Adam Smith's Simplified Wealth of Nations, Book 4, Chapter 6b: Gold in Coinage
Chapter 6b: Gold in Coinage
17 The goldsmiths trade is very big in Great Britain.
Most of the new plate they sell is made from old plate melted down.
Thus, the addition made to the whole plate of the kingdom cannot be very great.
It could require only a very small annual importation.
18 It is the same case with the coin.
Nobody imagines that the annual gold coinage of more than £800,000 a year for 10 years, was an addition to the money in the kingdom.
If the process of coinage is made free by the government, the coin's value can never be much greater than the value of those metals uncoined, even when the coin has its full standard weight of gold and silver.
Because it will only require the trouble of:
going to the mint
a delay of a few weeks to get those metals coined
But most of the coin in every country is almost always worn or degenerated from its standard.
Before the recent reformation, it was much worn in Great Britain.
The gold coin was more than 2% below its standard weight.
The silver coin was more than 8% below its standard weight.
If 44 guineas and a half, containing a pound weight of gold, could buy little more what a pound weight of uncoined gold could, 44 guineas and a half lacking some weight, could not buy a pound weight.
Something must be added to make up the deficiency.
The current market price of gold bullion was then 11,448 pence and sometimes 11,520 pence.
It was not the same with the mint price of 11, 214 pence.
When most of the coin was this degenerated, 44 guineas and a half, fresh from the mint, would purchase no more goods than other ordinary guineas.
Because when they came into the merchant's coffers, they were confounded with other money.
They could not be distinguished without more trouble than the difference was worth.
Like other guineas, they were worth no more than 11,214 pence.
If thrown into the melting pot, they produced a pound weight of standard gold without any sensible loss.
It could then be sold between 11,448 pence and 11,520 pence in gold or silver.
There was a profit in melting down new coined money.
It was done so instantaneously that no precaution of government could prevent it.
These operations of the mint were like the web of Penelope.
The work done in the day was undone in the night.
The mint was employed to replace the best part of the coin which was daily melted down
It did not make daily additions to the coin.
19 If the people who carry their gold and silver to the mint paid for the coinage, it would add value of those metals in the same way as fashion adds to the value of plate.
Gold and silver would be more valuable coined than uncoined.
The seignorage would add to the bullion the whole value of the duty, if it was not exorbitant.
The government has the exclusive privilege of coining.
No coin can come to market cheaper than those of the government.
The duty would be exorbitant if it was very much above the real value of the labour and expence needed for coinage.
If the duty were exorbitant, false coiners at home and abroad might be encouraged by the great difference between bullion value and coin value.
They would create so much counterfeit money.
It would reduce the value of government money.
In France, the seignorage is 8%.
No sensible inconveniency arose from it.
The dangers risked by a false coiner and his agents are too great for the sake of a profit of 6% or 7%.
20 French seignorage raises the value of the coin higher than the quantity of pure gold it contains.
By the edict of January 1726, the mint price of fine gold of 24 carats was fixed at 740 livres 9 sous and 1 denier 1/11, the mark of 8 Paris ounces.
The French gold coin makes an allowance for the seignorage by containing:
21 carats and 3/4 of fine gold
2 carats 1/4 of alloy
The mark of standard gold is worth no more than 671 livres 10 deniers.
But in France, this mark of standard gold is coined into 30 Louis d'ors of 24 livres each, or into 720 livres.
The coinage increases the value of a mark of standard gold bullion, by between 671 livres 10 deniers, and 720 livres; or by 48 livres 19 sous and 2 deniers.
21 In many cases, a seignorage will remove all the profit of melting down the new coin.
In all cases, it will reduce this profit.
This profit is from the difference between the quantity of bullion the currency should contain and the quantity 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 neither be profit nor loss."
If it is greater than the seignorage, there will be some profit, but less than if there was no seignorage.
For example, if there was a seignorage of 5% before the late reformation of the gold coin, there would have been a loss of 3% in its melting.
If the seignorage was 2%, there would have been neither profit nor loss.
If the seignorage was 1%, there would have been a profit
But the profit will be 1% only instead of 2%.
Wherever money is received by tale and not by weight, a seignorage is the most effectual preventative of the melting down and exportation of coin.
It is the best and heaviest pieces that are melted down or exported because it is upon such that the largest profits are made.
22 The law for encouragement of the coinage by rendering it duty-free, was first enacted during the reign of Charles II for a limited time.
It continued by different prolongations until in 1769 when it was rendered perpetual.
To replenish their coffers with money, the bank of England is frequently carried bullion to the mint.
They probably imagined that it was more for their interest that the coinage should be at the expence of government than their own.
It was probably out of complaisance to the Bank of England that the government rendered this law perpetual.
Should the custom of weighing gold become disused it is very likely caused by its inconvenience.
Should the English gold coin be received by tale, as it was before the late recoinage, the Bank of England may find that they have mistaken their own interest.
23 Before the recent recoinage, there was no seignorage.
When the English gold currency was 2% below its standard weight, it was 2% below the value of the gold bullion it should have contained.
When the Bank of England bought gold bullion to have it coined, they were obliged to pay 2% more than its worth after coinage.
But if there had been a seignorage of 2% on the coinage, the gold currency though 2% below its standard weight, would have been equal in value to the gold it should have contained.
The value of the fashion would compensate the diminution of the weight.
They would have had the seignorage of 2% to pay
Their loss on the whole transaction would have been 2% exactly the same, but no greater than it actually was.
24 If the seignorage was 5% and the gold currency was only 2% below its standard weight, the bank would have gained 3% on the bullion price.
But as the bank would have to pay a 5% seignorage, their loss on the whole transaction would have been exactly 2%.
25 If the seignorage was only 1% and the gold currency 2% below its standard weight, the bank would have lost only 1% on the price of the bullion.
But as the bank would have to pay a 1% seignorage, their loss on the whole transaction would have been exactly 2% as in all other cases.
26 If there was a reasonable seignorage while the coin contained its full standard weight, whatever the bank loses by the seignorage, they would gain from the bullion's price.
Whatever they gain from the price of the bullion, they would lose by the seignorage.
They would neither lose nor gain on the whole transaction.
They would be exactly in the same situation as if there was no seignorage.
27 When the tax on a commodity is so moderate as not to encourage smuggling, its merchant does not pay the tax though he advances it to government.
The tax is paid by the last purchaser or consumer.
But money is a commodity to which every man is a merchant.
People buy money to sell it again.
Money has no last purchaser or consumer in ordinary cases.
When the tax on coinage is so moderate as not to encourage false coining, everybody advances the tax but nobody finally pays it.
Because everybody gets the value of the tax back in the higher value of the coin.
28 A moderate seignorage would not increase bank expences.
It would not increase the expence of persons who carry their bullion to the mint to be coined.
The want of a moderate seignorage does not diminish it in any case.
Whether there is a seignorage or not, the coinage costs nothing to anybody if the currency contains its full standard weight.
If it is short of that weight, the coinage must always cost the difference between the bullion which should be contained in it, and that which actually is contained in it.
29 When the government defrays the expence of coinage, it incurs some small expence.
It loses some small revenue which it might get by a proper duty.
The bank or any private persons do not benefit in any way by this useless public generosity.
30 Bank directors would probably be unwilling to impose a seignorage which promises them no gain, but only pretends to insure them from any loss.
They certainly would gain nothing by such a change in the present state of the gold coin, as long as it continues to be received by weight.
The gain of the bank from a seignorage would probably be very big if:
the custom of weighing the gold coin is ever misused, as it is very likely to be
the gold coin should ever be degraded again as it was before the recent recoinage
Only the Bank of England sends any large amount of bullion to the mint.
The burden of the annual coinage falls entirely on it.
If this annual coinage was only to repair the losses and wear and tear of the coin, it could seldom exceed £50,000 to 100,000.
But when the coin is degraded below its standard weight, the annual coinage must fill up the large vacuities caused by the continual exportation and melting of the current coin.
This happened 10-12 years before the recent gold coin reformation.
The annual coinage then was more than £850,000.
Without seignorage, the bank lost yearly about 2.5% on the bullion which was coined into more than £850,000.
It was an annual loss of more than £21,250.
But if there was a seignorage of 4-5% on the gold coin, it would probably stop the exportation and melting of coin.
It probably would not have incurred 10% of that loss.
31 The revenue allotted by Parliament for defraying the cost of coinage is only £14,000 a year.
The real cost of the government, the fees of the officers of the mint, do not exceed £7,000.
The savings of this small sum does not deserve the serious attention of government.
But the frequent annual savings of £18,000-20,000 a year surely deserves the serious attention of the Bank of England.
32 Some of the foregoing reasonings might have been more properly placed in the following chapters of Book I:
The origin and use of money
The difference between the real and the nominal price of commodities.
But as the law for the encouragement of coinage originates from those vulgar prejudices of the mercantile system, it is more proper to put them in this chapter.
The mercantile system supposes that money constitutes the wealth of every nation.
Nothing could be more agreeable to the spirit of that system than a bounty on the production of money.
It is one of its many admirable expedients for enriching the country.