(3.vii.5) If the quantity of money, instead of performing ten exchanges to exchange all thegoods once, were ten times as great, and performed only one exchange, it is evident that whateveraddition were made to the whole quantity, would produce a proportional diminution of value, ineach of the minor quantities taken separately. As the quantity of goods, against which the moneyis all exchanged at once, is supposed to be the same, the value of all the money is no more, afterthe quantity is augmented, than before it was augmented. If it is supposed to be augmentedone-tenth, the value of every part, that of an ounce for example, must be diminished one-tenth.
Suppose the whole quantity 1,000,000 ounces, and augmented by one-tenth; the loss of value tothe whole must be communicated proportionally to every part; but what one-tenth or a million isto a million, one-tenth of an ounce is to an ounce.
(3.vii.6) If the whole of the money is only one-tenth of the above supposed sum, andperforms ten purchases it, exchanging all the goods once, it of course exchanges each time againstone-tenth of the goods. But if the tenth which exchanges against a tenth is increased in anyproportion, it is the same thing as if the whole which exchanges against the whole wereincreased in that proportion. In whatever degree, therefore, the quantity of money is increased ordiminished, other things remaining the same, in that same proportion, the value of the whole,and of every part, is reciprocally diminished or increased. This, it is evident, is a propositionuniversally true. Whenever the value of money has either risen or fallen, (the quantity of goods,against which it is exchanged, and the rapidity of circulation, remaining the same,) the changemust be owing to a corresponding diminution or increase of the quantity; and can be owing tonothing else. If the quantity of goods diminish, while the quantity of money remains unaltered, itis the same thing as if the quantity of money had been increased; and if the quantity of goods beincreased, while the quantity of money remains unaltered, it is the same thing as if the quantityof money had been diminished.
(3.vii.7) Similar changes are produced by any alteration in the rapidity of circulation. Byrapidity of circulation is meant, of course, the number of times the money must change hands to effectone sale of all the commodities.
(3.vii.8) The whole of the goods, which fall to be exchanged in the course of the year, is theamount contemplated in the above propositions. If there is any portion of the annual produce,which is not exchanged at all, as what is consumed by the producer; or which is not exchangedfor money; any such portion is not taken into account, because what is not exchanged for moneyis in the same state, with respect to the money, as if it did not exist. If there is any part of whatfalls to be exchanged in the course of the year, which is exchanged two, or three, or more times,that also is not taken into account, because the effect is the same, with respect to the money, as ifthe goods had been increased to the amount of these multiplications, and exchanged only once.
Section VIII. What Regulates the Quantity of Money (3.viii.1) When we have ascertained, that quantity determines the value of money, we stillhave to inquire what it is that regulates quantity.
(3.viii.2) The quantity of money may seem, at first sight, to depend upon the will of thegovernments, which assume to themselves the privilege of making it, and may fabricate anyquantity they please.
(3.viii.3) Money is made under two sets of circumstances; either when government leavesthe increase or diminution of it free; or when it endeavours to control the quantity, making it greator small as it pleases.
(3.viii.4) When the increase or diminution of money is left free, government opens the mintto the public at large, making bullion into coins for as many as require it.
(3.viii.5) It is evident that individuals, possessed of bullion, will desire to convert it intocoins, only when it is their interest to do so; that is, when their bullion, converted into coins, will bemore valuable to them than in the shape of bullion.
(3.viii.6) This can only happen when the coins are peculiarly valuable, and when the samequantity of metal, in the state of coin, will exchange for more than in the state of bullion.
(3.viii.7) As the value of the coins depends upon the quantity of them, it is only when thequantity is to a certain degree limited, that they have this value. It is the interest of individuals,when coins are thus high in value, to carry bullion, to be coined; but by every addition to thenumber of the coins, the value of them is diminished; and at last the value of the metal in thecoins, above the bullion, becomes too small to afford a motive for carrying bullion to be coined.
If the quantity of money, therefore, should at any time be so small as to increase its value abovethat of the metal of which it is made, the interest of individuals operates immediately, in a stateof freedom, to augment the quantity.
(3.viii.8) It is also possible for the quantity of money to be so large as to reduce the value ofthe metal in the coin, below its value in the state of bullion; in that case, the interest of individualsoperates immediately to reduce the quantity. If a man has possessed himself of a quantity of thecoins, containing, we shall say, an ounce of the metal, and if these coins are of less value thanthe metal in bullion, he has direct motive to melt the coins, and convert them into bullion: andthis motive continues to operate till by the reduction of the quantity of money, the value of themetal in that state is so nearly the same with its value in bullion, as not to afford a motive formelting.
