The Simplified Wealth of Nations of Adam Smith, Book 5, Chapter 3: Monetary Devaluation
Chapter 3e: Monetary Devaluation
Money Adulteration and Augmentation
61The raising of the coin's denomination has been the most usual way a real public bankruptcy is disguised under the appearance of a pretended payment.
For example, if an Act of Parliament doubled a coin's denomination, the person who borrowed a coin worth four ounces of silver in the old denomination, would pay it back with a new coin worth only two ounces of silver.
The capital of the funded and unfunded debt of Great Britain is about £128 million.
In this way, it might be paid with around £64 million of our present money.
It would be a pretended payment only.
Its creditors would really be defrauded of half of what was due to them.
The calamity would also extend much further beyond those creditors.
Every private person would suffer a proportional loss without any advantage.
In most cases, it would bring a great additional loss to those creditors.
If the creditors of the public debt were in debt, they might compensate their loss by paying their own creditors in the same coin paid to them.
But in most countries, most of the creditors of the public debt are wealthy people.
They are creditors for their fellow-citizens, more than debtors.
In most cases, a pretended payment of this kind aggravates the loss of those creditors instead of alleviating it.
It extends the calamity to many other innocent people, without any advantage to the public.
It causes a general and most pernicious subversion of the fortunes of private people.
In most cases:
it enriches the idle and profuse debtor at the expence of the industrious and frugal creditor
It transports much of the national capital from people likely to increase and improve it to those who are likely to dissipate and destroy it.
When it becomes necessary for a state to declare itself bankrupt, in the same way as that for an individual, a fair, open, and avowed bankruptcy is always least dishonourable to the debtor and least hurtful to the creditor.
The state's honour is surely very poorly provided for when it must do this juggling trick to cover the disgrace of a real bankruptcy.
This trick is so easily seen through and so extremely pernicious.
62 Almost all ancient and modern states have sometimes played this very juggling trick when needed.
The As is the coin by which the Romans computed the value of all their other coins.
At the end of the first Punic war, they reduced the As from containing 12 ounces of copper to only 2 ounces.
They raised 2 ounces of copper to a denomination which before expressed the value of 12 ounces.
In this way, the republic was able to pay its great debts with 1/6 of what it really owed.
We imagine that this sudden and great bankruptcy must have caused a very violent popular clamour.
It does not appear to have caused any.
The law which enacted it was, like all other laws relating to the coin, introduced by a tribune.
It was probably a very popular law.
In Rome and all ancient republics, the poor were constantly in debt to the rich.
The rich used to lend money to the poor at exorbitant interest to secure their votes at the annual elections.
These debts were never paid and soon accumulated to be too great for the debtor or anyone else to pay.
The debtor was obliged, without any further gratuity, to vote for the candidate the creditor recommended, for fear of a very severe execution.
In spite of all the laws against bribery and corruption, the principal funds of the poor for their subsistence were:
the bounty of the candidates
the occasional distributions of corn ordered by the senate
To free themselves from their creditors, the poorer citizens continually called out for New Tables or to abolish debts.
New Tables is a law which entitles them to a complete acquittance on paying only a certain proportion of their accumulated debts.
The law which reduced all coins to 1/6 of their former value enabled them to pay their debts with 1/6 of what they really owed.
It was equivalent to the most advantageous New Tables.
The rich were obliged to consent to laws for abolishing debts and for introducing New Tables to satisfy the people.
They probably also consented to this law to liberate the public revenue partly to restore the vigour to that government, which they themselves directed.
This operation would immediately reduce a debt of £128 million to £21,333,333 6 shillings and 8-pence.
During the second Punic war, the As was still further reduced.
From two ounces of copper to one ounce.
Afterwards, from one ounce to half an ounce or to 1/24 of its original value.
By combining the three Roman operations into one, a debt of £128 millions of our present money might in this way be reduced all at once to £5,333,333 6 shillings and 8-pence.
Even the enormous debts of Great Britain might soon be paid in this manner.
63 Through such expedients, the coin of all nations has been gradually reduced below its original value.
The same nominal sum has been gradually brought to contain a fewer silver.
64 For the same purpose, nations have sometimes adulterated the standard of their coin by mixing more alloy in it.
For example, if 249 grams of alloy was added in every 373 grams of our silver coin, instead of the present standard of 28 grams of alloy, 240 pence of such coin would be worth little more than 80 pence of our present money. [((373-249)/373)/((373-28)/373) or 36%]
The value of the amount of silver in 80 pence of our present money would be raised to the denomination of 240 pence.
The adulteration of the standard has exactly the same effect with what the French call an augmentation, or a direct raising of the coin's denomination.
65 An augmentation or a direct raising of the coin, always is an open and avowed operation.
It makes pieces of a smaller weight and bulk to be called by the same name which before were given to pieces of more weight and bulk.
On the contrary, the adulteration of the standard was generally a concealed operation.
It gives the same denomination, weight, bulk, and appearance to less valuable pieces from the mint with pieces which before were of much greater value.
When King John of France adulterated his coin to pay his debts, all the mint's officers were sworn to secrecy.
Both operations are unjust.
But a simple augmentation is an injustice of open violence, whereas the adulteration is an injustice of treacherous fraud.
This adulteration could never be concealed very long.
As soon as it has been discovered, it has always excited much greater indignation than adulteration.
The coin after any big augmentation has very seldom been brought back to its former weight.
But after the greater adulterations, it has almost always been brought back to its former fineness.
The people's fury and indignation could not be otherwise be appeased.
66 In the end of the reign of Henry VIII. and in the beginning of that of Edward VI, the English coin was raised in its denomination and adulterated in its standard.
The like frauds were practised in Scotland during the minority of James VI.
They have occasionally been practised in most other countries.
67 Great Britain's public revenue can never be completely liberated while its surplus revenue is so very small.