2.4 Nominal Variation of Price and the Peculiar Value of Bullion and of Coin
While the price of commodities is expressed in money, the value of money itself plays not part in the real or relative variation of the price of other commodities. One product is ultimately bought with the proceeds from the sale of another. Where the value of money decreases, the baker may be required to pay more coin for wool, but he also earns more coin from the sale of his bread, by which he acquired the money to purchase the wool.
Money is a commodity that, like all commodities, is subject to a change in value for both real reasons (variations in the cost of producing coin) and relative ones (scarcity or abundance of coin compared to other goods).
For example, the discovery of productive silver mines in America has caused silver to decrease in value - by virtue of a decreased cost to produce it and its abundance in quantity. As a result, traders must presently give four ounces of silver for the same quantity of wheat they used to purchase with one ounce. Wheat has not increased in value, but silver has decreased.
This may be disguised to some degree in the value of money - how much or how little a coin of a given denomination contains. That is to say that if 10 francs represented one ounce of silver in the past, but the alloy of the coin is increased, it is possible that 10 francs now represents four ounces of silver. Hence in the same situation, traders who once gave ten francs for a quantity of wheat perceive that wheat still costs 10 francs, if they conveniently ignore the amount of silver the coins represent.
It should be obvious, then, that the value of commodities cannot be assessed by their nominal prices in currency. Even if the currency changes in value, the question arises as to how much of the variation in price pertains to the value of the commodity purchased with money and how much pertains to the value of money as a commodity unto itself.
Say has, in the first book, explained the error of considering money to be a fixed value - whether an ounce of silver is struck into two coins instead of one makes no difference to the availability of goods for which it may be exchanged. It is injurious only to sales made on credit, where the debtor (unjustly) repays a sum worth half of the actual value he borrowed.
When gold and silver are in bullion form, they are traded as commodities rather than as money - that is, by weight. Even if each individual makes his own coins, it remains no more valuable than raw metal. The value in coinage, in addition to its metal content, is convenience in trade, in that both parties recognize that a coin represents a fixed weight and alloy of metal.
In practice, the value coin typically varies from an equivalent weight in bullion, but never by much. The premium of convenience is low, as metal can be traded in its bullion form, and the deficit must be less than the cost of melting the coin into raw metal to prevent people from doing so. The avid desire of government to have more wealth by producing more coin of less metal has never given it a lasting advantage.
Money is not an object of consumption, but of barter. Creating more of it does not create greater wealth, but merely more tokens by which goods can be traded. Hence, when the supply of silver to a market increases, the price of goods is seen to increase in relation to the amount of coin offered for them, but not in relation to the other goods for which the money earned from sale can be redeemed.
Some mention is made of the precious metals that are shaped into plate, embroidery, jewelry, and other forms of ornamentation. These items remove metal from circulation when it is plentiful and its value is low. But when the value of metals rise, such adornments are liquidated - in a very literal sense - as their value as baubles is surpassed by the value the metal gains in trade.
(EN: This remains true in the present day, though US currency represents no value in actual metal, that when the commodity price of metals spikes, people trade their "old" jewelry and other items containing precious metals for cash, and the salvaging of the sparse amounts of precious metals in old batteries and electronic devices becomes profitable.)
He also considers that the amount of silver in circulation among the civilized nations of the world has grown to such an extent that there are few events that can pour a significant excess into the market. The industry applied to the mining of silver in Attica in the classical age of Greece did little to sway the economy of that time.
The exploration of mines in the new world did, in Say's time, create a massive increase of gold and silver to the mother countries in Europe, but it was almost instantly traded away to the Orient for tea, spices, silk, and other consumer goods. Prices in Europe have risen considerably to reflect the greater supply of precious metals in the form of coinage, but given the majority of metal was passed on rather than retained in local markets, its impact on the money supply was less than it might have been.
What is noted in Europe, for the flow of silver into and out of the continent, is a great increase in the wealth of nations in the form of goods enjoyed by men. Common laborers of his time enjoy greater quantities of the necessities and conveniences of life than did many of the nobility of the middle ages, and there is a general state of national opulence.
Neither has the flow of precious metals out of the continent been a deterrent to progress, given the rise of credit and other forms of paper money, the use of which can be increased arbitrarily, without regard to the amount of precious metals that may (or may not) exist. It has been witnessed that some of the wealthiest nations have much smaller amounts of actual coin when compared to other nations.
Some portion of the demand for precious metals arises from their gradual destruction by use - the gradual wear of the metal in coins that are constantly handled, as well as the way that objects fashioned of precious (utensils, jewelry, embroidery, and decoration) erode over time. There's also the instances of loss in quantity, buried hordes that have been forgotten, amounts lost by shipwreck, and the like. Each loss is rather small, but their aggregation over time can become considerable.
As nations progress their wealth, there may be want of additional metal. To the degree that mining can keep pace with demand, prices in markets will remain stable. But this is largely inconsequential, as money is merely a token of exchange. When metal is scarce, more goods must be given for less of metal; when metal is plentiful, more metal must be given for goods.
Say asserts that there is quite a lot of "false reasoning and erroneous views" on the topic of money, and that exposing and rectifying misconceptions would be tedious - given the basic principles communicated thus far, it should be possible to recognize and dismiss fallacious reasoning.