Key ideas: Published in 1755. The chapters on inflation and money printing are particularly interesting. They describe the process that became known as The Cantillon Effect. The Cantillon Effect, named after Richard Cantiollon, illustrates the delitirious consequences of printing money and is an essential framework to understanding the true cause of wealth inequality in a society.
[The Cantillon Effect]
If gold or silver mines were found in a state, and considerable quantities of minerals were extracted from them, the owners of these mines, the entrepreneurs, and all those who work there, will increase their expenditures in proportion to the wealth and profit they make. They will also lend the money they have over and above what they need for the expenses and earn interest.
All this money, whether lent or spent, will enter into circulation and will not fail to raise the price of commodities and goods in all the channels of circulation it enters. Increased money will bring about increased expenditure, and this will cause an increase of market prices...
Mr. Locke lays it down as a fundamental maxim that the quantity of goods in proportion to the quantity of money is a regulator of market prices... [H]e has clearly seen that the abundance of money makes everything more expensive, but he has not considered how this happens. The great difficulty of this question consists in knowing in what way and in what proportion the increase of money raises the price of things. ...
In general, an increase of hard money in a state will cause a corresponding increase in consumption and this will gradually produce increased prices.
If the increase of hard money comes from gold and silver mines within the state, the owner of these mines, the entrepreneurs, the smelters, refiners, and all the other workers will increase their expenses in proportion to their profits.
Their households will consume more meat, wine, or beer than before. They will become accustomed to wearing better clothes, having finer linens, and to having more ornate houses and other desirable goods.
Consequently, they will give employment to several artisans who did not have that much work before and who, for the same reason, will increase their expenditures
All this increased expenditures on meat, wine, wool, etc., necessarily reduces the share of the other inhabitants in the state who do not participate at first in the wealth of the mines in question.
The bargaining process of the market, with the demand for meat, wine, wool, etc., being stronger than usual, will not fail to increase their prices.
These high prices will encourage farmers to employ more land to produce the following year, and these same farmers will profit from the increased prices and will increase their expenditure on their families like the others.
Those who will suffer from these higher prices and increased consumption will be, first of all, the property owners, during the term of their leases, then their domestic servants and all the workmen or fixed wage earners who support their families on a salary.
They all must diminish their expenditures in proportion to the new consumption, which will compel a large number of them to emigrate and to seek a living elsewhere.
The property owners will dismiss many of them, and the rest will demand a wage increase in order to live as before.
It is in this manner that a considerable increase of money from mines increases consumption and, by diminishing the number of inhabitants, greater expenditures result by those who remain.
If money continues to be extracted from the mines, the abundance of money will increase all prices to such a point that not only will the property owners raise their rents considerably when the leases expire and resume their old lifestyle, increasing their servants’ wages proportionally, but the artisans and workmen will increase the prices of the articles they produce so high that there will be a considerable gains in buying them from foreigners who make them much cheaper.
This will naturally encourage several people to import products at lower prices from foreign factories, and this will gradually ruin the artisans and manufacturers of the state who will be unable to sustain themselves by working at such low rates because of the high cost of living.
When the overabundance of money from the mines has diminished the number of inhabitants in a state, accustomed those who remain to excessive expenditures, raised the prices of farm products and the wages or labor to high levels, and ruined the manufactures of the state by the purchase of foreign products by property owners and mine workers, the money produced by the mines will necessarily go abroad to pay for imports.
This will gradually impoverish the state and make it, in a way, dependent on foreigners to whom it is obliged to send money every year as it is extracted from the mines.
The great circulation of money, which was widespread in the beginning, ceases; poverty and misery follow and the exploitation of the mines appears to be only advantageous to those employed in them...
At the first settlement of Rome, each citizen was given two units of land. Yet, soon after, there was as great an inequality among inheritances as what we observe today in all the countries of Europe. The land eventually was divided among a few owners.
Even if the prince distributes the land equally among all the inhabitants, it will ultimately be divided among a small number. One man will have several children and will not be able to leave each of them a portion of land equal to his own.
Another will die without children, and will leave his portion to someone who has land already, rather than to one who has none.
A third will be lazy, extravagant, or sickly, and be obliged to sell his portion to someone more frugal and industrious, who will continually add to his estate by new purchases on which he will employ the labor of those, who having no land of their own, are obliged to offer him their labor in order to subsist.