Key Arguments

• Smith notes the history and motive of the law: 'The law for the encouragement of the coinage, by rendering it duty-free, was first enacted during the reign of Charles II. for a limited time, and afterwards continued, by different prolongations, till 1769, when it was rendered perpetual. The bank of England, in order to replenish their coffers with money, are frequently obliged to carry bullion to the mint; and it was more for their interest, they probably imagined, that the coinage should be at the expense of the government than at their own.'
• He attributes its perpetuation to political deference to the Bank: 'It was probably out of complaisance to this great company, that the government agreed to render this law perpetual.'
• Through a series of hypotheticals with different seignorage rates and degrees of underweight coin, he shows that the Bank’s overall loss per transaction would have been exactly the same 2% with or without seignorage when coin was 2% below standard weight.
• He generalizes that when coin is at full weight, seignorage is neutral for those sending bullion to the mint: 'If there was a reasonable seignorage, while at the same time the coin contained its full standard weight, as it has done very nearly since the late recoinage, whatever the bank might lose by the seignorage, they would gain upon the price of the bullion; and whatever they might gain upon the price of the bullion, they would lose by the seignorage. They would neither lose nor gain, therefore, upon the whole transaction.'
• Using the analogy of other taxed commodities, he argues that with a moderate coinage duty 'every body advances the tax, nobody finally pays it,' because the advanced value of coin recoups it: 'A moderate seignorage, therefore, would not, in any case, augment the expense of the bank, or of any other private persons who carry their bullion to the mint in order to be coined; and the want of a moderate seignorage does not in any case diminish it.'
• Therefore, government generosity is pointless: 'The government, therefore, when it defrays the expense of coinage, not only incurs some small expense, but loses some small revenue which it might get by a proper duty; and neither the bank, nor any other private persons, are in the smallest degree benefited by this useless piece of public generosity.'
• Smith acknowledges that in the present full‑weight, weighed‑coin regime the Bank would not gain by introducing seignorage, which explains their likely opposition; but he adds that if weighing falls into disuse and the coin again degrades, then 'the gain, or more properly the savings, of the bank, in consequence of the imposition of a seignorage, would probably be very considerable.'
• He quantifies the potential saving, contrasting the extraordinary £850,000 annual coinage before reformation and the Bank’s roughly 2.5% loss (over £21,250) with the effect of a 4–5% seignorage that 'would probably ... have put an effectual stop to the business both of exportation and of the melting pot,' reducing this loss to less than a tenth.

Source Quotes

It is the best and heaviest pieces that are commonly either melted down or exported, because it is upon such that the largest profits are made. The law for the encouragement of the coinage, by rendering it duty-free, was first enacted during the reign of Charles II. for a limited time, and afterwards continued, by different prolongations, till 1769, when it was rendered perpetual. The bank of England, in order to replenish their coffers with money, are frequently obliged to carry bullion to the mint; and it was more for their interest, they probably imagined, that the coinage should be at the expense of the government than at their own.

The bank of England, in order to replenish their coffers with money, are frequently obliged to carry bullion to the mint; and it was more for their interest, they probably imagined, that the coinage should be at the expense of the government than at their own. It was probably out of complaisance to this great company, that the government agreed to render this law perpetual. Should the custom of weighing gold, however, come to be disused, as it is very likely to be on account of its inconveniency; should the gold coin of England come to be received by tale, as it was before the late recoinage this great company may, perhaps, find that they have, upon this, as upon some other occasions, mistaken their own interest not a little.

If there was a reasonable seignorage, while at the same time the coin contained its full standard weight, as it has done very nearly since the late recoinage, whatever the bank might lose by the seignorage, they would gain upon the price of the bullion; and whatever they might gain upon the price of the bullion, they would lose by the seignorage. They would neither lose nor gain, therefore, upon the whole transaction, and they would in this, as in all the foregoing cases, be exactly in the same situation as if there was no seignorage. When the tax upon a commodity is so moderate as not to encourage smuggling, the merchant who deals in it, though he advances, does not properly pay the tax, as he gets it back in the price of the commodity.

When the tax upon coinage, therefore, is so moderate as not to encourage false coining, though every body advances the tax, nobody finally pays it; because every body gets it back in the advanced value of the coin. A moderate seignorage, therefore, would not, in any case, augment the expense of the bank, or of any other private persons who carry their bullion to the mint in order to be coined; and the want of a moderate seignorage does not in any case diminish it. Whether there is or is not a seignorage, if the currency contains its full standard weight, the coinage costs nothing to anybody; and if it is short of that weight, the coinage must always cost the difference between the quantity of bullion which ought to be contained in it, and that which actually is contained in it.

Whether there is or is not a seignorage, if the currency contains its full standard weight, the coinage costs nothing to anybody; and if it is short of that weight, the coinage must always cost the difference between the quantity of bullion which ought to be contained in it, and that which actually is contained in it. The government, therefore, when it defrays the expense of coinage, not only incurs some small expense, but loses some small revenue which it might get by a proper duty; and neither the bank, nor any other private persons, are in the smallest degree benefited by this useless piece of public generosity. The directors of the bank, however, would probably be unwilling to agree to the imposition of a seignorage upon the authority of a speculation which promises them no gain, but only pretends to insure them from any loss.

In the present state of the gold coin, and as long as it continues to be received by weight, they certainly would gain nothing by such a change. But if the custom of weighing the gold coin should ever go into disuse, as it is very likely to do, and if the gold coin should ever fall into the same state of degradation in which it was before the late recoinage, the gain, or more properly the savings, of the bank, in consequence of the imposition of a seignorage, would probably be very considerable. The bank of England is the only company which sends any considerable quantity of bullion to the mint, and the burden of the annual coinage falls entirely, or almost entirely, upon it.

Key Concepts

• The law for the encouragement of the coinage, by rendering it duty-free, was first enacted during the reign of Charles II. for a limited time, and afterwards continued, by different prolongations, till 1769, when it was rendered perpetual.
• It was probably out of complaisance to this great company, that the government agreed to render this law perpetual.
• They would neither lose nor gain, therefore, upon the whole transaction, and they would in this, as in all the foregoing cases, be exactly in the same situation as if there was no seignorage.
• A moderate seignorage, therefore, would not, in any case, augment the expense of the bank, or of any other private persons who carry their bullion to the mint in order to be coined; and the want of a moderate seignorage does not in any case diminish it.
• The government, therefore, when it defrays the expense of coinage, not only incurs some small expense, but loses some small revenue which it might get by a proper duty; and neither the bank, nor any other private persons, are in the smallest degree benefited by this useless piece of public generosity.
• if the gold coin should ever fall into the same state of degradation in which it was before the late recoinage, the gain, or more properly the savings, of the bank, in consequence of the imposition of a seignorage, would probably be very considerable.

Context

Large central section of the passage, where Smith evaluates who actually benefits from free coinage, models the Bank of England’s position under different assumptions, and argues that free coinage mainly harms the public treasury while giving the Bank no real advantage except in a hypothetical future degradation scenario where seignorage would save it large sums.