The Denomination of Coin
Pieces of silver are valued for their weight and purity of alloy. In the author's time, commerce had evolved to the use of state-issued coinage that represented a given amount of metal, but issuers (primarily states) modified the value represented by the coin.
(EN: The author refers to the French livre, which was originally decreed by Charlemagne as one pound of silver, divisible into 20 sous [or sols], each of which was divisible into 12 deniers. This degraded over time to the point where a livre was worth about a sixth of an ounce. In 1726, just four years before this book was written, Louis XV attempted to revitalize the system to make a livre represent a full ounce and the ecu represent a sixth-ounce. In all, French money was in a terrible state, but it was not unique to this nation.)
The result of the modification of the denomination of currency causes fluctuations in marketplaces. Merchants are not foolish about money, nor are they easily fooled, and as such they are attentive to the actual value in metal for which they exchange regardless of the denomination of a given currency.
He considers the debasement of the ecu in 1714, which was the denomination in which most retail exchanges too place. The king decreed that the value of the coin would be decreased 1% per month for 20 months, such that the ecu that represented five livres would become worth only four.
- In general, people recognized that they would be better to receive livres than ecu because the ecu would lose value.
- Anyone with a debt denominated in livres made haste to repay it before their money lost its value
- Creditors were meanwhile very eager to lend, even without charging interest, because their notes would gain the additional 20% due to the change
- Those vendors whose goods were in high demand raised their prices immediately
- Those vendors whose goods were not in high demand and could not raise their prices suffered a loss, collecting 20% less revenue from their sale
- The price of imports likewise increased immediately, or the foreign merchants ceased sending goods to France
- In general, this caused an increase in the price of everything: merchandise, labor, and the rent of land.
Because the livre would maintain its value while the ecu would lose, shrewd people sought to exchange ecu for livres at any opportunity, and horded livres to the point that they disappeared for a time from circulation, specie was amassed, and money was even sent abroad.
The scarcity of desirable coinage further escalated price increases, meanwhile the abundance of undesirable coinage, churned out with great haste from mints (who would also profit 20% by changing to the new coin) did not counterbalance.
When the denomination of currency is changed, the citizens are made dupes: those who learn of the change sooner benefit at the expense of those who learn later, but ultimately all are damaged by instability in the currency. The damage to the public interest is essentially no different to counterfeit.
And making dupes is often the intent of currency devaluation. In essence, the King is able to mint more coins and benefit from seignorage, and while he may think himself to gain more by having a greater amount in the nominal currency, the devaluation means he can purchase no more than before. What could once be bought for an ounce of silver must still be bought for an ounce of silver, though it will require more coins because each coin represents a smaller amount of precious metal.
The author provides a plethora of examples from ancient times to his own present day, implying that the debasement of currency has never left any nation wealthier - but for the profit of temporary deception, which is the reason states repeated debase their currency.