Trade Treaties

When a nation binds itself by treaty, either to permit the entry of certain goods from one foreign country which it prohibits from all others, or to exempt the goods of one country from duties to which it subjects those of all others, the country, or at least the merchants and manufacturers of the country, whose commerce is so favoured, must necessarily derive great advantage from the treaty. Those merchants and manufacturers enjoy a sort of monopoly in the country which is so indulgent to them. That country becomes a market, both more extensive and more advantageous for their goods: more extensive, because the goods of other nations being either excluded or subjected to heavier duties, it takes off a greater quantity of theirs; more advantageous, because the merchants of the favoured country, enjoying a sort of monopoly there, will often sell their goods for a better price than if exposed to the free competition of all other nations.

When a nation signs a treaty, it may agree to admit certain goods from one foreign country while banning them from all others. Or it may exempt goods from one country from duties imposed on goods from all others. The favored country, or at least its merchants and manufacturers, must gain greatly from the treaty. Its merchants and manufacturers enjoy a kind of monopoly in the country that favors them. That country becomes a larger and more profitable market for their goods. It is larger because other nations’ goods are either excluded or subject to higher duties. As a result, the country buys more of the favored nation’s goods. It is more profitable because the favored merchants enjoy a kind of monopoly there. They will often sell their goods at higher prices than if they faced free competition from all other nations.

Such treaties, however, though they may be advantageous to the merchants and manufacturers of the favoured, are necessarily disadvantageous to those of the favouring country. A monopoly is thus granted against them to a foreign nation; and they must frequently buy the foreign goods they have occasion for, dearer than if the free competition of other nations was admitted. That part of its own produce with which such a nation purchases foreign goods, must consequently be sold cheaper; because, when two things are exchanged for one another, the cheapness of the one is a necessary consequence, or rather is the same thing, with the dearness of the other. The exchangeable value of its annual produce, therefore, is likely to be diminished by every such treaty. This diminution, however, can scarce amount to any positive loss, but only to a lessening of the gain which it might otherwise make. Though it sells its goods cheaper than it otherwise might do, it will not probably sell them for less than they cost; nor, as in the case of bounties, for a price which will not replace the capital employed in bringing them to market, together with the ordinary profits of stock. The trade could not go on long if it did. Even the favouring country, therefore, may still gain by the trade, though less than if there was a free competition.

Such treaties, however, though they may benefit merchants and manufacturers in the favored country, necessarily harm those in the country granting the favor. A foreign nation is thus given a monopoly over them. They must often pay more for the foreign goods they need than they would if other nations could compete freely. As a result, the country granting the favor must sell more cheaply the part of its own produce that it uses to buy foreign goods. When two things are exchanged, the low price of one necessarily follows from the high price of the other. Indeed, they are the same thing. Every such treaty is therefore likely to reduce the exchange value of the country’s annual produce. This reduction, however, can hardly amount to an actual loss. It only reduces the gain the country might otherwise make. Though the country sells its goods more cheaply than it otherwise might, it will probably not sell them for less than they cost. Nor will it probably sell them, as happens with bounties, for less than the capital spent bringing them to market plus the ordinary profits on that capital. The trade could not continue for long if it did. Even the country granting the favor may therefore still gain from the trade, though less than it would under free competition.

Some treaties of commerce, however, have been supposed advantageous, upon principles very different from these; and a commercial country has sometimes granted a monopoly of this kind, against itself, to certain goods of a foreign nation, because it expected, that in the whole commerce between them, it would annually sell more than it would buy, and that a balance in gold and silver would be annually returned to it. It is upon this principle that the treaty of commerce between England and Portugal, concluded in 1703 by Mr Methuen, has been so much commended. The following is a literal translation of that treaty, which consists of three articles only.

Some trade treaties, however, have been thought beneficial for very different reasons. A trading country has sometimes granted certain goods from a foreign nation a monopoly at its own expense. It did so because it expected to sell more than it bought in its overall trade with that nation. It also expected the balance to be paid to it each year in gold and silver. This is why the trade treaty between England and Portugal, concluded in 1703 by Mr Methuen, has been so widely praised. The following is a literal translation of that treaty, which has only three articles.

ART. I. His sacred royal majesty of Portugal promises, both in his own name and that of his successors, to admit for ever hereafter, into Portugal, the woollen cloths, and the rest of the woollen manufactures of the British, as was accustomed, till they were prohibited by the law; nevertheless upon this condition:

ART. I. His sacred royal majesty of Portugal makes this promise for himself and his successors. Portugal will forever admit British woollen cloth and other woollen goods, as it did before the law prohibited them. However, this promise is subject to the following condition:

ART. II. That is to say, that her sacred royal majesty of Great Britain shall, in her own name, and that of her successors, be obliged, for ever hereafter, to admit the wines of the growth of Portugal into Britain; so that at no time, whether there shall be peace or war between the kingdoms of Britain and France, any thing more shall be demanded for these wines by the name of custom or duty, or by whatsoever other title, directly or indirectly, whether they shall be imported into Great Britain in pipes or hogsheads, or other casks, than what shall be demanded for the like quantity or measure of French wine, deducting or abating a third part of the custom or duty. But if, at any time, this deduction or abatement of customs, which is to be made as aforesaid, shall in any manner be attempted and prejudiced, it shall be just and lawful for his sacred royal majesty of Portugal, again to prohibit the woollen cloths, and the rest of the British woollen manufactures.

ART. II. Her Majesty the Queen of Great Britain, on behalf of herself and her successors, shall admit wines grown in Portugal into Britain forever. Whether Britain and France are at peace or at war, these wines shall be charged one third less duty than an equal quantity of French wine. This applies to any charge, under any name, imposed directly or indirectly. It applies whether the wines are imported into Great Britain in pipes, hogsheads, or other casks. But if anyone attempts to undermine this duty reduction, His Majesty the King of Portugal may lawfully prohibit British woollen cloth and other woollen manufactures again.

ART. III. The most excellent lords the plenipotentiaries promise and take upon themselves, that their above named masters shall ratify this treaty; and within the space of two months the ratification shall be exchanged.

ART. III. The distinguished lords serving as plenipotentiaries promise that their masters named above will ratify this treaty. The ratifications will be exchanged within two months.

By this treaty, the crown of Portugal becomes bound to admit the English woollens upon the same footing as before the prohibition; that is, not to raise the duties which had been paid before that time. But it does not become bound to admit them upon any better terms than those of any other nation, of France or Holland, for example. The crown of Great Britain, on the contrary, becomes bound to admit the wines of Portugal, upon paying only two-thirds of the duty which is paid for those of France, the wines most likely to come into competition with them. So far this treaty, therefore, is evidently advantageous to Portugal, and disadvantageous to Great Britain.

Under this treaty, the crown of Portugal must admit English woollen goods on the same terms as before the ban. That means Portugal cannot raise the duties charged before the ban. But Portugal is not bound to admit English woollens on better terms than those of any other nation, such as France or Holland. The crown of Great Britain, on the other hand, must admit Portuguese wines at only two-thirds of the duty charged on French wines. French wines are the most likely to compete with Portuguese wines. In this respect, then, the treaty clearly benefits Portugal and disadvantages Great Britain.

It has been celebrated, however, as a masterpiece of the commercial policy of England. Portugal receives annually from the Brazils a greater quantity of gold than can be employed in its domestic commerce, whether in the shape of coin or of plate. The surplus is too valuable to be allowed to lie idle and locked up in coffers; and as it can find no advantageous market at home, it must, notwithstanding; any prohibition, be sent abroad, and exchanged for something for which there is a more advantageous market at home. A large share of it comes annually to England, in return either for English goods, or for those of other European nations that receive their returns through England. Mr Barretti was informed, that the weekly packet-boat from Lisbon brings, one week with another, more than £50,000 in gold to England. The sum had probably been exaggerated. It would amount to more than £2,600,000 a year, which is more than the Brazils are supposed to afford.

It has, however, been celebrated as a masterpiece of English trade policy. Portugal receives more gold from the Brazils each year than it can use in domestic trade, whether as coins or plate. The surplus is too valuable to leave idle, locked away in coffers. Since it cannot find a profitable market at home, it must be sent abroad despite any prohibition. There it is exchanged for goods that can be sold more profitably at home. A large share of this gold comes to England each year. It is exchanged for English goods or goods from other European nations that receive payment through England. Mr Barretti was told that the weekly packet boat from Lisbon brings an average of over £50,000 in gold to England. The amount was probably exaggerated. It would total more than £2,600,000 a year, which is more than the Brazils are thought to produce.

Our merchants were, some years ago, out of humour with the crown of Portugal. Some privileges which had been granted them, not by treaty, but by the free grace of that crown, at the solicitation, indeed, it is probable, and in return for much greater favours, defence and protection from the crown of Great Britain, had been either infringed or revoked. The people, therefore, usually most interested in celebrating the Portugal trade, were then rather disposed to represent it as less advantageous than it had commonly been imagined. The far greater part, almost the whole, they pretended, of this annual importation of gold, was not on account of Great Britain, but of other European nations; the fruits and wines of Portugal annually imported into Great Britain nearly compensating the value of the British goods sent thither.

Some years ago, our merchants were unhappy with the crown of Portugal. Some privileges it had granted them had been violated or revoked. The privileges had not been granted by treaty, but freely by the crown. They were probably granted at Great Britain's request and in return for much greater favors: defense and protection from the crown of Great Britain. As a result, those usually most eager to praise trade with Portugal were inclined to portray it as less advantageous than commonly believed. They claimed that the vast majority, almost all, of the gold imported each year was not for Great Britain but for other European nations. The value of Portugal's fruits and wines imported into Great Britain each year, they claimed, nearly equaled that of the British goods sent to Portugal.

Let us suppose, however, that the whole was on account of Great Britain, and that it amounted to a still greater sum than Mr Barretti seems to imagine; this trade would not, upon that account, be more advantageous than any other, in which, for the same value sent out, we received an equal value of consumable goods in return.

Suppose, however, that the whole amount was for Great Britain and was even greater than Mr Barretti seems to imagine. Even so, this trade would be no more advantageous than any other trade that returned an equal value of consumable goods for the same value sent out.

It is but a very small part of this importation which, it can be supposed, is employed as an annual addition, either to the plate or to the coin of the kingdom. The rest must all be sent abroad, and exchanged for consumable goods of some kind or other. But if those consumable goods were purchased directly with the produce of English industry, it would be more for the advantage of England, than first to purchase with that produce the gold of Portugal, and afterwards to purchase with that gold those consumable goods. A direct foreign trade of consumption is always more advantageous than a round-about one; and to bring the same value of foreign goods to the home market requires a much smaller capital in the one way than in the ether. If a smaller share of its industry, therefore, had been employed in producing goods fit for the Portugal market, and a greater in producing those lit for the other markets, where those consumable goods for which there is a demand in Great Britain are to be had, it would have been more for the advantage of England. To procure both the gold which it wants for its own use, and the consumable goods, would, in this way, employ a much smaller capital than at present. There would be a spare capital, therefore, to be employed for other purposes, in exciting an additional quantity of industry, and in raising a greater annual produce.

Only a very small part of these imports can be assumed to add each year to the kingdom’s silverware or coin. All the rest must be sent abroad and exchanged for consumable goods of some kind. But England would benefit more by buying those goods directly with the products of English industry. Instead, it first buys Portuguese gold with those products and then buys the consumable goods with the gold. Direct foreign trade in goods for consumption is always more advantageous than a roundabout trade. It also requires much less capital to bring the same value of foreign goods to the home market. England would therefore have benefited if less of its industry had produced goods for the Portuguese market. More could then have produced goods for other markets, where the consumable goods wanted in Great Britain are available. In this way, England could obtain both the gold it needs for its own use and the consumable goods with much less capital than at present. Capital would then be left over for other purposes. It could encourage more industry and increase annual production.

Though Britain were entirely excluded from the Portugal trade, it could find very little difficulty in procuring all the annual supplies of gold which it wants, either for the purposes of plate, or of coin, or of foreign trade. Gold, like every other commodity, is always somewhere or another to be got for its value by those who have that value to give for it. The annual surplus of gold in Portugal, besides, would still be sent abroad, and though not carried away by Great Britain, would be carried away by some other nation, which would be glad to sell it again for its price, in the same manner as Great Britain does at present. In buying gold of Portugal, indeed, we buy it at the first hand; whereas, in buying it of any other nation, except Spain, we should buy it at the second, and might pay somewhat dearer. This difference, however, would surely be too insignificant to deserve the public attention.

Even if Britain were completely shut out of trade with Portugal, it would have little difficulty obtaining all the gold it needs each year. Britain needs gold for plate, coins, and foreign trade. Like any other commodity, gold can always be obtained somewhere at its market value by those who can pay for it. Moreover, Portugal’s annual surplus of gold would still be sent abroad. Even if Great Britain did not carry it away, another nation would. That nation would gladly resell the gold at its market price, just as Great Britain does now. When we buy gold from Portugal, we buy it directly. But if we bought it from any other nation except Spain, we would buy it secondhand and might pay somewhat more. This difference, however, would surely be too small to deserve public attention.

Almost all our gold, it is said, comes from Portugal. With other nations, the balance of trade is either against as, or not much in our favour. 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 favour with some particular countries, the more it must necessarily appear to be against us with many others.

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 the more gold we import from one country, the less we must import from all others. In every country, effective demand for gold, like demand for any other commodity, is limited to a certain quantity. If nine-tenths of that quantity comes from one country, only one-tenth remains to be imported from all others. Also, the more gold we import each year from particular countries beyond what we need for plate and coin, the more we must export to other countries. And the more the balance of trade appears to favor us with particular countries, the more it must appear to be against us with many others. The balance of trade is a most insignificant concern of modern policy.

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 offence 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 defence, 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.

Yet it was on this silly notion that England could not survive without trade with Portugal that France and Spain acted. Towards the end of the recent war, they demanded that the king of Portugal exclude all British ships from his ports. They made this demand without claiming any offence or provocation. To enforce the exclusion, they also demanded that he allow French or Spanish garrisons into those ports. The king of Spain, the Portuguese king’s brother-in-law, proposed these shameful terms to him. If the king of Portugal had accepted them, Britain would have been freed from a much greater inconvenience than losing trade with Portugal. Britain would no longer have had to support a very weak ally. Portugal was so poorly equipped to defend itself that even England’s full power, devoted to that purpose alone, might scarcely have defended it for another campaign. Losing trade with Portugal would no doubt have caused considerable difficulty for the merchants then engaged in it. For a year or two, they might not have found another equally profitable way to use their capital. That would probably have been the full extent of England’s inconvenience 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 round-about 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.

The large quantities of gold and silver imported each year are intended neither for silverware nor for coins, but for foreign trade. These metals make an indirect foreign trade in goods for consumption more profitable than almost any other goods can. Gold and silver are used in commerce everywhere, so they are more readily accepted in exchange for all commodities than other goods. They are also compact and valuable, so they cost less to transport from place to place than almost any other merchandise. They also lose less of their value in transport. Of all the commodities bought in one foreign country solely to be sold or exchanged for other goods in another, none are as convenient as gold and silver. The main advantage of trade with Portugal is that it makes all the different indirect foreign trades in goods for consumption carried on in Great Britain easier. Though this is not a major advantage, it is undoubtedly 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.

Clearly, any reasonable estimate of the annual increase in the kingdom’s gold and silver plate or coins would require only a very small annual import of those metals. Even without direct trade with Portugal, we could always obtain this small quantity very easily from somewhere else.

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.

Although the goldsmiths’ trade is substantial in Great Britain, most new plate sold each year is made by melting down old plate. So the amount added each year to the kingdom’s total stock of plate cannot be very great. It could require only a very small amount of imports each year.

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 £800,000 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 per cent., and the silver more than eight per cent. 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 £46:14:6, was then about £47:14s., and sometimes about £48. 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 £46:14:6. 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 £47:14s. and £48, 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.

The same is true of coin. For ten years before the recent reform of the gold coinage, over £800,000 in gold was coined each year. Yet I believe nobody imagines that even most of it was added to the money already circulating in the kingdom. In a country where the government pays for coinage, coins can never be worth much more than an equal quantity of uncoined gold or silver. This is true even when the coins contain their full standard weight of metal. Anyone with uncoined gold or silver need only go to the mint and perhaps wait a few weeks. In return, they can obtain an equal quantity of metal in coins. But in every country, most coins in circulation are almost always worn or otherwise below their standard weight. In Great Britain, they were considerably below it before the recent reform. Gold coins were more than two percent below their standard weight, and silver coins more than eight percent below. Forty-four and a half guineas at their full standard weight contained a pound of gold. If they could buy very little more than a pound of uncoined gold, then underweight guineas could not buy a pound. Something had to be added to make up the shortfall. The market price of gold bullion was therefore not the mint price of £46:14:6. It was then about £47:14s., and sometimes about £48. Yet when most coins were in this worn condition, forty-four and a half guineas fresh from the mint would buy no more goods than the same number of ordinary guineas. Once they reached a merchant’s coffers, they were mixed with other money. Separating them afterward would have been more trouble than the difference was worth. Like other guineas, they were worth no more than £46:14:6. If melted down, however, the new guineas produced a pound of standard gold with no noticeable loss. This gold could be sold at any time for between £47:14s. and £48, in either gold or silver. The gold or silver received was just as fit for every purpose of coinage as the coins melted down. There was therefore a clear profit in melting down newly minted coins. It was done so quickly that no government precaution could prevent it. For this reason, the mint’s work was somewhat like Penelope’s web. What was done during the day was undone at night. The mint was not so much adding to the coinage each day as replacing its very best coins, which were melted down daily.

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 everywhere 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 labour 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 seignorage is eight per cent., no sensible inconveniency of this kind is found to arise from it. The dangers to which a false coiner is everywhere 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 per cent.

If private individuals paid for coinage when they took their gold and silver to the mint, it would increase the metals’ value. It would do so just as craftsmanship adds value to gold and silver plate. Coined gold and silver would be more valuable than uncoined metal. If the coinage fee, or seignorage, were not excessive, it would add its full value to the value of the bullion. This is because governments everywhere have the exclusive right to coin money. No coin can come to market more cheaply than the government chooses to offer it. But an excessive fee might encourage counterfeiters at home and abroad. A fee would be excessive if it were much higher than the actual labor and expense needed for coinage. The great difference between the value of bullion and that of coin might encourage counterfeiters to flood the market with counterfeit money. They might produce so much that it would reduce the value of government money. In France, however, the seignorage is eight percent, yet no noticeable problem of this kind arises. A counterfeiter who lives in the country whose coin he counterfeits faces dangers everywhere. If he lives abroad, his agents or correspondents face those dangers instead. The dangers are far too great to risk for a profit of six or seven percent.

The seignorage 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 livres nine sous and one denier one-eleventh the mark of eight Paris ounces. {See Dictionnaire des Monnoies, tom. ii. article Seigneurage, p. 439, par 81. Abbot de Bazinghen, Conseiller-Commissaire en la Cour des Monnoies à Paris.} 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 livres 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.

In France, seignorage raises the value of coins above the value of the pure gold they contain. An edict of January 1726 fixed the mint price of fine gold of twenty-four carats. The price was 740 livres, 9 sous, and 1 1/11 deniers per mark of eight Paris ounces. {See Dictionnaire des Monnoies, vol. ii, article Seigneurage, p. 439, paragraph 81. Abbot de Bazinghen, Conseiller-Commissaire en la Cour des Monnoies à Paris.} Allowing for the mint’s permitted variation, French gold coins contain 21 3/4 carats of fine gold and 2 1/4 carats of alloy. A mark of this standard gold is therefore worth no more than about 671 livres and 10 deniers. But in France, a mark of standard gold is coined into thirty louis d’ors of 24 livres each, or 720 livres. Coinage therefore increases the value of a mark of standard gold bullion by the difference between these two amounts. That difference is 48 livres, 19 sous, and 2 deniers.

A seignorage 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 seignorage, there will be loss instead of profit. If it is equal to the seignorage, there will be neither profit nor loss. If it is greater than the seignorage, there will, indeed, be some profit, but less than if there was no seignorage. If, before the late reformation of the gold coin, for example, there had been a seignorage of five per cent. upon the coinage, there would have been a loss of three per cent. upon the melting down of the gold coin. If the seignorage had been two per cent., there would have been neither profit nor loss. If the seignorage had been one per cent., there would have been a profit but of one per cent. only, instead of two per cent. Wherever money is received by tale, therefore, and not by weight, a seignorage is the most effectual preventive 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.

A seignorage, or coinage charge, will often eliminate the profit from melting down new coins. It will always reduce that profit. The profit always comes from the difference between the amount of bullion the circulating coins should contain and the amount they actually contain. If that difference is less than the seignorage, melting down the coins will produce a loss instead of a profit. If the difference equals the seignorage, there will be neither profit nor loss. If the difference is greater than the seignorage, there will be some profit, but less than without a seignorage. For example, suppose a five percent seignorage had been charged before the recent reform of the gold coinage. Melting down gold coins would then have produced a three percent loss. If the seignorage had been two percent, there would have been neither profit nor loss. If the seignorage had been one percent, the profit would have been only one percent, instead of two percent. Therefore, wherever money is accepted by count rather than by weight, a seignorage is the most effective way to prevent coins from being melted down. For the same reason, it is also the most effective way to prevent their export. The best and heaviest coins are usually the ones melted down or exported, because they yield the greatest profits.

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 recoinage this great company may, perhaps, find that they have, upon this, as upon some other occasions, mistaken their own interest not a little.

The law encouraging coinage by removing the fee was first enacted for a limited time during the reign of Charles II. It was then extended several times until 1769, when it was made permanent. The Bank of England often has to take bullion to the mint to replenish its supply of money. The bank probably thought it was in its interest for the government to pay for coinage rather than the bank itself. The government probably made the law permanent as a favor to this great company. But the practice of weighing gold may fall out of use, as it is very likely to do because it is inconvenient. Gold coins in England may then be accepted by count, as they were before the recent recoinage. If so, this great company may perhaps find that it has seriously misjudged its own interest, as it has on other occasions.

Before the late recoinage, when the gold currency of England was two per cent. below its standard weight, as there was no seignorage, it was two per cent. 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 per cent. more than it was worth after the coinage. But if there had been a seignorage of two per cent. upon the coinage, the common gold currency, though two per cent. 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 seignorage to pay, which being two per cent., their loss upon the whole transaction would have been two per cent., exactly the same, but no greater than it actually was.

Before the recent recoinage, England’s gold coins weighed two percent less than the standard required. Because there was no seignorage, or minting charge, the coins were worth two percent less than the standard gold bullion they should have contained. So when this great company bought gold bullion to have it coined, it had to pay two percent more than the coins would be worth afterward. But suppose there had been a two percent seignorage on coinage. The gold coins would still have weighed two percent less than the standard required. Even so, they would have been worth as much as the standard gold they should have contained. In this case, the value added by minting would have made up for the loss of weight. The company would still have had to pay the two percent seignorage. Its loss on the whole transaction would therefore have been two percent, exactly the same as its actual loss, but no greater.

If the seignorage had been five per cent. and the gold currency only two per cent. below its standard weight, the bank would, in this case, have gained three per cent. upon the price of the bullion; but as they would have had a seignorage of five per cent. to pay upon the coinage, their loss upon the whole transaction would, in the same manner, have been exactly two per cent.

If the seignorage had been 5 percent and the gold currency only 2 percent below its standard weight, the bank would have gained 3 percent on the price of the bullion. But the bank would have had to pay a 5 percent seignorage on the coinage. So its loss on the whole transaction would, in the same way, have been exactly 2 percent.

If the seignorage had been only one per cent., and the gold currency two per cent. below its standard weight, the bank would, in this case, have lost only one per cent. upon the price of the bullion; but as they would likewise have had a seignorage of one per cent. to pay, their loss upon the whole transaction would have been exactly two per cent., in the same manner as in all other cases.

If the seignorage had been only one percent and the gold coins had weighed two percent less than the standard weight, the bank would have lost only one percent on the price of the bullion. But the bank would also have had to pay one percent in seignorage. Its loss on the whole transaction would therefore have been exactly two percent, just as in all other cases.

If there was a reasonable seignorage, while at the same time the coin contained its full standard weight, as it has done very nearly since the late recoinage, whatever the bank might lose by the seignorage, 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 seignorage. 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 seignorage.

Suppose there were a reasonable seignorage, or coinage charge, and the coins contained their full standard weight. They have contained nearly that weight since the recent recoinage. The bank would gain on the price of bullion whatever it lost through the seignorage. And it would lose through the seignorage whatever it gained on the price of bullion. The bank would therefore neither lose nor gain on the transaction as a whole. In this case, as in all the previous cases, the bank would be exactly as well off as if there were no seignorage.

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 every body advances the tax, nobody finally pays it; because every body gets it back in the advanced value of the coin.

When a tax on a commodity is low enough not to encourage smuggling, the merchant pays it upfront. But the merchant does not really bear the tax, because the price of the commodity covers it. The final buyer or consumer ultimately pays the tax. But money is a commodity in which everyone is a merchant. Nobody buys money except to sell it again. Ordinarily, there is no final buyer or consumer of money. So when a tax on coinage is low enough not to encourage counterfeiting, everyone pays the tax upfront. But nobody ultimately bears it, because everyone recovers it through the increased value of the coin.

A moderate seignorage, therefore, would not, in any case, augment the expense of the bank, or of any other private persons who carry their bullion to the mint in order to be coined; and the want of a moderate seignorage does not in any case diminish it. Whether there is or is not a seignorage, if the currency contains its full standard weight, the coinage costs nothing to anybody; and if it is short of that weight, the coinage must always cost the difference between the quantity of bullion which ought to be contained in it, and that which actually is contained in it.

A moderate seignorage, therefore, would never increase the expense for the bank or other private parties who bring bullion to the mint to be coined. Nor does the absence of a moderate seignorage ever reduce that expense. Whether or not there is a seignorage, coinage costs no one anything if the coins contain their full standard weight of metal. If the coins fall short of that weight, the cost of coinage is always the difference between the amount of bullion they should contain and the amount they actually contain.

The government, therefore, when it defrays the expense of coinage, not only incurs some small expense, but loses some small revenue which it might get by a proper duty; and neither the bank, nor any other private persons, are in the smallest degree benefited by this useless piece of public generosity.

Therefore, when the government pays for coinage, it incurs a small expense. It also loses some small revenue it could raise by charging an appropriate fee. Yet neither the bank nor any other private individuals benefit in the slightest from this useless act of public generosity.

The directors of the bank, however, would probably be unwilling to agree to the imposition of a seignorage upon the authority of a speculation which promises them no gain, but only pretends to insure them from any loss. In the present state of the gold coin, and as long as it continues to be received by weight, they certainly would gain nothing by such a change. But if the custom of weighing the gold coin should ever go into disuse, as it is very likely to do, and if the gold coin should ever fall into the same state of degradation in which it was before the late recoinage, the gain, or more properly the savings, of the bank, in consequence of the imposition of a seignorage, would probably be very considerable. The bank of England is the only company which sends any considerable quantity of bullion to the mint, and the burden of the annual coinage falls entirely, or almost entirely, upon it. If this annual coinage had nothing to do but to repair the unavoidable losses and necessary wear and tear of the coin, it could seldom exceed fifty thousand, or at most a hundred thousand pounds. But when the coin is degraded below its standard weight, the annual coinage must, besides this, fill up the large vacuities which exportation and the melting pot are continually making in the current coin. It was upon this account, that during the ten or twelve years immediately preceding the late reformation of the gold coin, the annual coinage amounted, at an average, to more than £850,000. But if there had been a seignorage of four or five per cent. upon the gold coin, it would probably, even in the state in which things then were, have put an effectual stop to the business both of exportation and of the melting pot. The bank, instead of losing every year about two and a half per cent. upon the bullion which was to be coined into more than eight hundred and fifty thousand pounds, or incurring an annual loss of more than £21,250 pounds, would not probably have incurred the tenth part of that loss.

The bank’s directors, however, would probably be unwilling to agree to a seignorage based on a theory. The theory promises them no gain. It only claims to protect them from loss. Given the present condition of the gold coinage, they would certainly gain nothing from the change as long as gold coins continue to be accepted by weight. But the practice of weighing gold coins may well fall out of use. If it does, and the gold coinage again becomes as worn and underweight as it was before the recent recoinage, the bank’s gain, or more properly its savings, from a seignorage would probably be very considerable. The Bank of England is the only company that sends any considerable quantity of bullion to the mint. The burden of the annual coinage falls entirely, or almost entirely, on the bank. If the annual coinage had only to replace unavoidable losses and wear and tear, it could seldom exceed £50,000, or at most £100,000. But when coins fall below their standard weight, the annual coinage must also fill the large gaps continually left by the export and melting of coins in circulation. For this reason, during the ten or twelve years before the recent reform of the gold coinage, the annual coinage averaged more than £850,000. But a seignorage of four or five percent on gold coins would probably have stopped both export and melting effectively, even under the conditions then prevailing. Each year, the bank lost about two and a half percent on bullion to be coined into more than £850,000, an annual loss of more than £21,250. With a seignorage, the bank would probably not have incurred a tenth of that loss.

The revenue allotted by parliament for defraying the expense of the coinage is but fourteen thousand pounds a-year; and the real expense which it costs the government, or the fees of the officers of the mint, do not, upon ordinary occasions, I am assured, exceed the half of that sum. The saving of so very small a sum, or even the gaining of another, which could not well be much larger, are objects too inconsiderable, it may be thought, to deserve the serious attention of government. But the saving of eighteen or twenty thousand pounds a-year, in case of an event which is not improbable, which has frequently happened before, and which is very likely to happen again, is surely an object which well deserves the serious attention, even of so great a company as the bank of England.

Parliament allocates only fourteen thousand pounds a year to cover the cost of coinage. I am assured that the actual cost to the government, or the fees paid to mint officers, ordinarily does not exceed half that amount. Saving such a small sum might be thought too insignificant to deserve the government’s serious attention. The same might be said of gaining another sum, which could hardly be much larger. But an event that is not improbable could make it possible to save eighteen or twenty thousand pounds a year. This event has often happened before and is very likely to happen again. Such a saving surely deserves serious attention, even from a company as large as the Bank of England.

Some of the foregoing reasonings and observations might, perhaps, have been more properly placed in those chapters of the first book which treat of the origin and use of money, and of the difference between the real and the nominal price of commodities. But as the law for the encouragement of coinage derives its origin from those vulgar prejudices which have been introduced by the mercantile system, I judged it more proper to reserve them for this chapter. Nothing could be more agreeable to the spirit of that system than a sort of bounty upon the production of money, the very thing which, it supposes, constitutes the wealth of every nation. It is one of its many admirable expedients for enriching the country.

Some of the preceding arguments and observations might perhaps have been better placed in the first book. They might have belonged in its chapters on the origin and use of money and the difference between real and nominal prices of goods. But the law encouraging coinage arose from the common prejudices introduced by the mercantile system. So I thought it better to save these arguments and observations for this chapter. Nothing could be more in keeping with that system than a kind of reward for producing money. The system assumes that money is the very thing that makes a nation wealthy. This reward is one of the system’s many admirable schemes for enriching the country.