(4.xvi.5) This is a tax, therefore, which ought always to be carried as far as the peculiar limitto which it is subject will admit. The limit to which it is subject, is the inducement to illicitcoining. If the tax is raised so high as to pay the coiner for his expenses and the risk of detection,illicit coinage is ensured.
(4.xvi.6) In a country, in which paper circulates along with gold, the paper has a tendency toprevent the effect of a seignorage.
(4.xvi.7) It is the interest of those who issue paper, to maintain in circulation as great aquantity of it as they can. They may go on increasing the quantity, till it becomes the interest of thosewho hold their notes to bring the notes to them for coins.
(4.xvi.8) It is the interest of those who are the possessors of notes, to carry them to the bankfor coins, only when there is a profit by melting. The coins, as coins, are not more valuable than thepaper, so long as they circulate, without a premium, along with the paper. But if the paper hasbeen issued in great quantity, the value of the currency may be so reduced, that the metal in thecoins may be of more value as bullion than as coin. Melting for the sake of this profit, is the onlycheck upon the quantity of a paper money convertible into coins at the option of the holder.
(4.xvi.9) It is very obvious, that if coins are issued under a seignorage, with the metal in thecoins of greater value than the metal in the state of bullion, the coins can be retained of thatvalue only if the currency is limited in amount. When paper is issued without restriction, thatlimit is removed. The paper issued increases the quantity of currency, till the metal in the coinsis reduced, first to the same value as that in bullion, next to a less value. At that point it becomesthe interest of individuals to demand coins at the bank, for the purpose of melting; and then it isthe interest of the bank to contract its issues.
(4.xvi.10) A very simple, however, and a very effectual expedient, is capable of beingadopted, for preventing this effect of a paper currency. That is an obligation on the bank to pay for itsnotes, either in coins, or in bullion, at the option of the holder. Suppose that art ounce of gold iscoined into 3 l., deducting five per cent for seignorage, and suppose that a bank which issuesnotes is bound to pay, on demand, not only 3 l. of coins, but an ounce of bullion, if preferred; itis evident that the bank, in that case has an interest in preventing the currency from sinking invalue. If the currency is so high in value that 31. of currency is really equal in value to an ounceof bullion, the bank loses nothing by being obliged to give for it an ounce of bullion; if it is sodepressed in value that 3 l. is not worth an ounce of bullion, it does lose. The check upon theissue of paper is thus made to operate earlier.
(4.xvi.11) A tax upon the precious metals, when imported, or extracted from the mines,would, as far as the metals were destined to the ordinary purposes of use or ornament, fall upon theconsumers: it would, as far as the metals were used for currency, fall upon nobody.
(4.xvi.12) It would raise the exchangeable value of the metal. But a smaller quantity of avaluable metal is not less convenient as the medium of exchange, than a greater quantity of aless valuable. It would be expedient, therefore, to derive as much as possible from this source.
The facility, however, of carrying and concealing a commodity which involves a great value insmall dimensions, renders it a source from which much cannot be derived. Under a verymoderate duty, illicit importation would be unavoidable.
(4.xvi.13) Though a tax upon the precious metals, as imported, or issued from the mines,would, like all other taxes upon particular commodities, fall ultimately upon the consumer, it would notdo so immediately. That which enables the producers, when a tax is laid upon any commodity, tothrow the burden upon the consumers, is the power they have of raising the price, by lesseningthe supply. Of most commodities, the quantity in use is speedily consumed. The annual supplybears, therefore, a great proportion to the quantity in use; and if it is withheld, or only a part of itwithheld, the supply becomes so far diminished as greatly to raise the price. The case is differentwith the precious metals. If the annual supply were wholly withheld, it would, for some time,make no great defalcation from the quantity in use. It would, therefore, have little effect uponprices. During that interval the sellers of the metals would not be indemnified. During that time,more or less of the tax would fall upon them.
(4.xvi.14) The same observation applies to houses, and all other commodities of which thequantity in use is great in proportion to the annual supply.
Section XVII. Effects of the Taxation of Commodities Uponthe Value of Money, and the Employment of Capital (4.xvii.1) Capital is most advantageously employed, when no inducement whatsoever ismade use of to turn it out of one employment into another. It is most advantageously employed, whenit follows that direction which the interest of the owners would give to it of its own accord.
