Section XVI. Taxes on Money, and the Precious Metals

A tax upon money cannot be conveniently levied, excepting either upon the occasion of its coinage, or that of the first acquisition of the bullion. It might be levied upon the bullion, either upon its importation from abroad; or, if the mine were within the country, upon its issuing from the mine.

A tax upon coinage is the same thing, in effect, with what has been called a seignorage. It is the paying of something more for the coins, than the quantity of bullion of which they are composed.

The effect of this is evident, when a currency consists entirely of the metals. No man will carry bullion to be coined, unless the metal in the coin is of as much more value than the bullion, as the amount of the tax. The currency, therefore, is raised in value; that is to say, the metal in the state of currency is raised in value, to an amount equal to that of the tax.

This is a tax which possesses the peculiar property of falling upon nobody. It falls not upon the man who carries bullion to be coined, because he carries it only when the coins are equal in value to the tax and bullion together. It falls not upon the persons to whom the coins are paid as the medium of exchange; because they are of the same value to them as if they contained the whole of the bullion for which they will exchange.

This is a tax, therefore, which ought always to be carried as far as the peculiar limit to which it is subject will admit. The limit to which it is subject, is the inducement to illicit coining. If the tax is raised so high as to pay the coiner for his expenses and the risk of detection, illicit coinage is ensured.

In a country, in which paper circulates along with gold, the paper has a tendency to prevent the effect of a seignorage.

It is the interest of those who issue paper, to maintain in circulation as great a quantity of it as they can. They may go on increasing the quantity, till it becomes the interest of those who hold their notes to bring the notes to them for coins.

It is the interest of those who are the possessors of notes, to carry them to the bank for coins, only when there is a profit by melting. The coins, as coins, are not more valuable than the paper, so long as they circulate, without a premium, along with the paper. But if the paper has been issued in great quantity, the value of the currency may be so reduced, that the metal in the coins may be of more value as bullion than as coin. Melting for the sake of this profit, is the only check upon the quantity of a paper money convertible into coins at the option of the holder.

It is very obvious, that if coins are issued under a seignorage, with the metal in the coins of greater value than the metal in the state of bullion, the coins can be retained of that value only if the currency is limited in amount. When paper is issued without restriction, that limit is removed. The paper issued increases the quantity of currency, till the metal in the coins is reduced, first to the same value as that in bullion, next to a less value. At that point it becomes the interest of individuals to demand coins at the bank, for the purpose of melting; and then it is the interest of the bank to contract its issues.

A very simple, however, and a very effectual expedient, is capable of being adopted, for preventing this effect of a paper currency. That is an obligation on the bank to pay for its notes, either in coins, or in bullion, at the option of the holder. Suppose that an ounce of gold is coined into 3l., deducting five per cent. for seignorage, and suppose that a bank which issues notes is bound to pay, on demand, not only 3l. of coins, but an ounce of bullion, if preferred; it is evident that the bank, in that case has an interest in preventing the currency from sinking in value. If the currency is so high in value that 3l. of currency is really equal in value to an ounce of bullion, the bank loses nothing by being obliged to give for it an ounce of bullion; if it is so depressed in value that 3l. is not worth an ounce of bullion, it does lose. The check upon the issue of paper is thus made to operate earlier.

A tax upon the precious metals, when imported, or extracted from the mines, would, as far as the metals were destined to the ordinary purposes of use or ornament, fall upon the consumers: it would, as far as the metals were used for currency, fall upon nobody.

It would raise the exchangeable value of the metal. But a smaller quantity of a valuable metal is not less convenient as the medium of exchange, than a greater quantity of a less valuable. It would be expedient, therefore, to derive as much as possible from this source. The facility, however, of carrying and concealing a commodity which involves a great value in small dimensions, renders it a source from which much cannot be derived. Under a very moderate duty, illicit importation would be unavoidable.

Though a tax upon the precious metals, as imported, or issued from the mines, would, like all other taxes upon particular commodities, fall ultimately upon the consumer, it would not do so immediately. That which enables the producers, when a tax is laid upon any commodity, to throw the burden upon the consumers, is the power they have of raising the price, by lessening the supply. Of most commodities, the quantity in use is speedily consumed. The annual supply bears, therefore, a great proportion to the quantity in use; and if it is withheld, or only a part of it withheld, the supply becomes so far diminished as greatly to raise the price. The case is different with the precious metals. If the annual supply were wholly withheld, it would, for some time, make no great defalcation from the quantity in use. It would, therefore, have little effect upon prices. During that interval the sellers of the metals would not be indemnified. During that time, more or less of the tax would fall upon them.

The same observation applies to houses, and all other commodities of which the quantity in use is great in proportion to the annual supply.