(3.viii.9) Whenever the coining of money, therefore, is free, its quantity is regulated by thevalue of the metal, it being the interest of individuals to increase or diminish the quantity, inproportion as the value of the metal in coins is greater or less than its value in bullion.
(3.viii.10) But if the quantity of money is determined by the value of the metal, it is stillnecessary to inquire what it is which determines the value of the metal. That is a question,however, which may be considered as already solved. Gold and silver are in reality commodities.
They are commodities, for the attaining of which labour and capital must be employed. It is costof production, therefore, which determines the value of these, as of other ordinary productions.
(3.viii.11) We have next to examine the effects which take place by the attempts ofgovernment to control the increase or diminution of money, and to fix the quantity as it pleases. When itendeavours to keep the quantity of money less than it would be, if things were left in freedom, itraises the value of the metal in the coin, and renders it the interest of every body, who can, toconvert his bullion into money. By supposition, the government will not so convert it. He must,therefore, have recourse to private coining. This the government must, if it perseveres, preventby punishment. On the other hand, were it the object of government to keep the quantity ofmoney greater than it would be, if left in freedom, it would reduce the value of the metal inmoney, below its value in bullion, and make it the interest of every body to melt the coins. This,also, the government would have only one expedient for preventing, namely, punishment.
(3.viii.12) But the prospect of punishment will prevail over the prospect of profit, only if theprofit is small. It is well known, that, where the temptation is considerable, private coinage goeson, in spite of the endeavours of government. As melting is a more easy process than coining,and can be performed more secretly, it will take place by a less temptation than coinage.
(3.viii.13) It thus appears, that the quantity of money is naturally regulated, in every country,by the value, in other words, by the productive cost, in that country, of the metals of which it ismade; that the government may, by forcible methods, reduce the actual quantity Of money to acertain, but an inconsiderable extent, below that natural quantity; that it can also, but to a stillless extent, raise it above that quantity.
(3.viii.14) When it diminishes the quantity below what it would be in a state of freedom, inother words, raises the value of the metal in the coins, above its value in bullion, it in reality imposes aseignorage. In practice, a seignorage is commonly imposed by issuing coins which contain ratherless of the metal than they profess to contain, or less than that quantity to which they areintended to be an equivalent. By coining upon this principle, government makes a profit of thedifference between the value of the metal in the coins, and that in bullion. Suppose thedifference to be five per cent., the government obtains bullion at the market price, and makes itinto coins which are worth five per cent. more than the bullion. Coins, however, will retain thisvalue, only, if, as we have shown in the preceding section, they are limited in amount. To be ableto limit them in amount, it is necessary that seignorage should not be so high as to compensatefor the risk of counterfeiting; in short, that it should not greatly exceed the expense of coining.
Section IX. The Effect of Employing Two Metals both asStandard Money, and of Using Subsidiary Coins, at less than the Metallic Value.
(3.ix.1) Some nations have made use of two metals, gold and silver, both, as standardmoney, or legal tender to any amount.
(3.ix.2) For this purpose it was necessary to fix a certain relative value between them. Acertain weight of the one was taken to be equal in value to a certain weight of the other.
(3.ix.3) If the proportion thus fixed for the coins were accurately the proportion whichobtained in the market, and continued so invariably, there would be no inconvenience in the twostandards. The value of any sum would always be the same in either set of coins.
(3.ix.4) The relative value, however, of the two metals the market is fluctuating.
(3.ix.5) Suppose that the value fixed for the coins is that of 15 to 1; in other words, that onepiece of gold is equal to 15 pieces of silver of the same weight. A change takes place in themarket, and this value becomes as 16 to 1. What follows?
(3.ix.6) A man who had a debt to pay, equal, let us say, to 100 of the gold pieces, or 1500 ofthe silver, finds it his interest to pay his debt not with gold. With his 100 pieces of gold be can gointo the market and purchase as much silver as may be coined into 1600 pieces, with 1500 ofwhich he may pay his debt, and retain 100 to himself. In this manner silver coins would bemultiplied; and the quantity of the currency would be increased; its value would, therefore, bediminished; the gold in coins would thus become of less value than in bullion; hence the goldcoins would be melted and would disappear.
(3.ix.7) After a fluctuation in one direction, it may take place in another. Silver may rise,instead of falling, as compared with gold. The relative value may become as 14 to 1. In this case itwould be the interest of every man to pay in gold, rather than silver; and in this case it would bethe silver coins which would disappear.
(3.ix.8) Two inconveniences are therefore incurred by the double standard. First, the value ofthe currency, instead of being rendered as steady in value as possible, is subjected to a particularcause of variation. And, secondly, the country is put to the expence of a new coinage, as often asa change takes place in the relative value of the metals.
