His other economic writings include On the Coin and Credit of England, 1696, and A Proposal for paying off the Publick Debts by erecting a Nation Credit, London, 1719. The former was reprinted along with the second and third editions of his essay on trade. In the latter is found the proposal for a national bank, from which, he claimed in the second edition, “the famous Mr. Laws’ drew his scheme.”
• 124John Pollexfen (fl. 1697), an English merchant, was born about 1638. He became a member of the committee of trade and plantations in 1675 and was elected a member of the Board of Trade in 1696 (which he held up to 1705). In the following year (1697) he published his A Discourse of Trade and Coyn, in which he agitated for the withdrawal of the privileges of the East India Company. When Davenant published his essay in defence of the East India Company Pollexfen produced a reply, entitled England and East India Inconsistent in their Manufactures (London, 1697).
• 125Cary, A Discourse on Trade (London, 1695), p. 1. See also Pollexfen, A Discourse of Trade and Coyn (London, 1697), p. 5.
• 126Pollexfen, Discourse, p. 55.
• 127Ibid., p. 54.
• 128Ibid, p. 55.
• 129Pollexfen, Discourse, p. 62. “Trade governs Interest, and not Interest Trade” (p. 64).
• 130His remarks on paper credit also deserve notice. He said:—
• 131Josiah Child (1630–1699), “the wealthiest Englishman of his time and the most prominent figure in finance and foreign trade,” began his career as a merchant’s apprentice. He rapidly made his way in business and made a fortune. By the fifties he became Mayor of Portsmouth and was M.P. for Petersfield 1659, Dartmouth 1673–8, and Ludlow 1685–7. He was a director from 1677, deputy-governor from 1684 to 1686 and again from 1688 to 1690, and Governor of the East India Company from 1681 to 1683 and from 1686 to 1688 and “for a rule he ruled over the company absolutely”. The most important of his economic writings is New Discourse of Trade, which passed through several stages before it reached its final form. “The first draft was his Brief Observations concerning Trade and Interest of Money (London, 1668), followed the same year by A Short Addition to the Observations concerning Trade. In 1669–1670 he wrote ten additional chapters and the complete work was issued as A Discourse about Trade (London, 1690). In 1693 the same work with little variation, except for an introduction of twenty pages and the name of Child on the title page, appeared as A New Discourse of Trade.” His other writings include The Great Honour and Advantage of East India Trade (London, 1697).
• 132Charles Davenant (1656–1714) was a member of Parliament and an influential Tory politician. He held the office of commissioner of excise from 1683 to 1689. In 1705 he was appointed inspector-general of exports and imports, which office he held until his death. His economic writings are all reprinted in The Political and Commercial Works of Charles Davenant, edited by C. Whitworth (London, 1771).
• 133See Child, A New Discourse of Trade, London, 1693, pp. 137 ff.; Davenant, Works, i, p. 147. They considered the criterion of a general balance as “doubtful and uncertain”, because they had found that since the exportation of bullion to India had begun to increase, especially towards the close of the century, the usual calculations of the balance of trade had ceased to justify the operations of their company.
• 134Child, Discourse, pp. 148–9.
• 135One of the most important reasons given by Davenant is that since large quantities of the imported Indian textiles were re-exported to the Continent, any limitation imposed by England would divert the trade to the Dutch.
• 136Davenant, Works, i, p. 98; see also i, p. 429.
• 137Ibid., i, p. 97.
• 138Ibid., i, p. 100; Child, Discourse, p. 19.
• 139Child, Discourse, Preface (p. A 6).
• 140Ibid., p. 159 and passim. See also Child, Brief Observations.
• 141Davenant, Works, i, p. 382.
• 142Ibid., pp. 440 ff.
• 143Dudley North (1641–1690), a leading Tory of his time, made his way in business so early that when twenty-one years of age he was the leading merchant in Constantinople of the Turkey Company. Having made a large fortune, he returned to England in 1680. In 1683 he became one of the commissioners for the customs and carried out important reforms. His chief work is Discourses of Trade, published posthumously (London, 1691). We have used the reprint in Early English Tracts on Commerce, edited by J. R. McCulloch (London, 1856).
• 144Discourses of Trade, Early English Tracts, p. 513 (or Original, p. viii). See also p. 528 (Original, p. 14).
• 145“The Proposition I chiefly aim to prove . . . is, that Gold and Silver, and, out of them, Money are nothing but the Weights and Measures, by which Traffick is more conveniently carried on, then could be done without them: and also a proper Fund for a surplusage of Stock to be deposited in” (Discourse of Trade, p. 530 of E.E.T.).
• 146Ibid., E.E.T., p. 525 (Original, p. 11).
• 147Ibid., E.E.T., p. 539.
• 148Ibid., E.E.T., p. 513.
• 149Ibid., E.E.T., p. 527.
• 150Discourse of Trade, E.E.T., p. 539.
• 151Ibid., E.E.T., p. 531.
• 152Ibid., E.E.T., p. 518. The author of Considerations on the East-India Trade (1701) and other upholders of the East India Company bad also free trade ideas. But it would be too generous an interpretation to say, as an authority recently did, that they anticipated the doctrine of comparative costs.
• 153See W. Lowndes, An Essay for the Amendment of the Silver Coins (London, 1695). Lowndes, being the Secretary of the Treasury, was in the controversy a more important opponent of Locke than Barbon. But from the point of view of the theory of international price relationships the contributions of Barbon were of much more importance. For that reason we shall deal only with the views of Barbon. For the conditions of currency that were responsible for this controversy, see A. E. Feavearyear, The Pound Sterling (London, 1931), ch. 6.
• 154John Locke (1632–1704) was the son of John Locke of Pensford in Somersetshire, who took great care in the education of his son. The younger Locke took his B.A. degree at Oxford in 1655 and M.A. in 1658. He later spent some time in studying medicine “not with any design of practicing as a physician, but principally for the benefit of his own constitution, which was but weak”. Yet he was very successful in that line. He was known mainly as a great English philosopher. His famous Essay on the Human Understanding was written between 1670 and 1687 and published in 1689. After having served as one of the “commissioners of trade and plantation” and filled other posts, he retired, spending the last fourteen or fifteen years of his life at Oates. He died in the 73rd year of his life. His economic writings are:—
• 155Some Considerations, p. 53.
• 156Ibid., p. 53.
• 157Ibid., p. 60; see also p. 70.
• 158“The Value of Money in respect to those [Commodities] depends only on the Plenty or Scarcity of Money in proportion to the Plenty or Scarcity of those things.” Ibid., p. 45.
• 159Some Considerations, pp. 29, 32.
• 160Ibid., p. 32.
• 161Ibid., pp. 16–17.
• 162Ibid., p. 32. For his calculation of the average cash balance required by each of the several groups of people such as labourers, landlords, tenants, and brokers, see pp. 33 ff.
• 163Some Considerations, pp. 75–6. It follows that money is “not of the same value at the same time, in several parts of the World, but is of most worth in that Country where is the least Money, in proportion to its Trade” (p. 78).
• 164Some Considerations, p. 78. Note that the implicit assumption of this statement is international mobility of labour. Note also that he said nothing about the possibility of “too much” money.
• 165Ibid., pp. 14–15.
• 166Ibid., p. 81.
• 167Although the honour of having given the first descriptions of the specie-point mechanism must be shared by Petty, Locke, and Simon Clement, the description of Clement is the most elaborate of the three. The principal work of Clement is A Discourse of the General Notions of Money, Trade, and Exchanges (London, 1695), from which we may quote a few passages to show the essence of his theory of foreign exchanges:—
• 168Nicholas Barbon (1640?-1698) was the son of Praisigod Barbone. “He studied medecine at Leyden, received a medical degree at Utrecht in 1661, and was admitted as an honorary fellow of the College of Physicians in 1664. After the great fire of 1666 he established the first insurance office in London and participated actively in rebuilding the city. He was a member of Parliament in 1690 and again in 1695; he founded and conducted a land bank in 1695–6.” His writings are mainly concerned with the economic events of the period in which he lived. “He defended his scheme of fire insurance; he advocated building extensions in London; he discussed the possibilities of land-banking,” and he wrote also on money and trade. His contribution to the currency controversy under consideration is A Discourse Concerning Coining the Neiv Money Lighter (London, 1696), and that to the general problem of trade is A Discourse of Trade (London, 1690).
• 169“The Value of all Things, arises from their Use” (Discourse concerning Coining, p. 1). See also ibid, pp. 5, 7, and passim; Discourse of Trade, pp. 13 ff. It is interesting to note, furthermore, that he clearly pointed out that the “Use of all Wares” depended on scarcity:—
• 170Discourse concerning Coining, p. 6; see also p. 10 and passim.
• 171Ibid., p. 8.
• 172Ibid., p. 13.
• 173Discourse concerning Coining, p. 34.
• 174Discourse of Trade, pp. 20–2. He recognized, however, that moneys “change their Value in those Countries, where the Law has no Force, and yield no more than the Price of the Metal that bears the Stamp” (ibid., p. 22). See also Discourse concerning Coining, pp. 21–8.
• 175That is that there is no free coinage.
• 176Discourse concerning Coining, p. 89.
• 177Discourse concerning Coining, pp. 40 and 53. See also Discourse of Trade, p. 77.
• 178Discourse concerning Coining, p. 36.
• 179Ibid., p. 36.
• 180Ibid., pp. 56–9.
• 181Ibid., pp. 56 f.
• 182Discourse concerning Coining, p. 85.
• 183Cf. Angell, The Theory of International Prices, p. 211.
• 184The doctrine that money stimulates trade was closely connected with the concept of money as a circulating medium. Most mercantilists, even Mun and his followers, had the idea that money stimulates trade. But it was in the hands of the writers, with whom we shall deal in the present section, that the idea was not only emphatically developed but also clearly connected with the problems of international trade and international price relationships.
• 185As indicated above, Bodin and his followers had a very simple theory of money, viz. that a change in the volume of Money would lead to a change in the general price. In the hands of Petty, Locke, and others, both the velocity of the circulation of money and the volume of trade were introduced. Thenceforth, we have the formula:
• 186John Law (1671–1729) a Scotch financier, was the son of James Law, an Edinburgh goldsmith. He was “active in all the controversies arising in England at the time of the creation of the Bank of England in 1694”, and elaborated many financial and monetary projects. In 1705 he submitted to the Parliament of Scotland a proposal for the establishment of a national bank on the lines indicated in his famous Money and Trade considered with a proposal for supplying the nation with money, published in the same year. His scheme was to establish a national bank for the issue of paper currency which would be secured by the value of the nation’s land. After the public had gradually become accustomed to this new money, the bank was to extend its activities by engaging in profitable commercial operations in the colonies, in redeeming public debts, etc. The most important precursors of Law were, besides Potter, Hugh Chamberlain, who brought forward a rival scheme to the Bank of England in 1693, John Briscoe, one of the chief promoters of the Land Bank in 1696, and J. Asgill, who in his Several Assertions Proved (London, 1696), an essay of little merit, had presented a doctrine somewhat similar to those of Potter and Law. That project of Law’s was rejected. He then appealed to various European governments to adopt his plan. In 1716 he finally succeeded in winning the confidence of the French Government. In May of that year he was given the patent to establish a Banque Générale. After he had achieved a brilliant success during four years in the issue of paper money and such supplementary activities as redemption of public debts and the conduct of colonial trade, his system collapsed in consequence of a collapse of the confidence of the public. He died in 1729.
• 187That is based upon his use theory of value: “Goods have a Value from the Uses they are apply’d to; and their Value is Greater or Lesser, not so much from their more or less valuable, or necessary Uses; as from the greater or lesser Quantity of them in proportion to the Demand for them. Example. Water is of great use, but of little Value; Because the Quantity of Water is much greater than the Demand for it. Diamonds are of little use, yet of great Value; because the Demand for Diamonds is much greater than the Quantity of them.” (Money and Trade Considered, Glasgow, 1705, p. 3.) He then extended that theory of value to the value of silver: “Silver was Barter’d as it was valued for its Uses as a Mettal, and was given as Money according to its Value in Barter. The additional Use of Money Silver was apply’d to would add to its Value, because as Money it remedied the Disadvantages and Inconveniencies of Barter, and consequently the demand for Silver encreasing, it received an additional Value equal to the greater demand its Use as Money occasioned.” (Ibid., p. 10; see also p. 72.)
• 188Money and Trade Considered, p. 13. Note that the proposition was founded either on the implicit assumption that there was unemployment formerly or that labour was internationally mobile. Thus, in another connection he said: “As Trade depends on Money, so the encrease or decrease of the People depends on Trade. If they have Employment at Home, they are kept at Home: And if the Trade is greater than serves to Employ the People, it brings more from places where they are not Employ’d” (p. 19). Mr. J. M. Keynes, in his recent work The General Theory of Employment, Interest, and Money, gives an excellent demonstration of the connection between the quantity of money and the volume of employment. He seems to have thought that his doctrine is a development of what he calls “the element of scientific truth in mercantilist doctrine”. Although we cannot agree with all his interpretations of the mercantilist doctrines, yet we think that his doctrine may be correctly considered as a continuation of the doctrine of Law.
• 189Money and Trade Considered, p. 117; see also pp. 74 ff.
• 190Ibid., p. 75; see also p. 20.
• 191Money and Trade Considered, pp. 14–15.
• 192Ibid., pp. 115 f.; see also pp. 59 f., 101.
• 193“If Money were given to a People in greater Quantity than there was a Demand for, Money would fall in its value; but if only given equal to the Demand, it will not fall in value.”—Money and Trade Considered, p. 117. See also p. 76.
• 194Money and Trade Considered, p. 89; see also p. 102.
• 195Ibid., p. 19.
• 196Money and Trade Considered, pp. 6 f.
• 197Ibid., p. 104.
• 198Jean François Melon, Essai politique sur le commerce (Paris? 1734); English translation as A Political Essay upon Commerce, translated by David Bindon, Dublin, 1738; (nouvelle édition, augmentée de sept chaptres, Paris?, 1763). Melon was at one time a secretary of John Law.
• 199François Véron de Forbonnais (1722–1800), son of a merchant of Mans, went into trade at the age of 16. By the time that he was about thirty years of age he had collected so much valuable information on maritime and colonial trade that he began to write on economic subjects. In 1753 he published his Théorie et pratique du Commerce et de la Marine, which was soon followed by the Considerations sur les Finances d’Espagne relativement à celles de France. His important Recherches et considérations sur les finances de France depuis 1595 jusqu’a 1721, printed at Basle, 1758, in 2 vols., “experienced the most distinguished reception both in France and other countries” and made Forbonnais well known in his days. In the next year he was appointed inspector of the dépôt of the general financial comptrol. The most important of his economic writings is his Principes Economiques (Amsterdam, 1767).
• 200Principes (1767). We have used the reprint in the Collection des Principaus Economists, ed. by E. Daire and G. de Molinari, Paris, 1843–7, Mélanges, vol. i, pp. 165–240. The reference is to p. 223.
• 201Principes, p. 224.
• 202Ibid., p. 226.
• 203Principes, p. 225.
• 204“Le balance générale du commerce d’une nation, est la difference du montant de ses achats au montant de ses ventes au-dehors. Cette différence doit être nécessairement payée en argent, puis que c’est le seul équivalent qui puisse suppléer au défaut des échanges en nature.” (Elemens, 2nd ed., ii, p. 310.)
• 205Elemens, 2nd. ed., pp. 151 ff.
• 206See also the work of a later writer, An Inquiry into the Principles of Political Economy (2 vols., London, 1767) by James Denham Steuart (1712–1780).
• 207Before we go to the semi-equilibrium theory we may note the contributions of two French economists, viz. Boisguilbert and Montesquieu. Boisguilbert’s views of money were not mercantilistic. Firstly he asserted that money was a means and not an end in itself. Secondly unlike Law, Boisguilbert was of the opinion that trade was not stimulated by money but that the circulation of money was stimulated by the movement of trade. He accepted the doctrine that the general price level varies directly with the quantity of money, but he considered the problem of general price level as unimportant. What was important was the quantity of goods exchanged and not the quantity of money or the resultant price level. For it was the volume of transactions which determined the circulation and not the circulation which determined the volume of transactions. When commerce was active the velocity of the circulation of money increased; when commerce was not active the velocity decreased. Or, as Boisguilbert often put it, money “stops, dislodges, and runs along with consumption”. Where there was very much consumption, “a little silver on account of its frequent appearances, passes for a very large quantity of specie”; but when consumption was diminishing “silver stops immediately”. In short, it was consumption “that leads the march” of money. Boisguilbert’s important works were printed, under the title, Le détail de la France (1697, 1707, 2nd edition, 1712, reprinted with a critical note in D. Daire’s Economistes financiers du xviiie siècle, Paris, 1843). Montesquieu is known as one of the early advocates of the quantity theory of money. (See his The Spirit of Laws, published first in French, Geneva, 1748, English edition tr. by Thomas Nugent, new edition by J. V. Prichard, London, 1909. The reference is to the 1909 edition, pp. 54–6.) He also advanced the doctrine that money stimulates trade. (See 1909 ed., p. 56.)
• 208Before them there were only some fragmentary statements of a certain part of this theory. See, for example, John Houghton, A Collection of Letters . . . vol. ii (London, 1683), pp. 97–9, 115; William Wood, A Survey of Trade, pp. 329–373.
• 209Vanderlint, Money Answers All Things (London, 1734), p. 3.
• 210Ibid., pp. 52–3.
• 211Ibid., p. 46 and passim.
• 212Money Answers All Things, p. 94.
• 213Ibid., p. 6 and passim.
• 214Money Answers All Things, p. 5.
• 215Ibid., p. 95 n.
• 216Richard Cantillon (1680?—1734), Essai sur la Nature du Commerce en Général, written about 1734, first published in French in 1775. We have used the edition issued with an English translation by Henry Higgs (London, 1931). Cantillon was a great banker and speculator of his time. For a detailed account of his life, see Higgs’s ed. of the Essai, pp. 331–389.
• 217Essai, Higgs’s edition, part i, ch. x.
• 218Ibid., p. 97.
• 219Ibid., p. 117.
• 220Ibid., part ii, ch. i; see also p. 161.
• 221Ibid., p. 161. See also part ii, ch. iii, and ch. iv. His treatment of rapidity of circulation is the same as that of Petty.
• 222Ibid., p. 301.
• 223Essai, Higgs’s edition, pp. 163–5.
• 224“By doubling the quantity of money in a State the prices of products and merchandise are not always doubled. A River which runs and winds about in its bed will not flow with double the speed when the amount of the water is doubled.” Essai, p. 177.
• 225Essai, Higgs’s edition, p. 179.
• 226Ibid., p. 181.
• 227Ibid., pp. 181, 191, 195.
• 228Essai, Higgs’s ed., pp. 163–7.
• 229Ibid., p. 167.
• 230Ibid., p. 169. For the relationship between the rate of interest, on the one hand, and the quantity of money and the balance of trade, on the other, see part ii, ch. ix and x, especially pp. 215, 219.
• 231But when a country, for any reason whatever, has a constant balance due to another country, the prices and the money in circulation cannot be equal in those two countries, and “the inequality is always relative to the balance or debt The prices in the receiving country would ultimately be higher to the extent that the paying country would be able to pay its debts in commodities. Therefore the receiving country would be benefited in two ways: first it has a constant income to receive; and second, owing to its high level of prices, it “will exchange a smaller amount of Land and Labour with the Foreigner for a larger amount so long as these circumstances continue.” (Essai, Higgs’s edition, p. 159.) See pp. 151–9.
• 232Essai, p. 235.
• 233Ibid., pp. 189, 235.
• 234Ibid., p. 185.
• 235Essai, pp. 305, 307, 311, 319.
• 236Joseph Harris (1702–1764) is said “to have been a working blacksmith at his native place, but to have removed at an early age to London”. In London he became known as a writer on navigation, trigonometry, optics, and astronomy. He probably held some subordinate post in the Mint before 1748. In that year he was appointed assay master of the Mint. An Essay upon Money and Coins was written by him probably about 1750, and was first published in 1757–8 in London.
• 237Essay (written c. 1750, published London, 1757–8 in two parts). We have used the reprint in McCulloch’s A Select Collection of Scarce and Valuable Tracts on Money, etc., London, 1856. The reference is to p. 350.
• 238Ibid., pp. 391, 396–8.
• 239Ibid., pp. 406, 407.
• 240Ibid., p. 402.
• 241Ibid., p. 406.
• 242Essay, p. 404.
• 243Ibid., p. 404. Harris’s work contains one of the best statements of the balance-of-trade theory of foreign exchanges; see ibid., pt. i, ch. iii.
• 244That was James D. Steuart. See his Principles of Political Economy, London, 1767 (in two volumes).