Understanding the #UnitedStatesofAmerica - The Wealth of Nations: Book Four, Chapter Six (Part Two) "Of the Treaties of Commerce (Almost All Our Gold Comes From Portugal)"

BOOK IV

Chapter VI: Of Treaties of Commerce (continued)
Pages: 4

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Almost all our gold, it is said, comes from Portugal. With other nations the balance of trade is either against us, or not much in our favor. But we should remember that the more gold we import from one country, the less we must necessarily import from all others. The effectual demand for gold, like that for every other commodity, is in every country limited to a certain quantity. If nine–tenths of this quantity are imported from one country, there remains a tenth only to be imported from all others. The more gold besides that is annually imported from some particular countries, over and above what is requisite for plate and for coin, the more must necessarily be exported to some others; and the more, that most insignificant object of modern policy, the balance of trade, appears to be in our favor with some particular countries, the more it must necessarily appear to be against us with many others.
It was upon this silly notion, however, that England could not subsist without the Portugal trade, that, towards the end of the late war, France and Spain, without pretending either offense or provocation, required the king of Portugal to exclude all British ships from his ports, and for the security of this exclusion, to receive into them French or Spanish garrisons. Had the king of Portugal submitted to those ignominious terms which his brother–in–law the king of Spain proposed to him, Britain would have been freed from a much greater inconveniency than the loss of the Portugal trade, the burden of supporting a very weak ally, so unprovided of every thing for his own defense, that the whole power of England, had it been directed to that single purpose, could scarce perhaps have defended him for another campaign. The loss of the Portugal trade would, no doubt, have occasioned a considerable embarrassment to the merchants at that time engaged in it, who might not, perhaps, have found out, for a year or two, any other equally advantageous method of employing their capitals; and in this would probably have consisted all the inconveniency which England could have suffered from this notable piece of commercial policy.
The great annual importation of gold and silver is neither for the purpose of plate nor of coin, but of foreign trade. A round–about foreign trade of consumption can be carried on more advantageously by means of these metals than of almost any other goods. As they are the universal instruments of commerce, they are more readily received in return for all commodities than any other goods; and on account of their small bulk and great value, it costs less to transport them backward and forward from one place to another than almost any other sort of merchandize, and they lose less of their value by being so transported. Of all the commodities, therefore, which are bought in one foreign country, for no other purpose but to be sold or exchanged again for some other goods in another, there are none so convenient as gold and silver.In facilitating all the different roundabout foreign trades of consumption which are carried on in Great Britain, consists the principal advantage of the Portugal trade; and though it is not a capital advantage, it is, no doubt, a considerable one.
That any annual addition which, it can reasonably be supposed, is made either to the plate or to the coin of the kingdom, could require but a very small annual importation of gold and silver, seems evident enough; and though we had no direct trade with Portugal, this small quantity could always, somewhere or another, be very easily got.

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Though the goldsmiths trade be very considerable in Great Britain, the far greater part of the new plate which they annually sell, is made from other old plate melted down; so that the addition annually made to the whole plate of the kingdom cannot be very great, and could require but a very small annual importation.
It is the same case with the coin. Nobody imagines, I believe, that even the greater part of the annual coinage, amounting, for ten years together, before the late reformation of the gold coin,to upwards of eight hundred thousand pounds a year in gold, was an annual addition to the money before current in the kingdom. In a country where the expense of the coinage is defrayed by the government,the value of the coin, even when it contains its full standard weight of gold and silver, can never be much greater than that of an equal quantity of those metals uncoined; because it requires only the trouble of going to the mint, and the delay perhaps of a few weeks, to procure for any quantity of uncoined gold and silver an equal quantity of those metals in coin. But, in every country, the greater part of the current coin is almost always more or less worn, or otherwise degenerated from its standard. In Great Britain it was, before the late reformation, a good deal so, the gold being more than two percent. and the silver more than eight percent. below its standard weight. But if forty–four guineas and a half, containing their full standard weight, a pound weight of gold, could purchase very little more than a pound weight of uncoined gold, forty–four guineas and a half wanting a part of their weight could not purchase a pound weight, and something was to be added in order to make up the deficiency. The current price of gold bullion at market, therefore, instead of being the same with the mint price, or 46l. 14s. 6d. was then about 47l. 14s. and sometimes about forty–eight pounds. When the greater part of the coin, however, was in this degenerate condition, forty–four guineas and a half, fresh from the mint, would purchase no more goods in the market than any other ordinary guineas, because when they  came into the coffers of the merchant, being confounded with other money, they could not afterwards be distinguished without more trouble than the difference was worth. Like other guineas they were worth no more than 46l. 14s. 6d. If thrown into the melting pot, however, they produced, without any sensible loss, a pound weight of standard gold, which could be sold at any time for between 47l. 14s. and 48l. either in gold or silver, as fit for all the purposes of coin as that which had been melted down. There was an evident profit, therefore, in melting down new coined money, and it was done so instantaneously, that no precaution of government could prevent it. The operations of the mint were, upon this account, somewhat like the web of Penelope; the work that was done in the day was undone in the night. The mint was employed, not so much in making daily additions to the coin, as in replacing the very best part of it which was daily melted down.
Were the private people, who carry their gold and silver to the mint, to pay themselves for the coinage, it would add to the value of those metals in the same manner as the fashion does to that of plate. Coined gold and silver would be more valuable than uncoined. The seignorage, if it was not exorbitant, would add to the bullion the whole value of the duty; because, the government having every where the exclusive privilege of coining, no coin can come to market cheaper than they think proper to afford it. If the duty was exorbitant indeed, that is, if it was very much above the real value of the labor and expense requisite for coinage, false coiners, both at home and abroad, might be encouraged, by the great difference between the value of bullion and that of coin, to pour in so great a quantity of counterfeit money as might reduce the value of the government money. In France, however, though the seigniorage is eight percent. no sensible inconveniency of this kind is found to arise from it. The dangers to which a false coiner is every where exposed, if he lives in the country of which he counterfeits the coin, and to which his agents or correspondents are exposed if he lives in a foreign country, are by far too great to be incurred for the sake of a profit of six or seven percent.

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The seigniorage in France raises the value of the coin higher than in proportion to the quantity of pure gold which it contains. Thus by the edict of January, 1726, the* mint price of fine gold of twenty–four carats was fixed at seven hundred and forty livers, nine sous and one denier one–eleventh, the mark of eight Paris ounces. The gold coin of France, making an allowance for the remedy of the mint, contains twenty–one carats and three–fourths of fine gold, and two carats one–fourth of alloy. The mark of standard gold, therefore, is worth no more than about six hundred and seventy–one livers ten deniers. But in France this mark of standard gold is coined into thirty Louis–d’ors of twenty–four livres each, or into seven hundred and twenty livres. The coinage, therefore, increases the value of a mark of standard gold bullion, by the difference between six hundred and seventy–one livres ten deniers, and seven hundred and twenty livres; or by forty–eight livres nineteen sous and two deniers.
A seigniorage will, in many cases, take away altogether, and will, in all cases, diminish the profit of melting down the new coin. This profit always arises from the difference between the quantity of bullion which the common currency ought to contain, and that which it actually does contain. If this difference is less than the seigniorage, there will be loss instead of profit. If it is equal to the seigniorage, there will neither be profit nor loss. If it is greater than the seigniorage, there will indeed be some profit, but less than if there was no seigniorage. If, before the late reformation of the gold coin, for example, there had been a seigniorage of five percent. upon the coinage, there would have been a loss of three percent. upon the melting down of the gold coin. If the seigniorage had been two percent. there would have been neither profit nor loss. If the seigniorage had been one percent. there would have been a profit, but of one percent. only instead of two percent. Wherever money is received by tale, therefore, and not by weight, a seigniorage is the most effectual preventative of the melting down of the coin, and, for the same reason, of its exportation. It is the best and heaviest pieces that are commonly either melted down or exported; because it is upon such that the largest profits are made.
The law for the encouragement of the coinage, by rendering it duty–free, was first enacted, during the reign of Charles II, for a limited time; and afterwards continued, by different prolongations, till 1769, when it was rendered perpetual. The bank of England, in order to replenish their coffers with money, are frequently obliged to carry bullion to the mint; and it was more for their interest, they probably imagined, that the coinage should be at the expense of the government, than at their own. It was, probably, out of complaisance to this great company that the government agreed to render this law perpetual. Should the custom of weighing gold, however, come to be disused, as it is very likely to be on account of its inconveniency; should the gold coin of England come to be received by tale, as it was before the late re–coinage, this great company may, perhaps, find that they have upon this, as upon some other occasions, mistaken their own interest not a little.

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Before the late re–coinage, when the gold currency of England was two percent. below its standard weight, as there was no seigniorage, it was two percent. below the value of that quantity of standard gold bullion which it ought to have contained. When this great company, therefore, bought gold bullion in order to have it coined, they were obliged to pay for it two percent. more than it was worth after the coinage. But if there had been a seigniorage of two percent. upon the coinage, the common gold currency, though two percent. below its standard weight, would notwithstanding have been equal in value to the quantity of standard gold which it ought to have contained; the value of the fashion compensating in this case the diminution of the weight. They would indeed have had the seigniorage to pay, which being two percent. their loss upon the whole transaction would have been two percent. exactly the same, but no greater than it actually was.
If the seigniorage had been five percent. and the gold currency only two percent. below its standard weight, the bank would in this case have gained three percent. upon the price of the bullion; but as they would have had a seigniorage of five percent. to pay upon the coinage, their loss upon the whole transaction would, in the same manner, have been exactly two percent.
If the seigniorage had been only one percent. and the gold currency two percent. below its standard weight, the bank would in this case have lost only one percent. upon the price of the bullion; but as they would likewise have had a seigniorage of one percent. to pay, their loss upon the whole transaction would have been exactly two percent. in the same manner as in all other cases.
If there was a reasonable seigniorage, while at the same time the coin contained its full standard weight, as it has done very nearly since the late re–coinage, whatever the bank might lose by the seigniorage, they would gain upon the price of the bullion; and whatever they might gain upon the price of the bullion, they would lose by the seigniorage. They would neither lose nor gain, therefore, upon the whole transaction, and they would in this, as in all the foregoing cases, be exactly in the same situation as if there was no seigniorage.
When the tax upon a commodity is so moderate as not to encourage smuggling, the merchant who deals in it, though he advances, does not properly pay the tax, as he gets it back in the price of the commodity. The tax is finally paid by the last purchaser or consumer. But money is a commodity with regard to which every man is a merchant. Nobody buys it but in order to sell it again; and with regard to it there is in ordinary cases no last purchaser or consumer. When the tax upon coinage, therefore, is so moderate as not to encourage false coining, though everybody advances the tax, nobody finally pays it; because everybody gets it back in the advanced value of the coin.

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