The Wealth of Nations

BOOK ONE

About the Reasons for Better Work Efficiency and How What’s Made is Naturally Shared Among Different Groups of People

CHAPTER I: THE DIVISION OF LABOR

The biggest improvements in how much work people can get done, and most of the skill, speed, and good judgment used in doing work, seem to come from the division of labor.

Understanding the Division of Labor

It’s easier to understand how the division of labor affects society’s overall business if we look at how it works in specific industries. People often think it’s taken furthest in some very small industries. This isn’t necessarily because it’s truly more divided in them than in more important ones. Rather, in these small industries that make items for just a few people, the total number of workers is small. Often, everyone involved in different steps of the work can be gathered in the same workshop and be seen at once.

In large industries, however, which make things for many people, each step of the work employs so many workers that it’s impossible to gather them all in one place. We can usually only see the workers in one single branch at a time. So, even though the work in such large industries might actually be divided into many more parts than in smaller ones, this division is not as obvious and has been noticed much less.

An Example: Making Pins

Let’s take an example from a very small industry, but one where the division of labor is often mentioned: pin-making.

• A worker not trained in this specific business (which has become a distinct trade due to the division of labor) and not familiar with the machinery used (which the division of labor likely helped invent) could perhaps, even with his best effort, make only one pin in a day. He certainly couldn’t make twenty.

But here’s how the business is carried on now:

• The whole work of pin-making is a specialized trade.
• It’s divided into many branches, most of which are also specialized trades themselves.

The process involves about eighteen distinct steps:

1. One person draws out the wire.
2. Another straightens it.
3. A third cuts it.
4. A fourth points it.
5. A fifth grinds the top to prepare it for the head.
6. Making the head itself requires two or three separate operations.
7. Putting the head on is a specialized task.
8. Whitening the pins is another.
9. Even putting the pins into the paper is a trade by itself.

In some factories, all these eighteen operations are performed by different workers. In others, one person might do two or three of them.

I once saw a small factory like this that employed only ten men. Because there were so few workers, some of them performed two or three distinct operations. But even though they were very poor and didn’t have the best machinery, when they really tried, they could make about twelve pounds of pins in a day. A pound of medium-sized pins contains over four thousand pins. So, those ten people could make over forty-eight thousand pins in a day. This means each person, making a tenth of the total, could be considered to be making four thousand eight hundred pins a day.

But if they had all worked separately and independently, without any of them being trained in this specific business, they certainly could not each have made twenty pins, perhaps not even one pin, in a day. That’s definitely not even 1/240th, and perhaps not even 1/4800th, of what they can achieve now because of the proper division and combination of their different tasks.

Effects in Other Industries

In every other craft and industry, the effects of the division of labor are similar to what they are in this very small one, though in many, the labor cannot be subdivided quite as much, nor can each operation be made as simple. However, wherever the division of labor can be introduced, it causes a proportional increase in how much workers can produce. The separation of different trades and jobs from one another seems to have happened because of this advantage.

This separation is also generally carried furthest in countries that have the highest level of industry and development. What is the work of one person in an early, less developed society is generally the work of several people in a more developed one.

• In every developed society, a farmer is usually just a farmer.
• A manufacturer is just a manufacturer.

The labor needed to produce any single complete manufactured item is almost always divided among many hands. Think about how many different trades are employed in each branch of making linen and woolen fabrics:

• From the growers of the flax and the wool.
• To the bleachers and smoothers of the linen.
• Or to the dyers and finishers of the cloth!

Limitations in Agriculture

The nature of agriculture, however, does not allow for as many subdivisions of labor, nor as complete a separation of one job from another, as in manufacturing.

• It’s impossible to separate the business of a cattle farmer from that of a grain farmer as completely as the trade of a carpenter is usually separated from that of a blacksmith.
• A spinner is almost always a different person from a weaver.
• But the plowman, the person who harrows the field, the sower of the seed, and the reaper of the grain are often the same person. Since the need for these different kinds of labor comes at different seasons of the year, it’s impossible for one person to be constantly employed in any single one of them.

This difficulty in making a complete separation of all the different branches of labor in agriculture is perhaps why improvements in farming productivity do not always keep pace with improvements in manufacturing. Wealthy nations generally do better than their neighbors in both agriculture and manufacturing. But they are usually more known for their superiority in manufacturing than in farming. Their lands are generally better cultivated and, with more labor and expense put into them, produce more for their size and natural fertility. But this higher produce is seldom much more than what you’d expect given the extra labor and expense. In agriculture, the labor of a rich country is not always much more productive than that of a poor one. Or, at least, it’s never as much more productive as it commonly is in manufacturing. Therefore, the grain of a rich country will not always be cheaper in the market than that of a poor country, assuming the same quality.

• Polish grain, of the same quality, is as cheap as French grain, even though France is wealthier and more developed.
• French grain, in its grain-producing regions, is just as good as English grain and, in most years, about the same price, even though France is perhaps less wealthy and developed than England. English farmlands, however, are better cultivated than those of France, and French farmlands are said to be much better cultivated than those of Poland. But even though a poor country, despite its less advanced farming, can sometimes compete with a rich one in the cheapness and goodness of its grain, it cannot compete in its manufactured goods, at least if those manufactures suit the soil, climate, and situation of the rich country.
• French silks are better and cheaper than English silks because silk manufacturing, at least with the current high taxes on importing raw silk, does not suit England’s climate as well as France’s.
• But English hardware and basic woolen fabrics are far superior to those of France, and also much cheaper for the same quality.
• In Poland, there are said to be hardly any manufactures of any kind, except for a few of the coarser household items that every country needs to survive.

Three Reasons for Increased Productivity

This great increase in the quantity of work that the same number of people can perform, as a result of the division of labor, is due to three different circumstances:

1. The increase of skill in every particular workman.
2. The saving of time that is commonly lost in passing from one type of work to another.
3. The invention of a great number of machines that make work easier and shorter, and enable one person to do the work of many.

First: Increased Skill

The improvement of a worker’s skill necessarily increases the amount of work he can perform. The division of labor, by reducing every person’s business to some one simple operation, and by making this operation the sole employment of his life, necessarily greatly increases the worker’s skill.

• A common blacksmith, who, though used to handling a hammer, has never made nails, will hardly be able to make more than two or three hundred very bad nails in a day if he is forced to try on some particular occasion.
• A blacksmith who has been accustomed to making nails, but whose main job has not been nail-making, can seldom make more than eight hundred or a thousand nails in a day, even with his best effort.
• I have seen several young men under twenty years of age who had never done any other trade but making nails. When they put their minds to it, each of them could make upwards of two thousand three hundred nails in a day. Making a nail, however, is by no means one of the simplest operations. The same person operates the bellows, tends the fire, heats the iron, and forges every part of the nail. In forging the head, he also has to change his tools. The different operations involved in making a pin or a metal button are all much simpler. The skill of a person whose life has been dedicated to performing these simple operations is usually much greater. The speed with which some of these manufacturing operations are performed is beyond what someone who has never seen them would think the human hand capable of achieving.

Second: Saving Time

The advantage gained by saving the time commonly lost in moving from one sort of work to another is much greater than we might at first imagine. It is impossible to move very quickly from one kind of work to another if it is carried on in a different place and with completely different tools.

• A country weaver who also cultivates a small farm must lose a good deal of time going from his loom to the field, and from the field back to his loom.
• When the two trades can be carried on in the same workshop, the loss of time is undoubtedly much less. Even in this case, however, it is very considerable. A person commonly lingers a little when changing from one sort of job to another. When he first begins the new work, he is seldom very focused or enthusiastic. His mind, as they say, does not go to it, and for some time he tends to fiddle around rather than apply himself effectively. The habit of lingering and of working carelessly, which is naturally, or rather necessarily, acquired by every country workman who has to change his work and his tools every half hour and apply his hand in twenty different ways almost every day of his life, makes him almost always slow and lazy. He becomes incapable of any vigorous effort even on the most pressing occasions. Therefore, separate from his lack of skill, this cause alone must always considerably reduce the quantity of work he is capable of performing.

Third: Invention of Machinery

Lastly, everybody must be aware of how much labor is made easier and shorter by the use of proper machinery. It is unnecessary to give any example. I shall only observe, therefore, that the invention of all those machines that so greatly ease and shorten labor seems to have originally been due to the division of labor.

Men are much more likely to discover easier and quicker methods of achieving any goal when their whole attention is directed towards that single goal, than when it is scattered among a great variety of things. Because of the division of labor, the whole of every man’s attention naturally comes to be directed towards some one very simple task. It is naturally to be expected, therefore, that some one or other of those employed in each particular branch of labor should soon find out easier and quicker methods of performing their own particular work, whenever the nature of it allows for such improvement.

A great part of the machines used in those industries where labor is most subdivided were originally the inventions of common workmen. Being employed in some very simple operation, they naturally turned their thoughts towards finding easier and quicker methods of performing it. Anyone who has often visited such factories must frequently have been shown very clever machines that were the inventions of such workmen, designed to make their own particular part of the work easier and faster.

In the first steam engines (then called fire-engines), a boy was constantly employed to open and shut a valve between the boiler and the cylinder, as the piston moved up or down. One of these boys, who loved to play with his friends, observed that by tying a string from the handle of the valve to another part of the machine, the valve would open and shut without his help. This left him free to go and play. One of the greatest improvements made to this machine since it was first invented was, in this manner, the discovery of a boy who wanted to save his own labor.

However, not all improvements in machinery have been the inventions of those who used the machines. Many improvements have been made by the ingenuity of the makers of the machines, when machine-making became a specialized trade. Some improvements have also come from those who are called philosophers or men of speculation (thinkers or researchers), whose trade it is not to do anything practical, but to observe everything. Because of this, they are often capable of combining the powers of the most distant and dissimilar objects.

In the progress of society, philosophy or speculation becomes, like every other employment, the main or sole occupation of a particular class of citizens. Like every other employment, it is subdivided into a great number of different branches, each of which provides work for a particular group of philosophers. This subdivision of employment in philosophy, as well as in every other business, improves skill and saves time. Each individual becomes more expert in his own particular branch, more work is done overall, and the quantity of scientific knowledge is considerably increased by it.

Universal Wealth from Division of Labor

It is the great increase in the production of all the different crafts and industries, as a consequence of the division of labor, that causes, in a well-governed society, that universal wealth which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to sell, beyond what he himself needs. Since every other workman is in exactly the same situation, he is able to exchange a great quantity of his own goods for a great quantity of theirs (or, what amounts to the same thing, for the price of a great quantity of theirs). He supplies them abundantly with what they need, and they provide him just as amply with what he needs. A general plenty spreads itself through all the different ranks of society.

The Complexity Behind Simple Goods

Observe the lifestyle of the most common craftsman or day-laborer in a civilized and thriving country. You will see that the number of people whose industry has been partly employed in providing him with this lifestyle exceeds all calculation. The woolen coat, for example, which covers the day-laborer, as coarse and rough as it may appear, is the product of the combined labor of a great multitude of workmen.

• The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler (who prepares wool for spinning), the spinner, the weaver, the fuller (who cleans and thickens cloth), the dresser (who finishes cloth), with many others, must all combine their different skills to complete even this simple item.
• Besides these, how many merchants and carriers must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country!
• How many merchants and carriers, and also how many ship-builders, sailors, sail-makers, and rope-makers, must have been employed to bring together the different dyes and other chemicals used by the dyer, which often come from the remotest corners of the world! What a variety of labor, too, is necessary in order to produce the tools of even the least skilled of those workmen!

Let’s not even talk about complicated machines like a sailor’s ship, a fuller’s mill (for treating cloth), or even a weaver’s loom. Just think about the amount of different work needed to make a very simple machine: the shears the shepherd uses to clip wool.

• The miner who digs the ore.
• The builder of the furnace for melting the ore.
• The person who fells the timber.
• The charcoal burner whose charcoal is used in the smelting-house.
• The brick-maker.
• The brick-layer.
• The workers who operate the furnace.
• The mill-wright (who designs or builds mills).
• The forger.
• The smith. All of them must use their different skills just to produce these shears.

If we were to look in the same way at all the different parts of his clothes and household furniture:

• The coarse linen shirt he wears next to his skin.
• The shoes that cover his feet.
• The bed he lies on, and all its different parts.
• The kitchen grate where he prepares his food.
• The coals he uses for that purpose, dug from deep in the earth and perhaps brought to him by a long sea journey and then a long land journey.
• All the other tools in his kitchen.
• All the furniture on his table: the knives and forks, the earthenware or pewter plates on which he serves and divides his food.
• The different workers involved in preparing his bread and his beer.
• The glass window that lets in heat and light and keeps out wind and rain – including all the knowledge and skill needed for preparing that beautiful and useful invention, without which these northern parts of the world would hardly offer a very comfortable place to live.
• Add to this the tools of all the different workmen employed in producing these various conveniences.

If we examine, I say, all these things and consider the variety of labor involved in each, we will realize that without the help and cooperation of many thousands of people, even the poorest person in a civilized country could not be provided for, even in what we wrongly imagine to be an easy and simple manner.

Compared, indeed, with the more extravagant luxury of the rich and powerful, this poor person’s accommodation must no doubt seem extremely simple. And yet, it may be true, perhaps, that the lifestyle of a European prince does not always exceed that of an industrious and thrifty peasant as much as the peasant’s lifestyle exceeds that of many an African king, who is the absolute master of the lives and liberties of ten thousand naked people.

CHAPTER II: THE REASON FOR THE DIVISION OF LABOR

This division of labor, which brings so many advantages, is not originally the result of any human wisdom that foresees and intends the general wealth it leads to. Instead, it is the necessary, though very slow and gradual, consequence of a certain natural tendency in human nature. This tendency has no such broad usefulness in mind; it is the tendency to trade, barter, and exchange one thing for another.

Whether this tendency is one of those original principles in human nature that cannot be further explained, or whether, as seems more probable, it is a necessary consequence of our abilities to reason and speak, is not our current topic of inquiry. This tendency is common to all humans and is found in no other species of animals, which seem to know neither this nor any other kind of contract or agreement.

• Two greyhounds chasing the same rabbit sometimes appear to be working together. Each dog turns the rabbit towards its companion, or tries to intercept it when its companion turns the rabbit towards itself. However, this is not the result of any contract, but of their desires accidentally focusing on the same thing at the same time.
• Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.
• Nobody ever saw one animal, by its gestures and natural cries, indicate to another: “This is mine, that is yours; I am willing to give this for that.”

When an animal wants to get something from a human or another animal, its only way to persuade is to gain the favor of those whose help it needs.

• A puppy fawns on its mother.
• A spaniel tries a thousand tricks to get the attention of its master who is at dinner, when it wants to be fed. Humans sometimes use the same tactics with each other. When they have no other way to get others to act as they wish, they try by every overly humble and flattering behavior to gain their goodwill. However, a person doesn’t have time to do this on every occasion. In a civilized society, a person constantly needs the cooperation and help of many people, while his whole life is hardly enough time to gain the friendship of just a few.

In almost every other species of animal, each individual, when it reaches maturity, is entirely independent. In its natural state, it does not need the help of any other living creature. But humans almost constantly need the help of their fellow humans, and it is useless for them to expect it from their kindness alone. A person will be more likely to succeed if he can appeal to their self-love (self-interest) in his favor, and show them that it is to their own advantage to do for him what he asks of them. Whoever offers another person a bargain of any kind is proposing to do this. “Give me that which I want, and you shall have this which you want,” is the meaning of every such offer. It is in this way that we obtain from one another the vast majority of the helpful services we need.

It is not from the kindness of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We appeal not to their humanity but to their self-love, and we never talk to them about our own necessities but about their advantages. Nobody but a beggar chooses to depend mainly on the kindness of his fellow citizens. Even a beggar does not depend on it entirely. The charity of kind-hearted people indeed supplies him with all his basic needs. But though this kindness ultimately provides him with all the necessities of life he needs, it neither does nor can provide them for him exactly when he needs them. Most of his occasional wants are supplied in the same way as those of other people: by agreement, by barter (swapping), and by purchase.

• With the money one person gives him, he buys food.
• The old clothes another person gives him, he exchanges for other old clothes that suit him better, or for lodging, or for food, or for money with which he can buy food, clothes, or lodging, as he needs.

How Trading Leads to Specialization

Just as it is by agreement, barter, and purchase that we get most of the mutual help we need from each other, it is this same trading disposition that originally gives rise to the division of labor.

• In a tribe of hunters or shepherds, one person, for example, makes bows and arrows with more skill and speed than any other. He frequently exchanges them for cattle or deer meat with his companions. He eventually finds that he can get more cattle and deer meat this way than if he himself went to the field to catch them. Therefore, out of regard for his own interest, making bows and arrows becomes his main business, and he becomes a sort of weapon-maker.
• Another person excels in making the frames and covers of their little huts or movable houses. He is used to helping his neighbors in this way, and they reward him similarly with cattle and deer meat. At last, he finds it in his interest to dedicate himself entirely to this work and become a sort of house-carpenter.
• In the same way, a third person becomes a smith or a worker of brass. A fourth becomes a tanner or someone who prepares animal hides or skins, which are the main clothing material for people in simple societies.

And so, the certainty of being able to exchange all the surplus part of what his own labor produces (which is over and above his own consumption) for such parts of other men’s labor as he may need, encourages every person to apply himself to a particular occupation. It encourages him to cultivate and bring to perfection whatever talent or genius he may possess for that specific type of business.

Talent: A Result, Not Just a Cause, of Division of Labor

The difference in natural talents among different people is, in reality, much less than we are aware of. The very different kinds of genius that seem to distinguish people in different professions, when they are mature, are often not so much the cause as the effect of the division of labor. The difference between the most dissimilar characters – between a philosopher and a common street porter, for example – seems to arise not so much from nature as from habit, custom, and education. When they came into the world, and for the first six or eight years of their lives, they were perhaps very much alike. Neither their parents nor their playmates could see any remarkable difference. Around that age, or soon after, they come to be employed in very different occupations. The difference in their talents then begins to be noticed and widens by degrees, until at last the vanity of the philosopher makes him willing to acknowledge hardly any resemblance.

But without the tendency to trade, barter, and exchange, every person would have had to get for himself every necessity and convenience of life that he wanted. All would have had the same duties to perform and the same work to do. There could have been no such difference of employment as could alone give rise to any great difference in talents.

Just as this trading disposition forms that difference of talents so remarkable among people of different professions, it is this same disposition that makes that difference useful. Many tribes of animals acknowledged to be all of the same species get from nature a much more remarkable distinction of genius than what appears among humans before custom and education. By nature, a philosopher is not half as different in genius and disposition from a street porter as a mastiff is from a greyhound, or a greyhound from a spaniel, or this last from a shepherd’s dog. Those different tribes of animals, however, though all of the same species, are of hardly any use to one another. The strength of the mastiff is not in the least supported by the swiftness of the greyhound, or by the cleverness of the spaniel, or by the gentleness of the shepherd’s dog. The effects of these different geniuses and talents, for want of the power or tendency to barter and exchange, cannot be brought into a common stock. They do not in the least contribute to the better accommodation and convenience of their species. Each animal is still obliged to support and defend itself, separately and independently. It gets no sort of advantage from that variety of talents with which nature has distinguished its fellows. Among humans, on the contrary, the most dissimilar geniuses are useful to one another. The different products of their respective talents, by the general tendency to trade, barter, and exchange, are brought, as it were, into a common stock, where every person may purchase whatever part of the produce of other men’s talents he needs.

CHAPTER III: THE DIVISION OF LABOR IS LIMITED BY THE SIZE OF THE MARKET

Just as it is the power of exchanging that gives rise to the division of labor, the extent of this division must always be limited by the extent of that power of exchanging – in other words, by the size of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment. This is because he lacks the ability to exchange all the surplus part of his own labor’s produce (what is over and above his own consumption) for the parts of other men’s labor’s produce that he needs.

There are some sorts of industry, even of the lowest kind, which can only be carried on in a great town. A porter (someone who carries goods for others), for example, can find employment and earn a living in no other place. A village is much too small an area for him; even an ordinary market town is hardly large enough to give him constant work. In the isolated houses and very small villages scattered about in a sparsely populated country like the Highlands of Scotland, every farmer must be his own butcher, baker, and brewer for his family. In such situations, we can hardly expect to find even a smith, a carpenter, or a mason within less than twenty miles of another of the same trade. The scattered families that live eight or ten miles from the nearest of them must learn to perform many small tasks themselves, for which, in more populous countries, they would call in the help of those workmen.

Country workmen are almost everywhere obliged to apply themselves to all the different branches of industry that are similar enough to involve working with the same sort of materials.

• A country carpenter deals in every sort of work made of wood: he is not only a carpenter, but also a joiner (who does finer woodwork), a cabinet-maker, and even a wood carver, as well as a wheelwright (maker of wheels), a plow-wright (maker of plows), and a cart and wagon maker.
• The employments of a country smith are still more varied. It is impossible there should be such a specialized trade as even that of a nail-maker in the remote and inland parts of the Highlands of Scotland. Such a workman, making a thousand nails a day, and working three hundred days in the year, will make three hundred thousand nails in the year. But in such a remote situation, it would be impossible to sell one thousand nails, that is, one day’s work, in the entire year.

Water Transport Expands the Market

Since water transport opens a more extensive market to every sort of industry than land transport alone can, it is upon the sea-coast and along the banks of navigable rivers that industry of every kind naturally begins to subdivide and improve itself. It is frequently not until a long time after that these improvements extend to the inland parts of the country.

A large wagon with wide wheels, operated by two men and drawn by eight horses, takes about six weeks to carry nearly four tons of goods from London to Edinburgh and back. In about the same time, a ship sailed by six or eight men, traveling between the ports of London and Leith (near Edinburgh), frequently carries and brings back two hundred tons of goods. Therefore, six or eight men, with the help of water transport, can carry and bring back in the same time the same quantity of goods between London and Edinburgh as fifty large wagons, attended by a hundred men, and drawn by four hundred horses. Upon two hundred tons of goods, therefore, carried by the cheapest land transport from London to Edinburgh, one must charge for the maintenance of a hundred men for three weeks, and both the maintenance and the wear and tear (which is nearly equal to the maintenance) of four hundred horses as well as of fifty great wagons. In contrast, upon the same quantity of goods carried by water, one only needs to charge for the maintenance of six or eight men, and the wear and tear of a ship of two hundred tons capacity, together with the value of the higher risk, or the difference in insurance costs between land and water transport.

If there were no other communication between those two cities but by land transport, then no goods could be transported from one to the other, except those whose price was very high in proportion to their weight. They could carry on but a small part of the commerce that at present exists between them, and consequently could give but a small part of the encouragement that they at present mutually afford to each other’s industry. There could be little or no commerce of any kind between the distant parts of the world. What goods could bear the expense of land transport between London and Calcutta? Or if there were any so precious as to be able to support this expense, with what safety could they be transported through the territories of so many less civilized nations? Those two cities, however, at present carry on a very considerable commerce with each other, and by mutually providing a market, give a good deal of encouragement to each other’s industry.

Since these are the advantages of water transport, it is natural that the first improvements in crafts and industry should be made where this convenience opens the whole world as a market for the produce of every sort of labor. It is also natural that these improvements should always be much later in extending themselves into the inland parts of the country. The inland parts of the country can for a long time have no other market for most of their goods but the surrounding countryside, which separates them from the sea-coast and the great navigable rivers. The extent of their market, therefore, must for a long time be in proportion to the wealth and population of that surrounding country. Consequently, their improvement must always come after the improvement of that country. In our North American colonies, the plantations have constantly followed either the sea-coast or the banks of navigable rivers, and have hardly anywhere extended themselves to any considerable distance from both.

The nations that, according to the most reliable history, appear to have been first civilized, were those that dwelt round the coast of the Mediterranean Sea.

That sea, the Mediterranean, is by far the largest inlet of water known in the world. It has no tides, and therefore no waves except those caused by the wind. Because of its smooth surface, its many islands, and its nearby coastlines being close together, it was extremely favorable for the early beginnings of sea travel. In those early times, people did not know how to use a compass and were afraid to sail out of sight of the coast. They were also afraid to risk themselves on the rough waves of the open ocean due to the imperfect art of shipbuilding. To pass beyond the Pillars of Hercules (that is, to sail out of the Straits of Gibraltar) was, in the ancient world, long considered a most amazing and dangerous feat of sailing. It was late before even the Phoenicians and Carthaginians, the most skillful sailors and shipbuilders of those old times, attempted it. For a long time, they were the only nations that did.

Of all the countries on the coast of the Mediterranean Sea, Egypt seems to have been the first in which either farming or manufacturing were developed and improved to any significant degree. Upper Egypt extends only a few miles from the Nile River. In Lower Egypt, that great river breaks into many different canals. With the help of a little human effort, these canals seem tohave provided water transport not only between all the great towns but also between all the considerable villages, and even to many farmhouses in the country. This is much like the Rhine and Meuse rivers do in Holland today. The extent and easiness of this inland navigation was probably one of the main reasons for the early improvement of Egypt.

Improvements in farming and manufacturing also seem to have occurred very long ago in the provinces of Bengal in the East Indies (part of modern India and Bangladesh), and in some of the eastern provinces of China. However, the great age of these developments is not confirmed by historical records that people in our part of the world fully trust.

• In Bengal, the Ganges and several other great rivers form many navigable canals, similar to how the Nile does in Egypt.
• In the eastern provinces of China, too, several great rivers form a multitude of canals through their different branches. By connecting with one another, they provide an inland navigation system much more extensive than that of either the Nile or the Ganges, or perhaps even more than both of them put together. It is remarkable that neither the ancient Egyptians, nor the Indians, nor the Chinese encouraged foreign trade. Instead, they all seem to have gained their great wealth from this inland navigation.

All the inland parts of Africa, and all that part of Asia north of the Black Sea and Caspian Sea (ancient Scythia, modern Tartary and Siberia), seem to have remained in the same undeveloped and less advanced state throughout history as we find them today. The “Sea of Tartary” is the frozen Arctic Ocean, which does not allow for navigation. Although some of the greatest rivers in the world run through that country, they are too far from one another to support widespread commerce and communication. In Africa, there are none of those great sea inlets like the Baltic and Adriatic seas in Europe, the Mediterranean and Black seas in both Europe and Asia, or the gulfs of Arabia, Persia, India, Bengal, and Siam in Asia, to carry sea trade into the interior parts of that great continent. Furthermore, the great rivers of Africa are too far from one another to create any significant inland navigation. Besides, the commerce that any nation can carry on using a river that does not break into many branches or canals, and which runs into another country’s territory before it reaches the sea, can never be very large. This is because the nations who control that other territory can always block communication between the upper country and the sea. The navigation of the Danube River is of very little use to the different states of Bavaria, Austria, and Hungary, compared to what it would be if any one of them controlled its entire course until it flows into the Black Sea.

CHAPTER IV: THE ORIGIN AND USE OF MONEY

Once the division of labor has been thoroughly established, a person’s own labor can supply only a very small part of his wants. He supplies the far greater part of them by exchanging the surplus part of what his own labor produces (what is over and above his own consumption) for the parts of other men’s labor that he needs. Every person thus lives by exchanging, or becomes to some extent a merchant. Society itself grows to be what is properly a commercial society.

The Problem with Barter

But when the division of labor first began, this power of exchanging must frequently have been very difficult and awkward to carry out. Suppose one man has more of a certain commodity than he himself needs, while another has less. The first man would consequently be glad to get rid of his excess, and the second man would be glad to buy a part of this excess. But if this second man happens to have nothing that the first man needs, no exchange can be made between them.

• For example, a butcher has more meat in his shop than he himself can consume. The brewer and the baker would each be willing to purchase a part of it. But they have nothing to offer in exchange except the different products of their own trades (beer and bread), and the butcher already has all the bread and beer he immediately needs. In this case, no exchange can be made between them. The butcher cannot be their merchant, nor can they be his customers. They are all thus less helpful to one another.

To avoid the inconvenience of such situations, every sensible person in every period of society, after the division of labor was first established, must naturally have tried to manage his affairs in such a way as to always have on hand, besides the specific produce of his own industry, a certain quantity of some other commodity or other. This would be something he imagined few people would be likely to refuse in exchange for the produce of their industry.

Early Forms of Money

Many different commodities, it is probable, were successively thought of and used for this purpose.

• In the early ages of society, cattle are said to have been the common instrument of commerce. Though they must have been a most inconvenient form of money, in old times we find things were frequently valued according to the number of cattle given in exchange for them. Homer says the armor of Diomede cost only nine oxen, but that of Glaucus cost a hundred oxen.
• Salt is said to be the common instrument of commerce and exchange in Abyssinia (modern Ethiopia).
• A type of shell is used in some parts of the coast of India.
• Dried cod is used at Newfoundland.
• Tobacco in Virginia.
• Sugar in some of our West India colonies.
• Hides or dressed leather in some other countries.
• And there is to this day a village in Scotland where, I am told, it is not uncommon for a workman to carry nails instead of money to the baker’s shop or the pub.

Metals Become the Preferred Money

In all countries, however, people eventually seem to have been convinced by irresistible reasons to prefer metals above every other commodity for this purpose. Metals can not only be kept with as little loss as any other commodity (hardly anything is less perishable than they are), but they can also, without any loss, be divided into any number of parts. By melting (fusion), those parts can easily be reunited again. No other equally durable commodities possess this quality, and it, more than any other quality, makes them fit to be the instruments of commerce and circulation.

The man who wanted to buy salt, for example, and had nothing but cattle to give in exchange for it, would have been forced to buy salt to the value of a whole ox or a whole sheep at a time. He could seldom buy less than this, because what he was to give for it (the ox or sheep) could seldom be divided without loss. And if he wanted to buy more, he would, for the same reasons, have been forced to buy double or triple the quantity – that is, the value of two or three oxen, or two or three sheep. If, on the contrary, instead of sheep or oxen, he had metals to give in exchange, he could easily proportion the quantity of the metal to the precise quantity of the commodity which he immediately needed.

Different metals have been used by different nations for this purpose.

• Iron was the common instrument of commerce among the ancient Spartans.
• Copper among the ancient Romans.
• Gold and silver among all rich and commercial nations.

Those metals seem originally to have been used for this purpose in rough bars, without any stamp or coinage. For instance, the Roman writer Pliny tells us (based on the authority of Timaeus, an ancient historian) that until the time of Servius Tullius, the Romans had no coined money. Instead, they used unstamped bars of copper to purchase whatever they needed. These rough bars, therefore, performed the function of money at this time.

Problems with Unstamped Metals

The use of metals in this rough state came with two very significant inconveniences:

1. First, the trouble of weighing them.
2. Second, the trouble of assaying them (testing their purity).

In precious metals, where a small difference in quantity makes a great difference in value, even the business of weighing with proper exactness requires at least very accurate weights and scales. Weighing gold, in particular, is a delicate operation. In coarser metals, indeed, where a small error would be of little consequence, less accuracy would, no doubt, be necessary. Yet, we would find it excessively troublesome if every time a poor man needed to buy or sell a farthing’s worth of goods, he was obliged to weigh the farthing.

The operation of assaying is even more difficult and tedious. Unless a part of the metal is actually melted in a crucible with proper dissolving agents, any conclusion drawn from it is extremely uncertain. Before the establishment of coined money, however, unless people went through this tedious and difficult operation, they must always have been vulnerable to the worst kinds of fraud and deception. Instead of a pound weight of pure silver or pure copper, they might receive in exchange for their goods an adulterated mixture of the coarsest and cheapest materials, which had, however, been made to look like those metals on the outside.

The Invention of Coined Money

To prevent such abuses, to make exchanges easier, and thereby to encourage all sorts of industry and commerce, it has been found necessary, in all countries that have made any considerable advances towards improvement, to affix a public stamp upon certain quantities of such particular metals as were commonly used in those countries to purchase goods. Hence the origin of coined money and those public offices called mints. These institutions are of exactly the same nature as those of officials who certified the measure and quality of woolen and linen cloth. All of them are equally meant to certify, by means of a public stamp, the quantity and uniform goodness of those different commodities when brought to market.

The first public stamps of this kind affixed to the current metals seem in many cases to have been intended to certify what was both most difficult and most important to ascertain: the goodness or fineness of the metal. These stamps seem to have resembled the sterling mark which is currently affixed to silver plate and bars, or the Spanish mark which is sometimes affixed to gold ingots. These marks, being struck only on one side of the piece and not covering the whole surface, certify the fineness but not the weight of the metal. Abraham weighs to Ephron the four hundred shekels of silver which he had agreed to pay for the field of Machpelah. They are said, however, to be the current money of the merchant, and yet are received by weight and not by count (tale), in the same manner as gold ingots and silver bars are at present. The revenues of the ancient Saxon kings of England are said to have been paid not in money but in kind, that is, in food and supplies of all sorts. William the Conqueror introduced the custom of paying them in money. This money, however, was for a long time received at the treasury (exchequer) by weight and not by count.

The inconvenience and difficulty of weighing these metals with exactness led to the institution of coins, where the stamp, covering entirely both sides of the piece and sometimes the edges too, was supposed to certify not only the fineness but also the weight of the metal. Such coins, therefore, were received by count, as they are today, without the trouble of weighing.

Coin Names and Debasement

The names of these coins seem originally to have expressed the weight or quantity of metal contained in them.

• In the time of Servius Tullius, who first coined money at Rome, the Roman As or Pondo contained a Roman pound of good copper. It was divided in the same manner as our Troy pound, into twelve ounces, each of which contained a real ounce of good copper.
• The English pound sterling, in the time of Edward I, contained a pound (Tower weight) of silver of a known fineness. The Tower pound seems to have been slightly more than the Roman pound and slightly less than the Troy pound. This last was not introduced into the mint of England until the 18th year of Henry VIII’s reign.
• The French livre, in the time of Charlemagne, contained a pound (Troy weight) of silver of a known fineness. The fair of Troyes in Champagne was at that time frequented by all the nations of Europe, and the weights and measures of so famous a market were generally known and respected.
• The Scots money pound contained, from the time of Alexander I to that of Robert Bruce, a pound of silver of the same weight and fineness as the English pound sterling.
• English, French, and Scots pennies, too, all originally contained a real pennyweight of silver (the twentieth part of an ounce and the two-hundred-and-fortieth part of a pound). The shilling also seems originally to have been the name of a weight. An ancient statute of Henry III says: “When wheat is at twelve shillings the quarter, then wastel bread (a type of fine white bread) of a farthing shall weigh eleven shillings and four pence.” (Here, “shillings” and “pence” refer to units of weight for the bread, corresponding to the value of the coins). The proportion, however, between the shilling and either the penny on the one hand, or the pound on the other, seems not to have been as constant and uniform as that between the penny and the pound. During the first line of French kings, the French sou or shilling appears on different occasions to have contained five, twelve, twenty, and forty pennies. Among the ancient Saxons, a shilling appears at one time to have contained only five pennies, and it is not improbable that it may have been as variable among them as among their neighbors, the ancient Franks. From the time of Charlemagne among the French, and from that of William the Conqueror among the English, the proportion between the pound, the shilling, and the penny seems to have been uniformly the same as at present, though the value of each has been very different.

For in every country of the world, I believe, the greed and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal that had originally been contained in their coins.

• The Roman As, in the latter ages of the Republic, was reduced to one twenty-fourth of its original value and, instead of weighing a pound, came to weigh only half an ounce.
• The English pound and penny contain at present about a third only of their original value.
• The Scots pound and penny contain about a thirty-sixth of their original value.
• The French pound and penny contain about a sixty-sixth part of their original value. By means of these operations, the princes and sovereign states that performed them were enabled, in appearance, to pay their debts and fulfill their engagements with a smaller quantity of silver than would otherwise have been required. It was indeed in appearance only, for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations, therefore, have always proved favorable to the debtor and ruinous to the creditor. They have sometimes produced a greater and more universal revolution in the fortunes of private persons than could have been caused by a very great public calamity.

Money as a Universal Tool of Commerce

It is in this manner that money has become in all civilized nations the universal instrument of commerce, through the intervention of which goods of all kinds are bought and sold, or exchanged for one another.

What are the rules that people naturally observe in exchanging goods either for money or for one another? I shall now proceed to examine these. These rules determine what may be called the relative or exchangeable value of goods.

The word VALUE, it is to be observed, has two different meanings. Sometimes it expresses the utility of some particular object, and sometimes it expresses the power of purchasing other goods which the possession of that object conveys. The one may be called ‘value in use’; the other, ‘value in exchange’. The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use.

Nothing is more useful than water, but it will buy hardly anything; hardly anything can be gotten in exchange for it. A diamond, on the contrary, has hardly any value in use, but a very great quantity of other goods may frequently be had in exchange for it.

To investigate the principles that regulate the exchangeable value of commodities, I shall try to show:

1. First, what is the real measure of this exchangeable value; or, what makes up the real price of all commodities.
2. Second, what are the different parts that this real price is composed of or made up from.
3. And lastly, what are the different circumstances that sometimes raise some or all of these different parts of price above their natural or ordinary rate, and sometimes sink them below it; or, what are the causes that sometimes prevent the market price (that is, the actual price of commodities) from matching exactly what may be called their natural price.

I shall try to explain these three subjects as fully and clearly as I can in the three following chapters. For this, I must very earnestly ask for both the patience and attention of the reader:

• His patience to examine a detailed explanation that may perhaps in some places seem unnecessarily long and repetitive.
• His attention to understand what may, perhaps, even after the fullest explanation I am capable of giving, still seem somewhat unclear. I am always willing to risk being a bit tedious to be sure that I am clear. And even after taking the utmost pains that I can to be clear, some obscurity may still seem to remain upon a subject that is, by its very nature, extremely abstract.

THE PRICE OF COMMODITIES

CHAPTER V: THE REAL AND NOMINAL PRICE OF COMMODITIES, OR THEIR PRICE IN LABOR, AND THEIR PRICE IN MONEY

Every person is rich or poor according to the degree in which he can afford to enjoy the necessities, conveniences, and amusements of human life. But after the division of labor has once thoroughly taken place, a person’s own labor can supply him with only a very small part of these things. He must get the far greater part of them from the labor of other people. He must be rich or poor according to the quantity of that other people’s labor which he can command, or which he can afford to purchase.

The value of any commodity, therefore, to the person who possesses it and who does not mean to use or consume it himself but to exchange it for other commodities, is equal to the quantity of labor which it enables him to purchase or command. Labor, therefore, is the real measure of the exchangeable value of all commodities.

Labor as the Real Price

The real price of everything – what everything really costs to the person who wants to acquire it – is the toil and trouble of acquiring it. What everything is really worth to the person who has acquired it and who wants to sell it or exchange it for something else, is the toil and trouble which it can save himself, and which it can impose upon other people (by commanding their labor).

What is bought with money or with goods is purchased by labor, just as much as what we acquire by the toil of our own body. That money or those goods indeed save us this toil. They contain the value of a certain quantity of labor, which we exchange for what is supposed at the time to contain the value of an equal quantity. Labor was the first price – the original purchase-money that was paid for all things. It was not by gold or by silver, but by labor, that all the wealth of the world was originally purchased. And its value, to those who possess it and who want to exchange it for some new productions, is precisely equal to the quantity of labor which it can enable them to purchase or command.

Wealth as Purchasing Power

Wealth, as Mr. Hobbes says, is power. But the person who either acquires or inherits a great fortune does not necessarily acquire or inherit any political power, either civil or military. His fortune may, perhaps, give him the means of acquiring both, but the mere possession of that fortune does not necessarily give him either. The power which that possession immediately and directly gives him is the power of purchasing; a certain command over all the labor, or over all the produce of labor, which is then in the market. His fortune is greater or less, precisely in proportion to the extent of this power; or to the quantity either of other men’s labor, or, what is the same thing, of the produce of other men’s labor, which it enables him to purchase or command. The exchangeable value of everything must always be precisely equal to the extent of this purchasing power which it gives to its owner.

Why Labor Isn’t the Common Way to Estimate Value

But though labor is the real measure of the exchangeable value of all commodities, it is not how their value is commonly estimated. It is often difficult to determine the proportion between two different quantities of labor. The time spent in two different sorts of work will not always alone determine this proportion. The different degrees of hardship endured, and of skill (ingenuity) exercised, must also be taken into account. There may be more labor in an hour’s hard work than in two hours’ easy business; or in an hour’s application to a trade that took ten years’ labor to learn, than in a month’s industry at an ordinary and obvious job. But it is not easy to find any accurate measure of either hardship or skill. In exchanging the different productions of different sorts of labor for one another, some allowance is commonly made for both. It is adjusted, however, not by any accurate measure, but by the higgling and bargaining of the market, according to a sort of rough equality which, though not exact, is sufficient for carrying on the business of common life.

Besides, every commodity is more frequently exchanged for, and thereby compared with, other commodities than with labor. It is more natural, therefore, to estimate its exchangeable value by the quantity of some other commodity than by the quantity of labor it can purchase. Most people, too, understand better what is meant by a quantity of a particular commodity than by a quantity of labor. The one is a plain and tangible object; the other an abstract notion, which, though it can be made clear enough, is not altogether so natural and obvious.

Money as the Common Estimator of Value

But when barter ceases, and money has become the common instrument of commerce, every particular commodity is more frequently exchanged for money than for any other commodity. The butcher seldom carries his beef or his mutton to the baker or the brewer to exchange them for bread or for beer. Instead, he carries them to the market, where he exchanges them for money, and afterwards exchanges that money for bread and for beer. The quantity of money he gets for his meat also regulates the quantity of bread and beer he can afterwards purchase. It is more natural and obvious to him, therefore, to estimate the value of his meat by the quantity of money (the commodity for which he immediately exchanges it), than by the quantity of bread and beer (the commodities for which he can exchange it only by means of another commodity). He is more likely to say that his butcher’s meat is worth threepence or fourpence a pound, than that it is worth three or four pounds of bread, or three or four quarts of weak beer. Hence, it happens that the exchangeable value of every commodity is more frequently estimated by the quantity of money, than by the quantity either of labor or of any other commodity that can be had in exchange for it.

The Variability of Gold and Silver

Gold and silver, however, like every other commodity, vary in their value. They are sometimes cheaper and sometimes dearer, sometimes easier and sometimes more difficult to purchase. The quantity of labor that any particular quantity of them can purchase or command, or the quantity of other goods for which it will exchange, always depends on the fertility or barrenness of the mines that happen to be known around the time when such exchanges are made. The discovery of the abundant mines of America reduced, in the sixteenth century, the value of gold and silver in Europe to about a third of what it had been before. Because it cost less labor to bring those metals from the mine to the market, when they were brought there they could purchase or command less labor. This revolution in their value, though perhaps the greatest, is by no means the only one of which history gives some account.

But just as a measure of quantity, such as the natural foot, fathom, or handful, which is continually varying in its own quantity, can never be an accurate measure of the quantity of other things; so a commodity that is itself continually varying in its own value can never be an accurate measure of the value of other commodities.

Labor as the Ultimate Standard of Value

Equal quantities of labor, at all times and places, may be said to be of equal value to the laborer. In his ordinary state of health, strength, and spirits, and with his ordinary degree of skill, he must always give up the same portion of his ease, his liberty, and his happiness. The price he pays (in terms of his sacrifice) must always be the same, whatever the quantity of goods he receives in return for it. Indeed, his labor may sometimes purchase a greater and sometimes a smaller quantity of these goods; but it is their value which varies, not that of the labor which purchases them. At all times and places, that is dear which is difficult to get, or which costs much labor to acquire; and that is cheap which is to be had easily, or with very little labor. Labor alone, therefore, never varying in its own value (to the laborer), is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.

But though equal quantities of labor are always of equal value to the laborer, yet to the person who employs him they appear sometimes to be of greater and sometimes of smaller value. He purchases them sometimes with a greater and sometimes with a smaller quantity of goods, and to him, the price of labor seems to vary like that of all other things. It appears to him dear in one case, and cheap in the other. In reality, however, it is the goods which are cheap in the one case, and dear in the other.

Real vs. Nominal Price of Labor

In this popular sense, therefore, labor, like commodities, may be said to have a real price and a nominal price.

• Its real price may be said to consist in the quantity of the necessities and conveniences of life which are given for it.
• Its nominal price consists in the quantity of money given for it. The laborer is rich or poor, is well or ill rewarded, in proportion to the real, not to the nominal, price of his labor.

Practical Importance of the Distinction

The distinction between the real and the nominal price of commodities and labor is not just a matter of mere speculation, but may sometimes be of considerable use in practice. The same real price is always of the same value. But because of the variations in the value of gold and silver, the same nominal price (money price) is sometimes of very different values. When a landed estate, therefore, is sold with a provision for a perpetual rent, if it is intended that this rent should always be of the same value, it is important to the family for whom it is reserved that it should not consist in a particular sum of money. Its value in that case would be liable to variations of two different kinds:

1. First, to those which arise from the different quantities of gold and silver contained at different times in coins of the same name (e.g., a “pound” coin having less silver over time).
2. Second, to those which arise from the different values of equal quantities of gold and silver at different times (e.g., an ounce of silver buying less food over time).

Princes and sovereign states have frequently thought they had a temporary interest in diminishing the quantity of pure metal contained in their coins; but they seldom have thought they had any interest in increasing it. The quantity of metal contained in the coins, I believe of all nations, has accordingly been almost continually diminishing, and hardly ever increasing. Such variations, therefore, almost always tend to diminish the value of a money rent.

The discovery of the mines of America diminished the value of gold and silver in Europe. This diminution, it is commonly supposed (though I believe without any certain proof), is still going on gradually and is likely to continue to do so for a long time. Upon this supposition, therefore, such variations are more likely to diminish than to increase the value of a money rent, even if it should be specified to be paid, not in a certain quantity of coined money of a particular name (e.g., in so many pounds sterling), but in so many ounces of either pure silver or of silver of a certain standard purity.

Corn Rents vs. Money Rents

Rents that have been specified in corn (grain) have preserved their value much better than those specified in money, even where the name of the coin has not been altered. By a law passed in the 18th year of Queen Elizabeth’s reign, it was enacted that a third of the rent of all college leases should be specified in corn, to be paid either in actual corn or according to the current prices at the nearest public market. The money arising from this corn part of the rent, though originally only a third of the whole rent, is in the present times, according to Doctor Blackstone (a famous legal scholar), commonly near double what arises from the other two-thirds paid in money. The old money rents of colleges must, according to this account, have sunk to almost a fourth of their ancient value; or they are worth little more than a fourth of the corn they were formerly worth. But since the reign of Philip and Mary, the names of English coins have undergone little or no alteration, and the same number of pounds, shillings, and pence have contained very nearly the same quantity of pure silver. This decline, therefore, in the value of the money rents of colleges has arisen entirely from the decline in the value of silver itself.

When the decline in the value of silver is combined with the diminution of the quantity of silver contained in coins of the same name, the loss is frequently still greater. In Scotland, where the names of coins have undergone much greater alterations than they ever did in England, and in France, where they have undergone still greater alterations than in Scotland, some ancient rents, originally of considerable value, have in this manner been reduced almost to nothing.

Corn as a Long-Term Measure of Value

Equal quantities of labor will, at distant times, be purchased more nearly with equal quantities of corn (the subsistence of the laborer) than with equal quantities of gold and silver, or perhaps of any other commodity. Equal quantities of corn, therefore, will, at distant times, be more nearly of the same real value, or enable the possessor to purchase or command more nearly the same quantity of the labor of other people. They will do this, I say, more nearly than equal quantities of almost any other commodity; for even equal quantities of corn will not do it exactly. The subsistence of the laborer, or the real price of labor, as I shall try to show later, is very different on different occasions; more generous in a society advancing towards wealth than in one that is standing still, and more generous in one that is standing still than in one that is going backwards. Every other commodity, however, will at any particular time purchase a greater or smaller quantity of labor in proportion to the quantity of subsistence (food) which it can purchase at that time. A rent therefore specified in corn is liable only to the variations in the quantity of labor which a certain quantity of corn can purchase. But a rent specified in any other commodity is liable not only to the variations in the quantity of labor which any particular quantity of corn can purchase, but also to the variations in the quantity of corn which can be purchased by any particular quantity of that other commodity.

Though the real value of a corn rent, it is to be observed, varies much less from century to century than that of a money rent, it varies much more from year to year. The money price of labor, as I shall try to show later, does not fluctuate from year to year with the money price of corn. Instead, it seems to be everywhere adjusted, not to the temporary or occasional price of corn, but to the average or ordinary price of that necessary of life. The average or ordinary price of corn, again, is regulated, as I shall also try to show later, by the value of silver, by the richness or barrenness of the mines which supply the market with that metal, or by the quantity of labor which must be employed (and consequently of corn which must be consumed by that labor) to bring any particular quantity of silver from the mine to the market. But the value of silver, though it sometimes varies greatly from century to century, seldom varies much from year to year. It frequently continues the same, or very nearly the same, for half a century or a century together. The ordinary or average money price of corn, therefore, may, during such a long period, continue the same or very nearly the same too, and along with it the money price of labor – provided, at least, that the society continues, in other respects, in the same or nearly in the same condition. In the meantime, the temporary and occasional price of corn may frequently be double, one year, of what it had been the year before, or fluctuate, for example, from twenty-five to fifty shillings per quarter (a unit of volume).

But when corn is at the higher price, not only the nominal (money) value but also the real value of a corn rent will be double what it is when corn is at the lower price. This means it will command double the quantity either of labor or of most other commodities. This happens because the money price of labor, and along with it the price of most other things, tends to stay the same during these fluctuations in the price of corn.

Labor: The Only True Measure of Value

Labor, therefore, clearly appears to be the only universal, as well as the only accurate, measure of value. It is the only standard by which we can compare the values of different commodities at all times and in all places.

• We cannot, it is acknowledged, accurately estimate the real value of different commodities from century to century by the quantities of silver that were given for them.
• We cannot accurately estimate it from year to year by the quantities of corn.
• By the quantities of labor, however, we can, with the greatest accuracy, estimate value both from century to century and from year to year.

Comparing long periods (century to century), corn is a better measure of value than silver. This is because, over centuries, equal quantities of corn will command the same quantity of labor more consistently than equal quantities of silver will. Comparing short periods (year to year), on the contrary, silver is a better measure than corn. This is because, from one year to the next, equal quantities of silver will more consistently command the same quantity of labor.

Nominal vs. Real Price in Everyday Life

But even though it may be useful to distinguish between real and nominal price when establishing permanent rents, or even in setting up very long leases, this distinction is of no use in everyday buying and selling – the more common and ordinary transactions of human life.

At the same time and in the same place, the real and the nominal price of all commodities are exactly in proportion to one another. The more or less money you get for any commodity in the London market, for example, the more or less labor it will at that time and place enable you to purchase or command. At the same time and place, therefore, money is the exact measure of the real exchangeable value of all commodities. It is so, however, at the same time and place only.

Though at distant places there is no regular proportion between the real price (labor commanded) and the money price of commodities, the merchant who carries goods from one place to another has nothing to consider but their money price. He only looks at the difference between the quantity of silver for which he buys them and that for which he is likely to sell them.

• Half an ounce of silver at Canton in China may command a greater quantity both of labor and of the necessities and conveniences of life than an ounce of silver at London.
• A commodity, therefore, which sells for half an ounce of silver at Canton may there be really dearer (meaning it represents more labor or has more real importance to the person who possesses it there) than a commodity which sells for an ounce at London is to the person who possesses it at London.
• If a London merchant, however, can buy a commodity at Canton for half an ounce of silver and can later sell it at London for an ounce of silver, he gains a hundred percent by the bargain. This is just as true as if an ounce of silver in London had exactly the same real value as an ounce in Canton. It is of no importance to him that half an ounce of silver at Canton would have given him command over more labor and more necessities and conveniences than an ounce can in London. An ounce of silver in London will always give him command over double the quantity of all those things that half an ounce would have given him in Canton, and this (doubling his silver) is precisely what he wants.

Since it is the nominal or money price of goods, therefore, which finally determines the wisdom or unwisdom of all purchases and sales, and thereby regulates almost the whole business of common life where price is concerned, we cannot wonder that it has been so much more attended to than the real price.

In a work like this, however, it may sometimes be useful to compare the different real values of a particular commodity at different times and places. This means comparing the different degrees of power over the labor of other people which that commodity may have given to those who possessed it on different occasions. In this case, we must compare not so much the different quantities of silver for which it was commonly sold, but the different quantities of labor which those different quantities of silver could have purchased. But the current prices of labor at distant times and places can hardly ever be known with any degree of exactness. The prices of corn, though they have in few places been regularly recorded, are generally better known and have been more frequently noted by historians and other writers. We must generally, therefore, content ourselves with corn prices, not as being always exactly in the same proportion as the current prices of labor, but as being the nearest approximation which can commonly be had to that proportion. I shall later have occasion to make several comparisons of this kind.

The Standard Metal for Money

In the progress of industry, commercial nations have found it convenient to coin several different metals into money:

• Gold for larger payments.
• Silver for purchases of moderate value.
• Copper, or some other less expensive metal, for those of still smaller value.

They have always, however, considered one of those metals as more particularly the measure of value than any of the other two. This preference seems generally to have been given to the metal which they happened first to use as the instrument of commerce. Having once begun to use it as their standard (which they must have done when they had no other money), they have generally continued to do so even when the necessity was not the same.

The Romans are said to have had nothing but copper money until five years before the first Punic War (around 269 BCE), when they first began to coin silver. Copper, therefore, appears to have always remained the measure of value in that republic. At Rome, all accounts appear to have been kept, and the value of all estates to have been calculated, either in Asses or in Sestertii. The As was always the name of a copper coin. The word Sestertius means two and a half Asses. Though the Sestertius, therefore, was originally a silver coin, its value was estimated in copper. At Rome, someone who owed a great deal of money was said to have a great deal of other people’s copper.

The northern nations who established themselves upon the ruins of the Roman Empire seem to have had silver money from the very beginning of their settlements. They appear not to have known either gold or copper coins for several ages thereafter. There were silver coins in England in the time of the Saxons. But there was little gold coined until the time of Edward III, nor any copper until that of James I of Great Britain. In England, therefore, and for the same reason, I believe, in all other modern nations of Europe, all accounts are kept, and the value of all goods and of all estates is generally calculated in silver. When we mean to express the amount of a person’s fortune, we seldom mention the number of guineas (a gold coin), but the number of pounds sterling (originally a silver measure) which we suppose would be given for it.

Legal Tender and the Standard Metal

Originally, in all countries, I believe, a legal tender of payment (a payment that must be accepted by law) could be made only in the coin of that metal which was particularly considered as the standard or measure of value. In England, gold was not considered a legal tender for a long time after it was coined into money. The proportion between the values of gold and silver money was not fixed by any public law or proclamation but was left to be settled by the market. If a debtor offered payment in gold, the creditor might either reject such payment altogether or accept it at such a valuation of the gold as he and his debtor could agree upon. Copper is not at present a legal tender except for small amounts, as change for smaller silver coins. In this state of things, the distinction between the metal which was the standard and that which was not the standard was something more than just a nominal (in name only) distinction.

In the course of time, and as people became gradually more familiar with the use of the different metals in coin, and consequently better acquainted with the proportion between their respective values, it has in most countries, I believe, been found convenient to ascertain this proportion. They then declared by a public law that a guinea, for example, of such a weight and fineness, should exchange for twenty-one shillings, or be a legal tender for a debt of that amount. In this state of things, and as long as any one regulated proportion of this kind continues, the distinction between the metal which is the standard and that which is not the standard becomes little more than a nominal distinction.

Effects of Changing the Regulated Proportion

If there is any change, however, in this regulated proportion, this distinction becomes, or at least seems to become, something more than nominal again. If the regulated value of a guinea, for example, was either reduced to twenty shillings or raised to twenty-two shillings, with all accounts being kept and almost all obligations for debt being expressed in silver money:

• The greater part of payments could in either case be made with the same quantity of silver money as before.
• But these payments would require very different quantities of gold money: a greater quantity of gold in the first case (if the guinea is worth fewer shillings), and a smaller quantity in the second (if the guinea is worth more shillings). In this scenario, silver would appear to be more invariable in its value than gold. Silver would appear to measure the value of gold, and gold would not appear to measure the value of silver. The value of gold would seem to depend upon the quantity of silver for which it would exchange; and the value of silver would not seem to depend upon the quantity of gold for which it would exchange. This difference, however, would be entirely due to the custom of keeping accounts and of expressing the amount of all large and small sums in silver money rather than in gold money. One of Mr. Drummond’s (a banker of the time) notes for twenty-five or fifty guineas would, after an alteration of this kind in the guinea’s shilling value, still be payable with twenty-five or fifty guineas in the same manner as before. It would, after such an alteration, be payable with the same quantity of gold as before, but with very different quantities of silver. In the payment of such a note, gold would appear to be more invariable in its value than silver. Gold would appear to measure the value of silver, and silver would not appear to measure the value of gold. If the custom of keeping accounts, and of expressing promissory notes and other obligations for money in this manner (in gold units), should ever become general, gold, and not silver, would be considered as the metal which was peculiarly the standard or measure of value.

The Most Precious Metal Regulates Coin Value

In reality, as long as any one regulated proportion between the respective values of the different metals in coin continues, the value of the most precious metal regulates the value of the whole coin. Twelve copper pence contain half a pound (avoirdupois weight) of copper, of not the best quality. Before it is coined, this copper is seldom worth sevenpence in silver. But because by regulation twelve such pence are ordered to be exchanged for a shilling, they are in the market considered as worth a shilling, and a shilling can at any time be had for them. Even before the recent reformation of the gold coin of Great Britain, the gold (at least that part of it which circulated in London and its neighborhood) was generally less worn down below its standard weight than most of the silver. Twenty-one worn and damaged shillings, however, were considered as equivalent to a guinea (a gold coin), which perhaps was also worn and damaged, but seldom as much so. The recent regulations have brought the gold coin as near perhaps to its standard weight as it is possible to bring the current coin of any nation. The order to receive no gold at public offices except by weight is likely to keep it that way, as long as that order is enforced. The silver coin still continues in the same worn and degraded state as before the reformation of the gold coin. In the market, however, twenty-one shillings of this degraded silver coin are still considered as worth a guinea of this excellent gold coin.

The reformation of the gold coin has evidently raised the value of the silver coin which can be exchanged for it. In the English mint, a pound weight of gold is coined into forty-four and a half guineas. At twenty-one shillings per guinea, this is equal to forty-six pounds, fourteen shillings, and sixpence. An ounce of such gold coin, therefore, is worth £3 17s. 10½d. in silver. In England, no duty or seigniorage (a fee for coining money) is paid upon coinage. He who carries a pound weight or an ounce weight of standard gold bullion (uncoined gold) to the mint gets back a pound weight or an ounce weight of gold in coin, without any deduction. Therefore, £3 17s. 10½d. per ounce is said to be the mint price of gold in England, or the quantity of gold coin which the mint gives in return for standard gold bullion.

Before the reformation of the gold coin, the market price of standard gold bullion had for many years been upwards of £3 18s., sometimes £3 19s., and very frequently £4 an ounce. That sum, it is probable, in the worn and degraded gold coin of the time, seldom actually contained more than an ounce of standard gold. Since the reformation of the gold coin, the market price of standard gold bullion seldom exceeds £3 17s. 7d. an ounce. Before the reformation of the gold coin, the market price was always more or less above the mint price. Since that reformation, the market price has been constantly below the mint price. But that market price is the same whether it is paid in gold or in silver coin. The late reformation of the gold coin, therefore, has raised not only the value of the gold coin but also that of the silver coin in proportion to gold bullion, and probably too, in proportion to all other commodities. However, the price of most other commodities being influenced by so many other causes, the rise in the value either of gold or silver coin in proportion to them may not be so distinct and noticeable.

In the English mint, a pound weight of standard silver bullion is coined into sixty-two shillings, containing, in the same manner, a pound weight of standard silver. Five shillings and twopence an ounce, therefore, is said to be the mint price of silver in England, or the quantity of silver coin which the mint gives in return for standard silver bullion. Before the reformation of the gold coin, the market price of standard silver bullion was, on different occasions, five shillings and fourpence, five shillings and fivepence, five shillings and sixpence, five shillings and sevenpence, and very often five shillings and eightpence an ounce. Five shillings and sevenpence, however, seems to have been the most common price. Since the reformation of the gold coin, the market price of standard silver bullion has fallen occasionally to five shillings and threepence, five shillings and fourpence, and five shillings and fivepence an ounce, which last price it has rarely exceeded. Though the market price of silver bullion has fallen considerably since the reformation of the gold coin, it has not fallen as low as the mint price.

Relative Valuation of Metals in Coinage

In the proportion between the different metals in English coins, copper is rated very much above its real value, while silver is rated somewhat below its real value relative to gold.

• In the market of Europe, in French coins and in Dutch coins, an ounce of fine gold exchanges for about fourteen ounces of fine silver.
• In English coins, it exchanges for about fifteen ounces of silver, that is, for more silver than it is worth according to the common estimation of Europe. But just as the price of copper in bars is not, even in England, raised by the high price of copper in English coin, the price of silver in bullion is not lowered by the low official rate of silver in English coin. Silver in bullion still maintains its proper proportion to gold, for the same reason that copper in bars maintains its proper proportion to silver.

Upon the reformation of the silver coin in the reign of William III, the price of silver bullion still continued to be somewhat above the mint price. Mr. Locke attributed this high price to the permission to export silver bullion and the prohibition against exporting silver coin. This permission to export, he said, made the demand for silver bullion greater than the demand for silver coin. But the number of people who want silver coin for the common uses of buying and selling at home is surely much greater than that of those who want silver bullion either for export or for any other use. There is currently a similar permission to export gold bullion and a similar prohibition against exporting gold coin; yet the price of gold bullion has fallen below the mint price. But in the English coinage at that time (William III’s reign), silver was, in the same manner as now, under-rated in proportion to gold. The gold coin (which at that time too was not supposed to require any reformation) regulated then, as well as now, the real value of the whole coinage. Since the reformation of the silver coin did not then reduce the price of silver bullion to the mint price, it is not very probable that a similar reformation will do so now.

Were the silver coin brought back as near to its standard weight as the gold coin is, a guinea, it is probable, would, according to the present proportion, exchange for more silver in coin than it would purchase in bullion. If the silver coin contained its full standard weight, there would in this case be a profit in melting it down, in order, first, to sell the bullion for gold coin, and afterwards to exchange this gold coin for silver coin to be melted down in the same manner. Some alteration in the present proportion between gold and silver values in coinage seems to be the only method of preventing this problem.

The inconvenience of melting down coins might be less if silver coins were officially valued as much above their proper proportion to gold as they are currently valued below it. This would only work if it was also enacted that silver should not be a legal payment for more than the amount needed to make change for a guinea (a gold coin), just as copper is not legal tender for more than the change of a shilling. If this were the case, no creditor (someone owed money) could be cheated because of the high valuation of silver in coins, just as no creditor can currently be cheated because of the high valuation of copper. Only the bankers would suffer from this regulation. When there is a “run” on banks (many people trying to withdraw money at once), bankers sometimes try to gain time by paying in sixpences (small silver coins). This regulation would prevent them from using this shameful method of evading immediate payment. As a consequence, they would be obliged to keep more cash in their vaults than they do at present. Though this might certainly be a considerable inconvenience to them, it would at the same time be a considerable security for their creditors.

Three pounds, seventeen shillings, and tenpence halfpenny (the official mint price of an ounce of gold) certainly does not contain, even in our current excellent gold coins, more than an ounce of standard gold. It might be thought, therefore, that it should not purchase more than an ounce of standard gold bullion (uncoined gold). But gold in coin is more convenient than gold in bullion. And though, in England, coinage is free (no charge for minting), the gold which is carried as bullion to the mint can seldom be returned as coin to the owner until after a delay of several weeks. In the present hurry of the mint, it could not be returned until after a delay of several months. This delay is equivalent to a small fee and makes gold in coin somewhat more valuable than an equal quantity of gold in bullion. If, in English coins, silver were valued according to its proper proportion to gold, the price of silver bullion would probably fall below the mint price even without any reformation of the silver coin. This is because the value even of the present worn and damaged silver coin is regulated by the value of the excellent gold coin for which it can be exchanged.

A small seigniorage, or fee, charged upon the coinage of both gold and silver would probably increase still more the superiority of those metals in coin above an equal quantity of either of them in bullion. The coinage fee would, in this case, increase the value of the metal coined by the amount of this small fee, for the same reason that craftsmanship (fashion) increases the value of silverware in proportion to the cost of that craftsmanship. The superiority of coin above bullion would prevent the melting down of coins and would discourage their export. If, due to some public emergency, it should become necessary to export coins, the greater part of them would soon return again on their own. Abroad, coins could sell only for their weight in bullion. At home, they would buy more than that weight. There would be a profit, therefore, in bringing them home again. In France, a seigniorage of about eight percent is imposed upon coinage, and French coins, when exported, are said to return home again on their own.

The occasional fluctuations in the market price of gold and silver bullion arise from the same causes as similar fluctuations in the price of all other commodities. The frequent loss of these metals from various accidents by sea and by land, the continual waste of them in gilding and plating, in lace and embroidery, in the wear and tear of coins, and in that of silverware, require, in all countries that possess no mines of their own, a continual importation to repair this loss and this waste. The merchant importers, like all other merchants, we may believe, try as well as they can to suit their occasional importations to what they judge is likely to be the immediate demand. With all their attention, however, they sometimes overdo the business and import too much, and sometimes underdo it and import too little.

• When they import more bullion than is wanted, rather than incur the risk and trouble of exporting it again, they are sometimes willing to sell a part of it for something less than the ordinary or average price.
• When, on the other hand, they import less than is wanted, they get something more than this price. But when, under all these occasional fluctuations, the market price either of gold or silver bullion continues for several years together steadily and constantly either more or less above, or more or less below the mint price, we may be assured that this steady and constant difference in price is the effect of something in the state of the coin itself. This state of the coin, at that time, makes a certain quantity of coin either of more value or of less value than the precise quantity of bullion which it ought to contain. The constancy and steadiness of the effect suggest a proportional constancy and steadiness in the cause.

The money of any particular country is, at any particular time and place, a more or less accurate measure of value depending on how closely the current coin matches its standard – that is, whether it contains more or less exactly the precise quantity of pure gold or pure silver which it ought to contain. If in England, for example, forty-four and a half guineas contained exactly a pound weight of standard gold (eleven ounces of fine gold and one ounce of alloy), the gold coin of England would be as accurate a measure of the actual value of goods at any particular time and place as the nature of things would allow. But if, by rubbing and wearing, forty-four and a half guineas generally contain less than a pound weight of standard gold – with the reduction being greater in some pieces than in others – the measure of value becomes liable to the same sort of uncertainty to which all other weights and measures are commonly exposed. As it rarely happens that these weights and measures are exactly agreeable to their standard, the merchant adjusts the price of his goods, as well as he can, not to what those weights and measures ought to be, but to what, upon an average, he finds by experience they actually are. As a consequence of a similar disorder in the coin, the price of goods comes, in the same manner, to be adjusted, not to the quantity of pure gold or silver which the coin ought to contain, but to that which, upon an average, it is found by experience it actually does contain.

By the money-price of goods, it is to be observed, I always understand the quantity of pure gold or silver for which they are sold, without any regard to the name or denomination of the coin. Six shillings and eightpence, for example, in the time of Edward I, I consider as the same money-price as a pound sterling in the present times, because it contained, as nearly as we can judge, the same quantity of pure silver.

CHAPTER VI: THE COMPONENT PARTS OF THE PRICE OF COMMODITIES

In that early and undeveloped state of society which comes before both the accumulation of capital (stock) and land becoming private property, the proportion between the quantities of labor necessary for acquiring different objects seems to be the only circumstance that can provide any rule for exchanging them for one another. If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver as it does to kill a deer, one beaver should naturally exchange for, or be worth, two deer. It is natural that what is usually the produce of two days’ or two hours’ labor should be worth double what is usually the produce of one day’s or one hour’s labor.

If one type of labor should be more severe than the other, some allowance will naturally be made for this superior hardship. The produce of one hour’s labor in the one way may frequently exchange for that of two hours’ labor in the other.

Or if one type of labor requires an uncommon degree of skill (dexterity and ingenuity), the esteem which people have for such talents will naturally give a value to their produce superior to what would be due merely for the time employed. Such talents can seldom be acquired except as a result of long application and practice. The superior value of their produce may frequently be no more than a reasonable compensation for the time and labor which must be spent in acquiring them. In an advanced state of society, allowances of this kind, for superior hardship and superior skill, are commonly made in the wages of labor. Something of the same kind must probably have taken place in its earliest and most undeveloped period.

In this early state of things, the whole produce of labor belongs to the laborer. The quantity of labor commonly employed in acquiring or producing any commodity is the only circumstance which can regulate the quantity of labor which it ought commonly to purchase, command, or exchange for.

The Introduction of Profit

As soon as capital (stock) has accumulated in the hands of particular persons, some of them will naturally employ it by setting industrious people to work. They will supply these workers with materials and subsistence (living expenses) in order to make a profit by the sale of their work, or by what their labor adds to the value of the materials. When exchanging the complete manufactured item – whether for money, for labor, or for other goods – something must be given for the profits of the undertaker (the entrepreneur or business owner) of the work, who risks his capital in this adventure. This profit is over and above what may be sufficient to pay the price of the materials and the wages of the workmen. The value which the workmen add to the materials, therefore, resolves itself in this case into two parts:

1. One part pays their wages.
2. The other part pays the profits of their employer upon the whole stock of materials and wages which he advanced. The employer would have no interest in employing them unless he expected from the sale of their work something more than what was sufficient to replace his capital to him. And he would have no interest in employing a large amount of capital rather than a small one, unless his profits were to bear some proportion to the extent of his capital.

The profits of capital, it may perhaps be thought, are only a different name for the wages of a particular sort of labor – the labor of inspection and direction (management). They are, however, altogether different. They are regulated by quite different principles and bear no proportion to the quantity, the hardship, or the skill of this supposed labor of inspection and direction. Profits are regulated altogether by the value of the capital employed and are greater or smaller in proportion to the extent of this capital. Let us suppose, for example, that in some particular place, where the common annual profits of manufacturing capital are ten percent, there are two different manufactures. In each, twenty workmen are employed at the rate of fifteen pounds a year each, meaning an expense of three hundred a year in each factory for wages. Let us also suppose that the coarse materials annually worked up in one factory cost only seven hundred pounds, while the finer materials in the other cost seven thousand pounds.

• The capital annually employed in the first factory will in this case amount only to one thousand pounds (300 for wages + 700 for materials).
• The capital employed in the other will amount to seven thousand three hundred pounds (300 for wages + 7000 for materials). At the rate of ten percent profit, therefore:
• The owner of the first factory will expect a yearly profit of about one hundred pounds only.
• The owner of the other will expect about seven hundred and thirty pounds. But though their profits are so very different, their labor of inspection and direction may be either altogether or very nearly the same. In many great works, almost the whole labor of this kind is committed to some principal clerk. His wages properly express the value of this labor of inspection and direction. Though in settling his wages some regard is commonly had, not only to his labor and skill but also to the trust which is placed in him, yet his wages never bear any regular proportion to the capital of which he oversees the management. And the owner of this capital, though he is thus freed from almost all labor, still expects that his profits should bear a regular proportion to his capital. In the price of commodities, therefore, the profits of capital constitute a component part altogether different from the wages of labor, and are regulated by quite different principles.

In this state of things (where capital is employed), the whole produce of labor does not always belong to the laborer. He must in most cases share it with the owner of the capital which employs him. Neither is the quantity of labor commonly employed in acquiring or producing any commodity the only circumstance which can regulate the quantity of labor it ought commonly to purchase, command, or exchange for. An additional quantity of value, it is evident, must be due for the profits of the capital which advanced the wages and furnished the materials of that labor.

The Introduction of Rent

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed. They demand a rent even for the land’s natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was common, cost the laborer only the trouble of gathering them, now come, even to him, to have an additional price fixed upon them. He must then pay for the license to gather them. He must give up to the landlord a portion of what his labor either collects or produces. This portion, or what comes to the same thing, the price of this portion, constitutes the rent of land. In the price of the greater part of commodities, rent makes a third component part.

Labor as the Measure of All Components of Price

The real value of all the different component parts of price (wages, profit, and rent), it must be observed, is measured by the quantity of labor which they can, each of them, purchase or command. Labor measures the value not only of that part of price which resolves itself into labor (wages), but also of that which resolves itself into rent, and of that which resolves itself into profit.

In every society, the price of every commodity finally resolves itself into one or other, or all three of these parts. In every improved society, all three enter more or less, as component parts, into the price of the far greater part of commodities.

In the price of corn (grain), for example:

• One part pays the rent of the landlord.
• Another pays the wages or maintenance of the laborers and working animals employed in producing it.
• The third pays the profit of the farmer. These three parts seem either immediately or ultimately to make up the whole price of corn. A fourth part, it may perhaps be thought, is necessary for replacing the farmer’s capital, or for compensating the wear and tear of his working animals and other farming tools. But it must be considered that the price of any farming tool, such as a working horse, is itself made up of the same three parts: the rent of the land upon which he is reared, the labor of tending and rearing him, and the profits of the farmer who advances both the rent of this land and the wages of this labor. Though the price of the corn, therefore, may pay the price as well as the maintenance of the horse, the whole price still resolves itself either immediately or ultimately into the same three parts of rent, labor, and profit.

In the price of flour or meal, we must add to the price of the corn, the profits of the miller, and the wages of his servants. In the price of bread, the profits of the baker, and the wages of his servants must be added. And in the price of both, the labor of transporting the corn from the house of the farmer to that of the miller, and from that of the miller to that of the baker, must be included, together with the profits of those who advance the wages for that labor.

The price of flax resolves itself into the same three parts as that of corn. In the price of linen, we must add to this price the wages of the flax-dresser, of the spinner, of the weaver, of the bleacher, etc., together with the profits of their respective employers.

As any particular commodity comes to be more manufactured, that part of the price which resolves itself into wages and profit comes to be greater in proportion to that which resolves itself into rent. In the progress of the manufacture, not only does the number of profits increase (as it passes through more hands), but every subsequent profit is greater than the foregoing one. This is because the capital from which it is derived must always be greater. The capital which employs the weavers, for example, must be greater than that which employs the spinners. This is because it not only replaces the spinners’ capital with its profits, but also pays the wages of the weavers; and the profits must always bear some proportion to the capital.

Exceptions to the Three Components

In the most improved societies, however, there are always a few commodities of which the price resolves itself into two parts only: the wages of labor and the profits of capital. There is a still smaller number in which it consists altogether in the wages of labor.

• In the price of sea-fish, for example, one part pays the labor of the fishermen, and the other the profits of the capital employed in the fishery. Rent very seldom makes any part of it, though it does sometimes, as I shall show later.
• It is otherwise, at least through the greater part of Europe, in river fisheries. A salmon fishery pays a rent, and rent, though it cannot well be called the rent of land, makes a part of the price of a salmon, as well as wages and profit.
• In some parts of Scotland, a few poor people make a trade of gathering, along the sea-shore, those little multi-colored stones commonly known by the name of Scotch Pebbles. The price which is paid to them by the stone-cutter is altogether the wages of their labor; neither rent nor profit make any part of it.

But the whole price of any commodity must still finally be broken down into one or more, or all three of those parts (rent, wages, profit). Whatever part of its price remains after paying the rent of the land, and the price of all the labor used in growing, manufacturing, and bringing it to market, must necessarily be profit to somebody.

Just as the price or exchangeable value of every particular commodity, taken separately, is made up of one or more of these three parts, the same is true for all the commodities that make up the whole annual produce of a country’s labor, when considered together. This total value must also be made up of the same three parts and be divided up among the different inhabitants of the country, either as:

• The wages of their labor.
• The profits of their capital (stock).
• The rent of their land.

The whole amount of what is annually either collected or produced by the labor of every society (or, what amounts to the same thing, the whole price of it) is in this manner originally distributed among some of its different members. Wages, profit, and rent are the three original sources of all income (revenue) as well as of all exchangeable value. All other income is ultimately derived from one or more of these.

Whoever gets his income from a fund which is his own must get it either from his labor, from his capital, or from his land.

• The income derived from labor is called wages.
• That derived from capital, by the person who manages or employs it, is called profit.
• That derived from capital by the person who does not employ it himself but lends it to another, is called interest or the use of money. It is the payment which the borrower makes to the lender for the profit which he has an opportunity of making by using the money. Part of that profit naturally belongs to the borrower, who runs the risk and takes the trouble of employing it; and part to the lender, who gives him the opportunity to make this profit. The interest of money is always a secondary income. If it is not paid from the profit made by using the money, it must be paid from some other source of income, unless perhaps the borrower is a spendthrift who takes on a second debt just to pay the interest on the first.
• The income which comes entirely from land is called rent and belongs to the landlord.
• The income of a farmer is derived partly from his labor and partly from his capital. To him, land is only the instrument which enables him to earn the wages for his labor and to make the profits from his capital.

All taxes, and all the income which is based on them, all salaries, pensions, and fixed yearly payments (annuities) of every kind, are ultimately derived from one or more of those three original sources of income. They are paid either directly or indirectly from the wages of labor, the profits of capital, or the rent of land.

How Income Types Can Be Confused

When these three different sorts of income belong to different people, they are easily distinguished. But when they belong to the same person, they are sometimes mixed up with one another, at least in common language.

• A gentleman who farms part of his own estate, after paying the expenses of cultivation, should gain both the rent of a landlord and the profit of a farmer. However, he is likely to call his whole gain “profit,” and thus mixes up rent with profit, at least in common language. Most of our North American and West Indian planters are in this situation. The greater part of them farm their own estates, and accordingly, we seldom hear about the rent of a plantation, but frequently about its profit.

• Common farmers seldom employ an overseer to direct the general operations of the farm. They also generally work a good deal with their own hands, as plowmen, harrowers, etc. What remains of the crop after paying the rent, therefore, should not only replace their capital used in cultivation, along with its ordinary profits, but also pay them the wages which are due to them, both as laborers and as overseers. Whatever remains, however, after paying the rent and maintaining the capital, is called profit. But wages clearly make up a part of it. The farmer, by saving these wages (by doing the work himself), must necessarily gain them. Wages, therefore, are in this case mixed up with profit.

• An independent manufacturer, who has enough capital both to purchase materials and to support himself until he can sell his work, should gain both the wages of a journeyman (a skilled worker) who works under a master, and the profit which that master makes by the sale of the journeyman’s work. His whole gains, however, are commonly called profit, and wages are, in this case too, mixed up with profit.

• A gardener who cultivates his own garden with his own hands combines in his own person the three different characters of landlord, farmer, and laborer. His produce, therefore, should pay him the rent of the first, the profit of the second, and the wages of the third. The whole, however, is commonly considered as the earnings of his labor. Both rent and profit are, in this case, mixed up with wages.

Annual Produce and Labor Command

In a civilized country, there are very few commodities whose exchangeable value arises from labor only. Rent and profit contribute largely to the value of the vast majority of them. Therefore, the annual produce of a country’s labor will always be sufficient to purchase or command a much greater quantity of labor than what was employed in growing, preparing, and bringing that produce to market. If society were to annually employ all the labor which it can annually purchase, the quantity of labor would increase greatly every year. Consequently, the produce of every succeeding year would be of vastly greater value than that of the preceding year. But there is no country in which the whole annual produce is employed in maintaining the industrious (those who work productively). The idle (those who do not work productively) everywhere consume a great part of it. According to the different proportions in which the annual produce is divided between these two different groups of people, its ordinary or average value must either annually increase, diminish, or continue the same from one year to another.

CHAPTER VII: THE NATURAL AND MARKET PRICE OF COMMODITIES

In every society or neighborhood, there is an ordinary or average rate for both wages and profit in every different employment of labor and capital. This rate is naturally regulated, as I shall show later, partly by the general circumstances of the society – their riches or poverty, their advancing, stationary, or declining condition – and partly by the particular nature of each employment.

There is likewise in every society or neighborhood an ordinary or average rate of rent. This is also regulated, as I shall show later, partly by the general circumstances of the society or neighborhood in which the land is situated, and partly by the natural or improved fertility of the land.

These ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place in which they commonly prevail.

Natural Price

When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labor, and the profits of the capital employed in growing, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price.

The commodity is then sold precisely for what it is worth, or for what it really costs the person who brings it to market. Although in common language what is called the prime cost (or basic cost) of any commodity does not include the profit of the person who is to sell it again, yet if he sells it at a price that does not allow him the ordinary rate of profit in his neighborhood, he is clearly a loser by the trade. This is because by employing his capital in some other way, he might have made that profit. His profit, besides, is his income, the proper fund for his living expenses. Just as while he is preparing and bringing the goods to market he advances to his workmen their wages (or their living expenses), he also advances to himself, in the same manner, his own living expenses, which are generally suitable to the profit he may reasonably expect from the sale of his goods. Unless the goods yield him this profit, therefore, they do not repay him what they may very properly be said to have really cost him.

Therefore, though the price which leaves him this profit is not always the lowest at which a dealer may sometimes sell his goods, it is the lowest at which he is likely to sell them for any considerable time – at least where there is perfect liberty, or where he may change his trade as often as he pleases.

Market Price

The actual price at which any commodity is commonly sold is called its market price. It may be either above, below, or exactly the same as its natural price.

The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market and the demand of those who are willing to pay the natural price of the commodity (or the whole value of the rent, labor, and profit which must be paid in order to bring it there). Such people may be called the effectual demanders, and their demand the effectual demand, since it may be sufficient to actually bring the commodity to market. It is different from the absolute demand. A very poor man may be said in some sense to have a demand for a coach and six horses; he might like to have it. But his demand is not an effectual demand, as the commodity can never be brought to market to satisfy it.

How Market Price Fluctuates Around Natural Price

• When Supply is Less Than Effectual Demand: If the quantity of any commodity brought to market falls short of the effectual demand, not all those who are willing to pay the full natural price can be supplied with the quantity they want. Rather than go without it altogether, some of them will be willing to give more. A competition will immediately begin among them, and the market price will rise above the natural price. How much it rises depends on either the size of the shortage or the wealth and extravagant desires of the competitors, which influences the eagerness of the competition. Among competitors of equal wealth and luxury, the same shortage will generally cause a more or less eager competition depending on how important the commodity is to them. This explains the extremely high price of necessities during the blockade of a town or in a famine.

• When Supply Exceeds Effectual Demand: If the quantity brought to market exceeds the effectual demand, it cannot all be sold to those who are willing to pay the full natural price. Some part must be sold to those who are willing to pay less, and the low price they give for it must reduce the price of the whole lot. The market price will sink below the natural price. How much it sinks depends on how much the excess supply increases the competition among sellers, or how important it is for them to get rid of the commodity immediately. The same excess in the importation of perishable goods (like oranges) will cause much greater competition than in that of durable commodities (like old iron).

• When Supply Equals Effectual Demand: If the quantity brought to market is just sufficient to supply the effectual demand, and no more, the market price naturally comes to be either exactly, or as nearly as can be judged, the same as the natural price. The whole quantity on hand can be sold for this price, and cannot be sold for more. The competition of the different dealers obliges them all to accept this price but does not oblige them to accept less.

The Market’s Self-Regulating Mechanism

The quantity of every commodity brought to market naturally adjusts itself to the effectual demand. It is in the interest of all those who use their land, labor, or capital in bringing any commodity to market that the quantity should never exceed the effectual demand. And it is in the interest of all other people that it should never fall short of that demand.

• If at any time the supply exceeds the effectual demand, some of the component parts of its price (rent, wages, or profit) must be paid below their natural rate.

  • If it is rent, the interest of the landlords will immediately prompt them to withdraw a part of their land from producing that commodity.
  • If it is wages or profit, the interest of the laborers in one case, and of their employers in the other, will prompt them to withdraw a part of their labor or capital from this employment. The quantity brought to market will soon be no more than sufficient to supply the effectual demand. All the different parts of its price will rise to their natural rate, and the whole price to its natural price.

• If, on the contrary, the quantity brought to market should at any time fall short of the effectual demand, some of the component parts of its price must rise above their natural rate.

  • If it is rent, the interest of all other landlords will naturally prompt them to prepare more land for growing this commodity.
  • If it is wages or profit, the interest of all other laborers and dealers will soon prompt them to employ more labor and capital in preparing and bringing it to market. The quantity brought there will soon be sufficient to supply the effectual demand. All the different parts of its price will soon sink to their natural rate, and the whole price to its natural price.

The natural price, therefore, is like the central price, to which the prices of all commodities are continually being pulled (gravitating). Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them down even somewhat below it. But whatever the obstacles that prevent them from settling in this center of rest and stability, they are constantly tending towards it.

The whole quantity of industry annually employed to bring any commodity to market naturally adjusts itself in this manner to the effectual demand. It naturally aims at bringing exactly that quantity there which may be sufficient to supply, and no more than supply, that demand.

Differences in Price Stability Across Industries

But in some employments, the same quantity of industry will in different years produce very different quantities of commodities, while in others it will produce always the same, or very nearly the same.

• The same number of laborers in farming (husbandry) will, in different years, produce very different quantities of corn, wine, oil, hops, etc. It is only the average produce of this type of industry that can be suited in any respect to the effectual demand. Since its actual produce is frequently much greater and frequently much less than its average produce, the quantity of these commodities brought to market will sometimes greatly exceed, and sometimes greatly fall short of, the effectual demand. Therefore, even if that demand should always remain the same, their market price will be liable to great fluctuations, sometimes falling well below, and sometimes rising well above, their natural price.
• In other types of industry, like manufacturing linen and woolen cloth, the produce of equal quantities of labor is always the same, or very nearly the same. Therefore, it can be more exactly suited to the effectual demand. While that demand remains the same, the market price of these commodities is likely to do so too, and to be either exactly, or as nearly as can be judged, the same as the natural price. Everyone’s experience will tell him that the price of linen and woolen cloth is not liable to such frequent or such great variations as the price of corn. The price of manufactured goods varies only with variations in demand. The price of agricultural goods varies not only with variations in demand but also with the much greater and more frequent variations in the quantity brought to market to supply that demand.

Impact of Fluctuations on Price Components

The occasional and temporary fluctuations in the market price of any commodity fall chiefly upon those parts of its price which are made up of wages and profit. That part which is made up of rent is less affected by them.

• A rent that is fixed in money (a “rent certain”) is not in the least affected by these fluctuations, either in its rate or in its value.
• A rent which consists either in a certain proportion or in a certain quantity of the raw agricultural produce is no doubt affected in its yearly value by all the occasional and temporary fluctuations in the market price of that raw produce. However, it is seldom affected by them in its yearly rate (the agreed-upon amount for the lease). In settling the terms of the lease, the landlord and farmer try, according to their best judgment, to adjust that rate not to the temporary and occasional price, but to the average and ordinary price of the produce.

Such fluctuations affect both the value and the rate of either wages or profit, depending on whether the market happens to be either over-stocked or under-stocked with commodities or with labor – with work already done, or with work to be done.

• A public mourning raises the price of black cloth (because the market is almost always under-stocked with black cloth on such occasions). This increases the profits of the merchants who have a considerable quantity of it. It has no effect on the wages of the weavers. The market is under-stocked with commodities, not with labor; with work done, not with work to be done.
• A public mourning does raise the wages of journeymen tailors. In this case, the market is under-stocked with labor. There is an effectual demand for more labor, for more work to be done than can be had.

A public mourning sinks the price of colored silks and cloths. This, in turn, reduces the profits of merchants who have a considerable quantity of these items on hand. It also lowers the wages of the workmen employed in preparing such commodities, because all demand for them stops for six months, perhaps even for a whole year. In this situation, the market is over-stocked both with these particular goods and with the labor to make them.

Why Market Price Can Stay Above Natural Price

But even though the market price of every particular commodity is, in this way, continually being pulled (gravitating, if one may say so) towards the natural price, sometimes particular accidents, sometimes natural causes, and sometimes particular government regulations or official rules, may keep the market price of many commodities a good deal above the natural price for a long time.

• Secrets in Trade or Manufacturing: When an increase in effectual demand causes the market price of some particular commodity to rise well above the natural price, those who supply that market are generally careful to hide this change. If it were commonly known, their great profit would tempt so many new rivals to use their capital in the same way. Then, the effectual demand being fully supplied, the market price would soon be reduced to the natural price, and perhaps for some time even below it. If the market is a great distance from where the suppliers live, they may sometimes be able to keep the secret for several years and enjoy their extraordinary profits for that long without any new rivals. Secrets of this kind, however, it must be acknowledged, can seldom be kept for long. The extraordinary profit can last very little longer than the secrets are kept. Secrets in manufacturing can be kept longer than secrets in trade. A dyer who has found a way to produce a particular color with materials that cost only half the price of those commonly used may, with good management, enjoy the advantage of his discovery as long as he lives. He might even leave it as a legacy to his children. His extraordinary gains come from the high price paid for his private labor. They properly consist in the high wages of that labor. But as these gains are repeated upon every part of his capital (since his lower costs apply to all he produces), and as their whole amount bears a regular proportion to his capital, they are commonly considered as extraordinary profits of capital. Such increases in the market price are clearly the effects of particular accidents, though their operation may sometimes last for many years.

• Natural Scarcity: Some natural productions require such a unique type of soil and location that all the land in a large country suitable for producing them may not be enough to supply the effectual demand. The whole quantity brought to market, therefore, may be sold to those who are willing to give more than what is sufficient to pay the natural rates of rent for the land, wages for the labor, and profits for the capital used in preparing and bringing them to market. Such commodities may continue for whole centuries to be sold at this high price. That part of the price which consists of the rent of land is, in this case, the part that is generally paid above its natural rate. The rent of land that produces such unique and highly valued products (like the rent of some vineyards in France with exceptionally good soil and location) bears no regular proportion to the rent of other equally fertile and equally well-cultivated land in its neighborhood. The wages of labor and the profits of capital employed in bringing such commodities to market, on the contrary, are seldom out of their natural proportion to those of other employments of labor and capital in their neighborhood. Such increases in the market price are clearly the effect of natural causes. These causes may prevent the effectual demand from ever being fully supplied and may therefore continue to operate forever.

• Monopolies and Regulations: A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. Monopolists, by keeping the market constantly under-stocked and by never fully supplying the effectual demand, sell their commodities much above the natural price. They raise their earnings, whether these consist of wages or profit, greatly above their natural rate. The price of monopoly is, on every occasion, the highest which can be gotten. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken – not on every single occasion, perhaps, but for any considerable time together. The monopoly price is, on every occasion, the highest that can be squeezed out of the buyers, or the highest they are thought willing to give. The natural price is the lowest the sellers can commonly afford to take and still continue their business. The exclusive privileges of corporations, laws about apprenticeships (statutes of apprenticeship), and all those laws which restrict competition in particular employments to a smaller number of people than might otherwise enter them, have the same tendency, though to a lesser degree. They are a sort of enlarged monopoly. They may frequently, for ages, and in whole classes of employments, keep up the market price of particular commodities above the natural price. They can also maintain both the wages of the labor and the profits of the capital employed in those businesses somewhat above their natural rate. Such increases in the market price may last as long as the official regulations that cause them.

Why Market Price Rarely Stays Below Natural Price for Long

The market price of any particular commodity, though it may continue long above its natural price, can seldom continue long below it. If any part of its price (rent, wages, or profit) was paid below the natural rate, the persons whose interest it affected would immediately feel the loss. They would immediately withdraw either so much land, or so much labor, or so much capital from being employed in producing it. As a result, the quantity brought to market would soon be no more than sufficient to supply the effectual demand. Its market price, therefore, would soon rise to the natural price. This, at least, would be the case where there was perfect liberty for resources to move.

The same apprenticeship laws and other corporation laws that, when a manufacture is prosperous, enable workmen to raise their wages well above their natural rate, sometimes oblige them, when the industry declines, to let their wages fall well below it. Just as in one case these laws exclude many people from their employment, in the other case, they exclude the workman from many other employments. The effect of such regulations, however, is not nearly as durable in sinking workmen’s wages below their natural rate as in raising them above it. Their operation in raising wages may endure for many centuries, but their effect in lowering them can last no longer than the lives of some of the workmen who were trained in the business during its time of prosperity. When they are gone, the number of those who are afterwards educated for the trade will naturally adjust itself to the effectual demand. The official rules must be as restrictive as those of India or ancient Egypt (where every man was bound by a principle of religion to follow the occupation of his father and was supposed to commit a terrible offense against religion if he changed it for another) to be able to sink either the wages of labor or the profits of capital below their natural rate in any particular employment for several generations.

This is all that I think necessary to observe at present concerning the deviations, whether occasional or permanent, of the market price of commodities from the natural price.

Factors Affecting the Natural Price Itself

The natural price itself varies with the natural rate of each of its component parts: wages, profit, and rent. In every society, these rates vary according to their circumstances – according to their riches or poverty, and their advancing, stationary, or declining condition. I shall, in the four following chapters, try to explain, as fully and clearly as I can, the causes of these different variations.

1. First, I shall try to explain what circumstances naturally determine the rate of wages, and how those circumstances are affected by the riches or poverty, and by the advancing, stationary, or declining state of the society.
2. Secondly, I shall try to show what circumstances naturally determine the rate of profit, and how those circumstances are also affected by similar variations in the state of the society.

Though money wages and profits are very different in the different employments of labor and capital, a certain proportion seems commonly to exist between both the money wages in all the different employments of labor, and the money profits in all the different employments of capital. This proportion, it will appear later, depends partly upon the nature of the different employments, and partly upon the different laws and policies of the society in which they are carried on. But though in many respects dependent upon the laws and policy, this proportion seems to be little affected by the riches or poverty of that society, or by its advancing, stationary, or declining condition. It seems to remain the same, or very nearly the same, in all those different states. I shall, in the third place, try to explain all the different circumstances which regulate this proportion.

3. In the fourth and last place, I shall try to show what circumstances regulate the rent of land, and which either raise or lower the real price of all the different substances it produces.

CHAPTER VIII

THE WAGES OF LABOR

What a worker produces is the natural payment, or wages, for their labor.

In the Beginning: The Worker Gets Everything

In the original state of things, before land became private property and before capital (stock) was accumulated, the entire product of a worker’s labor belonged to the worker. He had no landlord or employer to share it with.

If this state had continued, wages would have increased with all the improvements in workers’ ability to produce, which the division of labor brings about. All things would have gradually become cheaper. They would have been produced with a smaller quantity of labor. And since commodities produced by equal amounts of labor would naturally be exchanged for one another in this state of things, they would also have been purchased with the produce of a smaller quantity of labor.

But even though all things would have become cheaper in reality, in appearance many things might have seemed more expensive than before, or have been exchanged for a greater quantity of other goods.

• For example, let’s suppose that in most jobs, workers’ productivity improved tenfold (a day’s labor could produce ten times what it originally did).
• But in one particular job, productivity only doubled (a day’s labor could produce only twice what it did before). In exchanging the produce of a day’s labor in most jobs for that of a day’s labor in this particular one, ten times the original quantity of work in the improved jobs would purchase only twice the original quantity in the less improved one. Therefore, any specific quantity of the less improved product (a pound weight, for example) would appear to be five times more expensive than before. In reality, however, it would be twice as cheap because it required only half the labor to produce or purchase it. So, getting it would be twice as easy as before.

But this original state of things, where the laborer enjoyed the whole produce of his own labor, could not last beyond the first introduction of private land ownership and the accumulation of capital. It was, therefore, over long before the most significant improvements were made in workers’ productivity. It would be pointless to explore further what its effect might have been on the payment or wages of labor.

Deductions from the Worker’s Produce: Rent and Profit

As soon as land becomes private property, the landlord demands a share of almost all the produce that the laborer can either grow or collect from it. The landlord’s rent becomes the first deduction from the produce of the labor employed on land.

It seldom happens that the person who tills the ground has enough to support himself until he reaps the harvest. His living expenses are generally advanced to him from the capital of a master – the farmer who employs him. The farmer would have no interest in employing him unless he was to share in the produce of his labor, or unless his capital was to be replaced with a profit. This profit becomes the second deduction from the produce of the labor employed on land.

The produce of almost all other labor is subject to a similar deduction for profit. In all crafts and manufactures, most workmen need a master to advance them the materials for their work, as well as their wages and living expenses, until the work is completed. The master shares in the produce of their labor, or in the value which their labor adds to the materials upon which it is bestowed. This share is his profit.

The Independent Workman

Sometimes, indeed, a single independent workman has enough capital (stock) to both purchase the materials for his work and to support himself until it is completed. He is both master and workman and enjoys the whole produce of his own labor, or the whole value which it adds to the materials. This includes what are usually two distinct incomes belonging to two distinct people: the profits of capital and the wages of labor.

Such cases, however, are not very frequent. In every part of Europe, for every one independent workman, there are twenty who serve under a master. The wages of labor are everywhere understood to be what they usually are when the laborer is one person, and the owner of the capital which employs him is another.

The Wage Agreement: Workers vs. Masters

What the common wages of labor are depends everywhere upon the contract usually made between these two parties (workers and masters), whose interests are by no means the same.

• The workmen want to get as much as possible.
• The masters want to give as little as possible. The former are inclined to combine (form groups) in order to raise wages, while the latter are inclined to combine in order to lower them.

It is not, however, difficult to foresee which of the two parties must, on all ordinary occasions, have the advantage in the dispute and force the other to comply with their terms.

• The masters, being fewer in number, can combine much more easily.
• The law, besides, authorizes, or at least does not prohibit, their combinations, while it prohibits those of the workmen. We have no acts of parliament against employers combining to lower the price of work, but many against workers combining to raise it.
• In all such disputes, the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or a merchant, even if they did not employ a single workman, could generally live a year or two on the capital they have already acquired. Many workmen could not survive a week without employment, few could survive a month, and hardly any could survive a year. In the long run, the workman may be as necessary to his master as his master is to him, but the necessity is not so immediate for the master.

Masters’ Combinations

We rarely hear, it has been said, of the combinations of masters, though we frequently hear of those of workmen. But whoever imagines, on this account, that masters rarely combine, is as ignorant of the world as he is of the subject. Masters are always and everywhere in a sort of unspoken (tacit), but constant and uniform, combination not to raise the wages of labor above their current rate. To violate this combination is everywhere a most unpopular action and brings a sort of shame upon a master among his neighbors and equals. We seldom, indeed, hear of this combination because it is the usual, and one may say, the natural state of things, which nobody ever pays attention to. Masters, too, sometimes enter into particular combinations to push the wages of labor even below this rate. These are always conducted with the utmost silence and secrecy until the moment they are put into action. When the workmen yield, as they sometimes do, without resistance (though it is severely felt by them), these combinations are never heard of by other people.

Workmen’s Combinations

Such combinations by masters, however, are frequently resisted by a contrary defensive combination of the workmen. Sometimes, too, without any provocation of this kind, workmen combine on their own accord to raise the price of their labor. Their usual stated reasons (pretences) are sometimes the high price of provisions, and sometimes the great profit which their masters make from their work. But whether their combinations are offensive or defensive, they are always widely heard of. To bring the point to a speedy decision, they always resort to the loudest clamor, and sometimes to the most shocking violence and outrage. They are desperate and act with the foolishness and extravagance of desperate men, who must either starve or frighten their masters into immediately complying with their demands. The masters on these occasions are just as loud on the other side and never cease to call for the help of the civil magistrate (government officials) and the strict enforcement of those laws which have been enacted with so much severity against the combinations of servants, laborers, and journeymen. The workmen, accordingly, very seldom gain any advantage from the violence of these disruptive combinations. These generally end in nothing but the punishment or ruin of the ringleaders, partly due to the intervention of the civil magistrate, partly from the superior determination of the masters, and partly from the necessity which most workmen are under of submitting for the sake of present survival.

The Minimum Wage

But though in disputes with their workmen, masters generally have the advantage, there is, however, a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest type of labor.

A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even on most occasions be somewhat more; otherwise, it would be impossible for him to bring up a family, and the supply of such workmen could not last beyond the first generation. Mr. Cantillon (an earlier economist) seems, on this account, to suppose that the lowest type of common laborers must everywhere earn at least double their own maintenance. This is so that, on average, they may be enabled to bring up two children, as the labor of the wife (due to her necessary care for the children) is supposed to be no more than sufficient to provide for herself. But it is estimated that one-half of the children born die before reaching adulthood. The poorest laborers, therefore, according to this account, must, on average, attempt to rear at least four children, so that two may have an equal chance of living to that age. But the necessary maintenance of four children, it is supposed, may be nearly equal to that of one man. The labor of an able-bodied slave, the same author adds, is calculated to be worth double his maintenance; and he thinks that of the lowest-paid laborer cannot be worth less than that of an able-bodied slave. Thus far at least seems certain: in order to bring up a family, the labor of the husband and wife together must, even in the lowest type of common labor, be able to earn something more than what is precisely necessary for their own maintenance. But in what proportion, whether in that mentioned above or in any other, I shall not try to determine.

When Wages Rise Above the Minimum

There are certain circumstances, however, which sometimes give the laborers an advantage and enable them to raise their wages considerably above this rate – which is evidently the lowest consistent with common humanity.

When in any country the demand for those who live by wages (laborers, journeymen, servants of every kind) is continually increasing, when every year provides employment for a greater number than had been employed the year before, the workmen have no need to combine to raise their wages. The scarcity of workers causes a competition among masters, who bid against one another to get workmen. They thus voluntarily break through the natural combination of masters not to raise wages.

The demand for those who live by wages, it is clear, cannot increase except in proportion to the increase of the funds destined for the payment of wages. These funds are of two kinds:

1. First, the revenue (income of the wealthy) which is over and above what is necessary for their own maintenance.
2. Second, the capital (stock) which is over and above what is necessary for the employment of their masters (i.e., capital available for expanding business).

When a landlord, an annuitant (someone living on a fixed income), or a wealthy individual (monied man) has a greater income than what he judges sufficient to maintain his own family, he employs either the whole or a part of the surplus in maintaining one or more household servants. If this surplus increases, he will naturally increase the number of those servants.

When an independent workman, such as a weaver or shoemaker, has more capital than is sufficient to purchase the materials for his own work and to maintain himself until he can sell it, he naturally employs one or more journeymen with the surplus, in order to make a profit from their work. If this surplus increases, he will naturally increase the number of his journeymen.

The demand for those who live by wages, therefore, necessarily increases with the increase of the revenue and capital of every country, and cannot possibly increase without it. The increase of revenue and capital is the increase of national wealth. The demand for those who live by wages, therefore, naturally increases with the increase of national wealth, and cannot possibly increase without it.

Growing Wealth, Not Just Existing Wealth, Raises Wages

It is not the actual greatness of national wealth, but its continual increase, which causes a rise in the wages of labor. Accordingly, it is not in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labor are highest. England is certainly, in the present times, a much richer country than any part of North America. The wages of labor, however, are much higher in North America than in any part of England.

• In the province of New York, common laborers earn three shillings and sixpence local currency a day (equal to two shillings sterling).
• Ship carpenters earn ten shillings and sixpence local currency, plus a pint of rum worth sixpence sterling (totaling six shillings and sixpence sterling).
• House carpenters and bricklayers earn eight shillings local currency (equal to four shillings and sixpence sterling).
• Journeymen tailors earn five shillings local currency (equal to about two shillings and tenpence sterling). These prices are all above the London price; and wages are said to be as high in the other colonies as in New York. The price of provisions (food) is everywhere in North America much lower than in England. A severe food shortage (dearth) has never been known there. In the worst seasons, they have always had enough for themselves, though less for exportation. If the money price of labor, therefore, is higher than it is anywhere in the mother country (Britain), its real price – the real command of the necessities and conveniences of life which it gives to the laborer – must be higher in a still greater proportion.

But though North America is not yet as rich as England, it is much more thriving and advancing with much greater speed towards acquiring more riches. The most decisive mark of the prosperity of any country is the increase in the number of its inhabitants.

• In Great Britain and most other European countries, the population is not supposed to double in less than five hundred years.
• In the British colonies in North America, it has been found that the population doubles in twenty or twenty-five years. Nor in the present times is this increase principally owing to the continual importation of new inhabitants, but to the great multiplication of the species (high birth rates and survival). It is said that those who live to old age there frequently see from fifty to a hundred, and sometimes many more, descendants from their own body. Labor is so well rewarded there that a numerous family of children, instead of being a burden, is a source of wealth and prosperity to the parents. The labor of each child, before it can leave their house, is calculated to be worth a hundred pounds clear gain to them. A young widow with four or five young children, who among the middle or lower ranks of people in Europe would have so little chance for a second husband, is frequently sought after there as a kind of fortune. The value of children is the greatest of all encouragements to marriage. We cannot, therefore, wonder that the people in North America should generally marry very young. Notwithstanding the great increase in population caused by such early marriages, there is a continual complaint about the scarcity of workers in North America. The demand for laborers, and the funds available for maintaining them, seem to increase still faster than they can find laborers to employ.

Wages in Stationary Countries

Though the wealth of a country may be very great, yet if it has been stationary (not growing) for a long time, we must not expect to find the wages of labor very high in it. The funds destined for the payment of wages – the revenue and capital of its inhabitants – may be of the greatest extent. But if they have continued for several centuries at the same, or very nearly the same, level, the number of laborers employed every year could easily supply, and even more than supply, the number wanted the following year. There could seldom be any scarcity of workers, nor could the masters be obliged to bid against one another to get them. The workers, on the contrary, would in this case naturally multiply beyond the available employment. There would be a constant scarcity of employment, and the laborers would be obliged to bid against one another in order to get it. If in such a country the wages of labor had ever been more than sufficient to maintain the laborer and to enable him to bring up a family, the competition of the laborers and the interest of the masters would soon reduce them to this lowest rate which is consistent with common humanity.

China has long been one of the richest – that is, one of the most fertile, best cultivated, most industrious, and most populous countries in the world. It seems, however, to have been stationary for a long time. Marco Polo, who visited it more than five hundred years ago, describes its cultivation, industry, and population in almost the same terms in which they are described by travelers in the present times. It had perhaps, even long before his time, acquired that full amount of riches which the nature of its laws and institutions permitted it to acquire. The accounts of all travelers, inconsistent in many other respects, agree on the low wages of labor and the difficulty a laborer finds in bringing up a family in China. If by digging the ground for a whole day he can get what will purchase a small quantity of rice in the evening, he is contented. The condition of craftsmen (artificers) is, if possible, still worse.

Instead of waiting idly in their workshops for customers to call, as craftsmen do in Europe, they are continually running about the streets with the tools of their respective trades, offering their services and, in a way, begging for employment. The poverty of the lower ranks of people in China far surpasses that of the most destitute nations in Europe. In the neighborhood of Canton, it is commonly said that many hundreds, even many thousands, of families have no home on land but live constantly in little fishing boats on the rivers and canals. The food they find there is so meager that they are eager to fish up the nastiest garbage thrown overboard from any European ship. Any rotten meat – the carcass of a dead dog or cat, for example, though half decayed and stinking – is as welcome to them as the most wholesome food is to people in other countries. Marriage is encouraged in China, not by the profitability of children, but by the liberty of abandoning or killing them. In all great towns, several infants are exposed in the street every night, or drowned like puppies in the water. Performing this horrid task is even said to be the acknowledged business by which some people earn their living.

China, however, though it may perhaps be standing still economically, does not seem to be going backwards. Its towns are nowhere deserted by their inhabitants. The lands which had once been cultivated are nowhere neglected. The same, or very nearly the same, amount of annual labor must therefore continue to be performed. Consequently, the funds available for maintaining that labor must not be noticeably diminishing. The lowest class of laborers, therefore, despite their meager subsistence, must somehow manage to continue their families well enough to keep up their usual numbers.

Wages in a Declining Country

But it would be different in a country where the funds available for the maintenance of labor were noticeably decaying. Every year, the demand for servants and laborers, in all the different types of jobs, would be less than it had been the year before. Many who had been brought up in the higher classes, not being able to find employment in their own business, would be glad to seek it in the lowest. The lowest class, being not only over-stocked with its own workmen but also with the overflow from all the other classes, would experience such great competition for employment as to reduce the wages of labor to the most miserable and scanty subsistence for the laborer. Many would not be able to find employment even on these hard terms. They would either starve or be driven to seek a living either by begging or perhaps by committing the greatest crimes. Want, famine, and high death rates (mortality) would immediately prevail in that class, and from there would extend themselves to all the higher classes. This would continue until the number of inhabitants in the country was reduced to what could easily be maintained by the revenue and capital which remained in it, and which had escaped either the tyranny or calamity that had destroyed the rest. This perhaps is nearly the present state of Bengal and of some other English settlements in the East Indies. In a fertile country which had previously been much depopulated, where subsistence, consequently, should not be very difficult, and where, notwithstanding, three or four hundred thousand people die of hunger in one year, we may be assured that the funds destined for the maintenance of the laboring poor are rapidly decaying. The difference between the spirit of the British constitution, which protects and governs North America, and that of the mercantile company, which oppresses and domineers in the East Indies, cannot perhaps be better illustrated than by the different state of those countries.

Wages as a Sign of National Wealth

Therefore, a generous reward for labor is both the necessary effect and the natural symptom of increasing national wealth. The scanty maintenance of the laboring poor, on the other hand, is the natural symptom that things are at a standstill. Their starving condition is a symptom that the country is going fast backwards.

Wages in Great Britain

In Great Britain, the wages of labor seem, in the present times, to be clearly more than what is precisely necessary to enable the laborer to bring up a family. To satisfy ourselves on this point, it will not be necessary to enter into any tedious or doubtful calculation of what may be the lowest sum upon which it is possible to do this. There are many plain symptoms that the wages of labor are nowhere in this country regulated by this lowest rate which is consistent with common humanity.

1. Summer vs. Winter Wages: First, in almost every part of Great Britain, there is a distinction, even in the lowest types of labor, between summer and winter wages. Summer wages are always highest. But on account of the extraordinary expense of fuel, maintaining a family is most expensive in winter. Wages, therefore, being highest when this expense is lowest, it seems evident that they are not regulated by what is necessary for this expense, but by the quantity and supposed value of the work. A laborer, it may be said indeed, ought to save part of his summer wages to cover his winter expense, so that through the whole year his earnings do not exceed what is necessary to maintain his family through the whole year. A slave, however, or someone absolutely dependent on us for immediate subsistence, would not be treated in this manner. His daily subsistence would be proportioned to his daily necessities.

2. Wages and Provision Prices: Secondly, the wages of labor in Great Britain do not fluctuate with the price of provisions (food). Provision prices vary everywhere from year to year, frequently from month to month. But in many places, the money price of labor remains uniformly the same, sometimes for half a century together. If in these places, therefore, the laboring poor can maintain their families in expensive years, they must be comfortable in times of moderate plenty, and well-off in times of extraordinary cheapness. The high price of provisions during these last ten years has not, in many parts of the kingdom, been accompanied by any noticeable rise in the money price of labor. It has, indeed, in some places, but this was probably due more to the increase in the demand for labor than to the increase in the price of provisions.

3. Wages Vary More by Place than Provision Prices: Thirdly, just as the price of provisions varies more from year to year than the wages of labor, the wages of labor, on the other hand, vary more from place to place than the price of provisions. The prices of bread and butcher’s meat are generally the same or very nearly the same throughout most of the united kingdom. These and most other things which are sold by retail (the way the laboring poor buy all things) are generally just as cheap or cheaper in great towns than in the more remote parts of the country, for reasons which I shall explain later. But the wages of labor in a great town and its neighborhood are frequently a fourth or a fifth part (twenty or twenty-five percent) higher than at a few miles distance. Eighteenpence a day may be reckoned the common price of labor in London and its neighborhood. At a few miles distance, it falls to fourteen and fifteen pence. Tenpence may be reckoned its price in Edinburgh and its neighborhood. At a few miles distance, it falls to eightpence, the usual price of common labor through most of the low country of Scotland, where it varies a good deal less than in England. Such a difference in prices, which it seems is not always sufficient to make a man move from one parish to another, would necessarily cause so great a movement of the bulkiest commodities, not only from one parish to another but from one end of the kingdom, almost from one end of the world, to the other, as would soon reduce their prices more nearly to a level. After all that has been said of the fickleness and inconstancy of human nature, it appears clearly from experience that a man is, of all sorts of luggage, the most difficult to be transported. If the laboring poor, therefore, can maintain their families in those parts of the kingdom where the price of labor is lowest, they must be well-off where it is highest.

4. Labor Price Variations Often Opposite to Provision Price Variations: Fourthly, the variations in the price of labor not only do not correspond either in place or time with those in the price of provisions, but they are frequently quite opposite. Grain, the food of the common people, is more expensive in Scotland than in England, from where Scotland receives almost every year very large supplies. But English corn must be sold at a higher price in Scotland (the country to which it is brought) than in England (the country from which it comes). In proportion to its quality, it cannot be sold at a higher price in Scotland than the Scotch corn that comes to the same market in competition with it. The quality of grain depends chiefly upon the quantity of flour or meal which it yields at the mill. In this respect, English grain is so much superior to Scotch grain that, though often appearing more expensive (either by volume or bulk), it is generally cheaper in reality (by quality or even by weight). The price of labor, on the contrary, is higher in England than in Scotland. If the laboring poor, therefore, can maintain their families in one part of the united kingdom, they must be well-off in the other. Oatmeal indeed supplies the common people in Scotland with the greatest and the best part of their food, which is generally much inferior to that of their neighbors of the same rank in England. This difference, however, in their mode of subsistence is not the cause, but the effect of the difference in their wages; though, by a strange misunderstanding, I have frequently heard it represented as the cause. It is not because one man keeps a coach while his neighbor walks on foot that the one is rich and the other poor; but because the one is rich he keeps a coach, and because the other is poor he walks on foot.

Historical Trends in Wages and Grain Prices

During the course of the last century (the 1600s), taking one year with another, grain was more expensive in both parts of the united kingdom than during the present century (the 1700s). This is a matter of fact which cannot now admit of any reasonable doubt. The proof of it is, if possible, still more decisive for Scotland than for England. In Scotland, it is supported by the evidence of the public “fiars” – annual valuations made under oath, according to the actual state of the markets, of all the different sorts of grain in every different county of Scotland. If such direct proof needed any supporting evidence, I would observe that this has also been the case in France, and probably in most other parts of Europe. With regard to France, there is the clearest proof. But though it is certain that in both parts of the united kingdom grain was somewhat dearer in the last century than in the present, it is equally certain that labor was much cheaper. If the laboring poor, therefore, could bring up their families then, they must be much more comfortable now.

• In the last century, the most usual day-wages for common labor throughout most of Scotland were sixpence in summer and fivepence in winter. Three shillings a week, very nearly the same price, still continues to be paid in some parts of the Highlands and Western Islands.
• Through most of the low country of Scotland, the most usual wages for common labor are now eightpence a day; tenpence, sometimes a shilling around Edinburgh; in the counties which border England (probably because of that neighborhood); and in a few other places where there has lately been a considerable rise in the demand for labor (around Glasgow, Carron, Ayrshire, etc.). In England, improvements in agriculture, manufactures, and commerce began much earlier than in Scotland. The demand for labor, and consequently its price, must necessarily have increased with those improvements. In the last century, accordingly, as well as in the present, the wages of labor were higher in England than in Scotland. They have risen considerably since that time too, though, because of the greater variety of wages paid there in different places, it is more difficult to ascertain how much. In 1614, the pay of a foot soldier was the same as in the present times: eightpence a day. When it was first established, it would naturally be regulated by the usual wages of common laborers, the rank of people from which foot soldiers are commonly drawn. Lord Chief Justice Hales, who wrote in the time of Charles II, calculated the necessary expense of a laborer’s family (consisting of six persons: the father and mother, two children able to do something, and two not able) at ten shillings a week, or twenty-six pounds a year. If they cannot earn this by their labor, he supposes, they must make it up either by begging or stealing. He appears to have researched this subject very carefully. In 1688, Mr. Gregory King, whose skill in political arithmetic (early statistics) is so much praised by Doctor Davenant, calculated the ordinary income of laborers and out-servants (servants living outside the master’s house) to be fifteen pounds a year per family, which he supposed to consist, on average, of three and a half persons. His calculation, therefore, though different in appearance, corresponds very nearly at bottom with that of Judge Hales. Both suppose the weekly expense of such families to be about twenty pence per head. Both the money income and expense of such families have increased considerably since that time throughout most of the kingdom – in some places more, and in some less – though perhaps hardly anywhere as much as some exaggerated accounts of the present wages of labor have lately represented them to the public. The price of labor, it must be observed, cannot be ascertained very accurately anywhere. Different prices are often paid at the same place and for the same sort of labor, not only according to the different abilities of the workmen but also according to the easiness or hardness of the masters. Where wages are not regulated by law, all that we can pretend to determine is what are the most usual wages. Experience seems to show that law can never regulate them properly, though it has often pretended to do so.

Increase in Real Wages

The real reward of labor – the real quantity of the necessities and conveniences of life which it can obtain for the laborer – has, during the course of the present century, increased perhaps in a still greater proportion than its money price.

• Not only has grain become somewhat cheaper, but many other things from which the industrious poor get an agreeable and wholesome variety of food have become a great deal cheaper. Potatoes, for example, do not at present, throughout most of the kingdom, cost half the price which they used to cost thirty or forty years ago. The same thing may be said of turnips, carrots, and cabbages – things which were formerly never grown except by hand with a spade, but which are now commonly grown by the plow. All sorts of garden vegetables have also become cheaper. Most of the apples and even of the onions consumed in Great Britain were, in the last century, imported from Flanders.
• The great improvements in the coarser manufactures of both linen and woolen cloth furnish laborers with cheaper and better clothing.
• Improvements in the manufactures of coarser metals provide them with cheaper and better instruments of trade, as well as with many agreeable and convenient pieces of household furniture. Soap, salt, candles, leather, and fermented liquors (like beer) have, indeed, become a good deal dearer, chiefly because of the taxes which have been laid upon them. The quantity of these, however, which the laboring poor are under any necessity of consuming is so very small that the increase in their price does not cancel out the decrease in the price of so many other things. The common complaint that luxury extends itself even to the lowest ranks of the people, and that the laboring poor will not now be contented with the same food, clothing, and lodging which satisfied them in former times, may convince us that it is not only the money price of labor but also its real reward which has increased.

Is Improvement for the Lower Ranks Good for Society?

Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconvenience to society? The answer seems at first sight abundantly plain. Servants, laborers, and workmen of different kinds make up the vast majority of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconvenience to the whole. No society can surely be flourishing and happy if the vast majority of its members are poor and miserable. It is only fair, besides, that those who feed, clothe, and lodge the whole body of the people should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed, and lodged.

Poverty, Marriage, and Rearing Children

Poverty, though it no doubt discourages marriage, does not always prevent it. It even seems to be favorable to having many children (generation). A half-starved Highland woman frequently bears more than twenty children, while a pampered, wealthy lady is often incapable of bearing any and is generally exhausted by two or three. Infertility (barrenness), so frequent among women of fashion, is very rare among those of lower station. Luxury in women, while it perhaps inflames the passion for enjoyment, seems always to weaken, and frequently to destroy altogether, the ability to have children.

But poverty, though it does not prevent conception, is extremely unfavorable to the rearing of children. The tender plant is produced, but in so cold a soil and so severe a climate, it soon withers and dies.

It is not uncommon, I have been frequently told, in the Highlands of Scotland for a mother who has borne twenty children not to have two alive. Several army officers of great experience have assured me that, far from being able to recruit new soldiers from the children born within their regiments, they have never even been able to supply the regiment with enough drummers and fifers from all the soldiers’ children born there. However, a greater number of fine children is seldom seen anywhere than around a soldiers’ barracks. Very few of them, it seems, reach the age of thirteen or fourteen.

• In some places, half the children born die before they are four years old.
• In many places, they die before they are seven.
• And in almost all places, they die before they are nine or ten. This great mortality, however, will everywhere be found chiefly among the children of the common people, who cannot afford to care for them with the same attention as those of better social standing. Though their marriages are generally more fruitful (produce more children) than those of people of fashion, a smaller proportion of their children reach adulthood. In foundling hospitals (orphanages), and among children brought up by parish charities, the death rate is still greater than among those of the common people.

Subsistence and Population Growth

Every species of animal naturally multiplies in proportion to its means of subsistence (food and resources), and no species can ever multiply beyond it. But in civilized society, it is only among the lower ranks of people that a lack of subsistence can set limits to the further multiplication of the human species. It can do so in no other way than by destroying a great part of the children which their fruitful marriages produce.

A generous reward for labor, by enabling parents to provide better for their children and consequently to bring up a greater number, naturally tends to widen and extend those limits on population. It also deserves to be remarked that it necessarily does this as nearly as possible in the proportion which the demand for labor requires.

• If this demand is continually increasing, the reward of labor must necessarily encourage the marriage and multiplication of laborers in such a manner as may enable them to supply that continually increasing demand with a continually increasing population.
• If the reward should at any time be less than what was needed for this purpose, the shortage of workers would soon raise it.
• And if it should at any time be more, their excessive multiplication would soon lower wages back to this necessary rate. The market would be so much under-stocked with labor in the one case, and so much over-stocked in the other, as would soon force its price back to the proper rate which the circumstances of the society required. It is in this manner that the demand for men, like that for any other commodity, necessarily regulates the production of men: it speeds it up when it goes on too slowly, and stops it when it advances too fast. It is this demand which regulates and determines the state of population growth in all the different countries of the world – in North America, in Europe, and in China – which makes it rapidly progressive in the first, slow and gradual in the second, and altogether stationary in the last.

Free vs. Enslaved Labor

The wear and tear of a slave, it has been said, is at the expense of his master; but that of a free servant is at his own expense. The wear and tear of the latter, however, is, in reality, as much at the expense of his master as that of the former. The wages paid to journeymen and servants of every kind must be such as may enable them, one with another, to continue the supply of journeymen and servants, according to whether the demand of the society is increasing, diminishing, or stationary. But though the wear and tear of a free servant is equally at the expense of his master, it generally costs him much less than that of a slave.

• The fund set aside for replacing or repairing, if I may say so, the wear and tear of the slave, is commonly managed by a negligent master or a careless overseer.
• The fund set aside for performing the same office for the free man is managed by the free man himself. The disorders which generally prevail in the household management of the rich naturally introduce themselves into the management of the enslaved workers. The strict thriftiness and careful attention of the poor as naturally establish themselves in the management of the free worker’s own affairs. Under such different management, the same purpose must require very different degrees of expense to achieve it. It appears, accordingly, from the experience of all ages and nations, I believe, that the work done by freemen comes out cheaper in the end than that performed by slaves. It is found to do so even in Boston, New York, and Philadelphia, where the wages of common labor are very high.

A generous reward for labor, therefore, as it is the effect of increasing wealth, is also the cause of increasing population. To complain of it is to lament over the necessary effect and cause of the greatest public prosperity.

The Happiest State for the Laboring Poor

It deserves to be remarked, perhaps, that it is in the progressive state, while the society is advancing towards further acquisition of wealth, rather than when it has acquired its full amount of riches, that the condition of the laboring poor (the great body of the people) seems to be the happiest and the most comfortable. It is hard in the stationary state, and miserable in the declining state. The progressive state is in reality the cheerful and hearty state for all the different orders of society. The stationary state is dull; the declining one, melancholy.

High Wages and Worker Industry

A generous reward for labor, as it encourages population growth, also increases the industry of the common people. The wages of labor are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives. A plentiful subsistence increases the bodily strength of the laborer. The comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, motivates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find workmen more active, diligent, and quick than where wages are low: in England, for example, more so than in Scotland; in the neighborhood of great towns more so than in remote country places.

Some workmen, indeed, when they can earn in four days what will maintain them through the week, will be idle the other three. This, however, is by no means the case with the greater part. Workmen, on the contrary, when they are generously paid by the piece, are very likely to overwork themselves and to ruin their health and constitution in a few years. A carpenter in London, and in some other places, is not supposed to last in his utmost vigor for more than eight years. Something of the same kind happens in many other trades in which the workmen are paid by the piece, as they generally are in manufactures, and even in country labor, wherever wages are higher than ordinary. Almost every class of craftsmen (artificers) is subject to some particular illness caused by excessive application to their specific type of work. Ramuzzini, an eminent Italian physician, has written a particular book about such diseases. We do not consider our soldiers the most industrious set of people among us. Yet when soldiers have been employed in some particular sorts of work and generously paid by the piece, their officers have frequently been obliged to stipulate with the employer that the soldiers should not be allowed to earn above a certain sum each day, according to the rate at which they were paid. Until this stipulation was made, mutual emulation and the desire for greater gain frequently prompted them to overwork themselves and to hurt their health by excessive labor.

Excessive application during four days of the week is frequently the real cause of the idleness of the other three, so much and so loudly complained of. Great labor, either of mind or body, continued for several days together, is in most men naturally followed by a great desire for relaxation. This desire, if not restrained by force or by some strong necessity, is almost irresistible. It is the call of nature, which requires to be relieved by some indulgence – sometimes of ease only, but sometimes, too, of dissipation and diversion. If it is not complied with, the consequences are often dangerous, and sometimes fatal, and such as almost always, sooner or later, bring on the particular illness associated with that trade. If masters would always listen to the dictates of reason and humanity, they would frequently have occasion to moderate rather than to encourage the application of many of their workmen. It will be found, I believe, in every sort of trade, that the man who works so moderately as to be able to work constantly not only preserves his health the longest but, in the course of the year, executes the greatest quantity of work.

Cheap Years vs. Dear Years: Impact on Workers

It is pretended that in cheap years (when food is inexpensive), workmen are generally more idle, and in dear years (when food is expensive), more industrious than ordinary. A plentiful subsistence, therefore, it has been concluded, relaxes their industry, and a scanty one quickens it. That a little more plenty than ordinary may make some workmen idle cannot well be doubted. But that it should have this effect upon the greater part, or that men in general should work better when they are ill-fed than when they are well-fed, when they are disheartened than when they are in good spirits, when they are frequently sick than when they are generally in good health, seems not very probable. Years of dearth (scarcity and high food prices), it is to be observed, are generally among the common people years of sickness and high death rates, which cannot fail to diminish the produce of their industry.

In years of plenty, servants frequently leave their masters and trust their subsistence to what they can make by their own industry. But the same cheapness of provisions, by increasing the fund which is destined for the maintenance of servants, encourages masters, farmers especially, to employ a greater number. Farmers on such occasions expect more profit from their corn by maintaining a few more laboring servants than by selling it at a low price in the market. The demand for servants increases, while the number of those who offer to supply that demand diminishes. The price of labor, therefore, frequently rises in cheap years.

In years of scarcity, the difficulty and uncertainty of subsistence make all such people eager to return to service. But the high price of provisions, by diminishing the funds destined for the maintenance of servants, disposes masters to diminish rather than to increase the number of those they have. In dear years, too, poor independent workmen frequently consume the little capital with which they had used to supply themselves with the materials for their work, and are obliged to become journeymen for subsistence. More people want employment than can easily get it; many are willing to take it on lower terms than ordinary, and the wages of both servants and journeymen frequently sink in dear years.

Masters of all sorts, therefore, frequently make better bargains with their servants in dear years than in cheap years, and find them more humble and dependent in the former than in the latter. They naturally, therefore, commend dear years as more favorable to industry. Landlords and farmers, besides, two of the largest classes of masters, have another reason for being pleased with dear years: the rents of the one and the profits of the other depend very much on the price of provisions. Nothing can be more absurd, however, than to imagine that men in general should work less when they work for themselves than when they work for other people. A poor independent workman will generally be more industrious than even a journeyman who works by the piece. The one enjoys the whole produce of his own industry; the other shares it with his master. The one, in his separate independent state, is less liable to the temptations of bad company, which in large manufactories so frequently ruin the morals of the other. The superiority of the independent workman over those servants who are hired by the month or by the year, and whose wages and maintenance are the same whether they do much or little, is likely to be still greater. Cheap years tend to increase the proportion of independent workmen to journeymen and servants of all kinds, and dear years to diminish it.

A French author of great knowledge and ingenuity, Mr. Messance, a tax collector in Saint-Étienne, tries to show that the poor do more work in cheap years than in dear years. He does this by comparing the quantity and value of the goods made on those different occasions in three different manufactures: one of coarse woolens at Elbeuf; one of linen, and another of silk, both of which extend through the whole administrative region of Rouen. It appears from his account, which is copied from the registers of public offices, that the quantity and value of the goods made in all those three manufactures has generally been greater in cheap years than in dear years; and that it has always been greatest in the cheapest years, and least in the dearest years. All three seem to be stationary manufactures, meaning that though their produce may vary somewhat from year to year, they are on the whole neither declining nor growing.

The manufacture of linen in Scotland, and that of coarse woolens in the West Riding of Yorkshire, are growing manufactures, of which the produce is generally, though with some variations, increasing both in quantity and value. Upon examining, however, the accounts which have been published of their annual produce, I have not been able to observe that its variations have had any noticeable connection with the dearness or cheapness of the seasons. In 1740, a year of great scarcity, both manufactures, indeed, appear to have declined very considerably. But in 1756, another year of great scarcity, the Scotch linen manufacture made more than ordinary advances. The Yorkshire woolen manufacture, indeed, declined, and its produce did not rise to what it had been in 1755 until 1766, after the repeal of the American Stamp Act. In that and the following year, it greatly exceeded what it had ever been before, and it has continued to advance ever since.

The produce of all great manufactures for distant sale must necessarily depend, not so much upon the dearness or cheapness of the seasons in the countries where they are carried on, as upon the circumstances which affect the demand in the countries where they are consumed. These include peace or war, the prosperity or decline of other rival manufacturers, and the good or bad mood of their principal customers. A great part of the extraordinary work, besides, which is probably done in cheap years, never enters the public registers of manufactures. The men servants who leave their masters become independent laborers. The women return to their parents and commonly spin in order to make clothes for themselves and their families. Even independent workmen do not always work for public sale but are employed by some of their neighbors in making goods for family use. The produce of their labor, therefore, frequently makes no appearance in those public registers, whose records are sometimes published with so much parade, and from which our merchants and manufacturers would often vainly pretend to announce the prosperity or decline of great empires.

The Relationship Between Provision Prices and Labor Prices

Though the variations in the price of labor not only do not always correspond with those in the price of provisions, but are frequently quite opposite, we must not, on this account, imagine that the price of provisions has no influence upon that of labor. The money price of labor is necessarily regulated by two circumstances:

1. The demand for labor.
2. The price of the necessities and conveniences of life.

The demand for labor – depending on whether it is increasing, stationary, or declining, or whether it requires an increasing, stationary, or declining population – determines the quantity of the necessities and conveniences of life which must be given to the laborer. The money price of labor is determined by what is required for purchasing this quantity. Though the money price of labor, therefore, is sometimes high where the price of provisions is low, it would be still higher (if demand remained the same) if the price of provisions was high.

It is because the demand for labor increases in years of sudden and extraordinary plenty, and diminishes in those of sudden and extraordinary scarcity, that the money price of labor sometimes rises in the one and sinks in the other.

In a year of sudden and extraordinary plenty, many employers of industry have sufficient funds to maintain and employ a greater number of industrious people than had been employed the year before. This extraordinary number cannot always be had immediately. Those masters, therefore, who want more workmen bid against one another in order to get them, which sometimes raises both the real and the money price of their labor.

The contrary of this happens in a year of sudden and extraordinary scarcity. The funds destined for employing industry are less than they had been the year before. A considerable number of people are thrown out of employment. They bid against one another in order to get work, which sometimes lowers both the real and the money price of labor. In 1740, a year of extraordinary scarcity, many people were willing to work for bare subsistence. In the succeeding years of plenty, it was more difficult to get laborers and servants.

The scarcity of a dear year, by diminishing the demand for labor, tends to lower its price, just as the high price of provisions tends to raise it (to cover subsistence).

The plenty of a cheap year, on the contrary, by increasing the demand for labor, tends to raise the price of labor. At the same time, the cheapness of food supplies tends to lower the real cost of that labor (in terms of what’s needed for subsistence). In the ordinary variations of the price of food, these two opposite causes seem to counterbalance one another. This is probably partly why the wages of labor are everywhere so much more steady and permanent than the price of food.

The increase in the wages of labor necessarily increases the price of many commodities by increasing that part of the price which consists of wages. This, in turn, tends to diminish their consumption both at home and abroad. However, the same cause that raises the wages of labor – the increase of capital (stock) – also tends to increase labor’s productive powers. It makes a smaller quantity of labor produce a greater quantity of work. The owner of the capital who employs a great number of laborers necessarily tries, for his own advantage, to make such a proper division and distribution of employment that they may be enabled to produce the greatest quantity of work possible. For the same reason, he tries to supply them with the best machinery that either he or they can think of. What takes place among the laborers in a particular workshop also takes place, for the same reason, among those in a great society. The greater their number, the more they naturally divide themselves into different classes and subdivisions of employment. More minds are occupied in inventing the most proper machinery for doing the work of each, and it is, therefore, more likely to be invented. There are many commodities, therefore, which, as a consequence of these improvements, come to be produced by so much less labor than before that the increase in the price of labor (wages) is more than compensated for by the decrease in the quantity of labor needed.

CHAPTER IX: THE PROFITS OF CAPITAL

The rise and fall in the profits of capital (or stock) depend upon the same causes as the rise and fall in the wages of labor: the increasing or declining state of the wealth of the society. But those causes affect profits and wages very differently.

Impact of Increasing Capital

The increase of capital, which raises wages, tends to lower profit. When the capital of many rich merchants is invested in the same trade, their mutual competition naturally tends to lower its profit. And when there is a similar increase of capital in all the different trades carried on in the same society, the same competition must produce the same effect in all of them.

Difficulty in Determining Average Profits

It is not easy, as has already been observed, to determine what the average wages of labor are, even in a particular place and at a particular time. We can, even in this case, seldom determine more than what are the most usual wages. But even this can seldom be done with regard to the profits of capital. Profit is so very fluctuating that the person who carries on a particular trade cannot always tell you himself what his average annual profit is. It is affected not only by every variation of price in the commodities he deals in, but by the good or bad fortune of both his rivals and his customers, and by a thousand other accidents to which goods are liable when carried either by sea or by land, or even when stored in a warehouse. Profit varies, therefore, not only from year to year but from day to day, and almost from hour to hour. To determine what the average profit is of all the different trades carried on in a great kingdom must be much more difficult. And to judge what it may have been formerly, or in remote periods of time, with any degree of precision, must be altogether impossible.

Interest Rates as an Indicator of Profits

But though it may be impossible to determine with any precision what the average profits of capital are or were, either in the present or in ancient times, some notion may be formed of them from the interest of money. It may be laid down as a general rule:

• Wherever a great deal can be made by the use of money, a great deal will commonly be given for the use of it.
• Wherever little can be made by it, less will commonly be given for it. According, therefore, as the usual market rate of interest varies in any country, we may be assured that the ordinary profits of capital must vary with it. Profits must sink as interest rates sink, and rise as interest rates rise. The progress of interest rates, therefore, may lead us to form some notion of the progress of profit.

By a law in the 37th year of Henry VIII’s reign, all interest above ten percent was declared unlawful. It seems that more had sometimes been taken before that. In the reign of Edward VI, religious zeal prohibited all interest. This prohibition, however, like all others of the same kind, is said to have produced no effect and probably rather increased than diminished the evil of charging excessive interest (usury). The statute of Henry VIII was revived by the 13th of Elizabeth, chapter 8, and ten percent continued to be the legal rate of interest until the 21st year of James I, when it was restricted to eight percent. It was reduced to six percent soon after the Restoration (of the monarchy), and by the 12th of Queen Anne to five percent. All these different laws seem to have been made with great propriety. They seem to have followed, and not to have gone before, the market rate of interest, or the rate at which people of good credit usually borrowed. Since the time of Queen Anne, five percent seems to have been rather above than below the market rate. Before the late war, the government borrowed at three percent; and people of good credit in the capital, and in many other parts of the kingdom, borrowed at three and a half, four, and four and a half percent.

Since the time of Henry VIII, the wealth and revenue of the country have been continually advancing. In the course of their progress, their pace seems rather to have gradually sped up than slowed down. They seem not only to have been going on but to have been going on faster and faster. The wages of labor have been continually increasing during the same period, and in most different branches of trade and manufactures, the profits of capital have been diminishing.

Profits in Towns vs. Villages

It generally requires more capital to carry on any sort of trade in a great town than in a country village. The large amounts of capital employed in every branch of trade in towns, and the number of rich competitors, generally reduce the rate of profit in towns below what it is in villages. But the wages of labor are generally higher in a great town than in a country village. In a thriving town, people who have large amounts of capital to employ frequently cannot get the number of workmen they want. They, therefore, bid against one another to get as many as they can, which raises the wages of labor and lowers the profits of capital. In remote parts of the country, there is frequently not enough capital to employ all the people. These people, therefore, bid against one another to get employment, which lowers the wages of labor and raises the profits of capital.

Profits and Wages: Scotland vs. England vs. France

In Scotland, though the legal rate of interest is the same as in England, the market rate is rather higher. People of the best credit there seldom borrow for less than five percent. Even private bankers in Edinburgh give four percent on their promissory notes (written promises to pay), from which payment can be demanded at any time. Private bankers in London give no interest for the money deposited with them. There are few trades that cannot be carried on with smaller capital in Scotland than in England. The common rate of profit, therefore, must be somewhat greater in Scotland. The wages of labor, as has already been observed, are lower in Scotland than in England. The country, too, is not only much poorer, but the steps by which it advances to a better condition (for it is clearly advancing) seem to be slower and more gradual.

The legal rate of interest in France has not, during the course of the present century, always been regulated by the market rate.

• In 1720, interest was reduced from five to two percent.
• In 1724, it was raised to three and a half percent.
• In 1725, it was again raised to five percent.
• In 1766, during the administration of Mr. Laverdy, it was reduced to four percent. The Abbe Terray later raised it to the old rate of five percent. The supposed purpose of many of those sharp reductions of interest was to prepare the way for reducing the interest on public debts, a purpose which has sometimes been carried out. France is perhaps, in the present times, not as rich a country as England. And though the legal rate of interest in France has frequently been lower than in England, the market rate has generally been higher. This is because in France, as in other countries, they have several very safe and easy methods of evading the law. The profits of trade, I have been assured by British merchants who had traded in both countries, are higher in France than in England. It is no doubt on this account that many British subjects choose to employ their capitals in a country where trade is looked down upon, rather than in one where it is highly respected. The wages of labor are lower in France than in England. When you go from Scotland to England, the difference you may notice between the dress and appearance of the common people in the one country and in the other sufficiently indicates the difference in their condition. The contrast is still greater when you return from France. France, though no doubt a richer country than Scotland, seems not to be going forward so fast. It is a common and even a popular opinion in France that it is going backwards – an opinion which, I believe, is ill-founded even with regard to France, but which nobody can possibly entertain with regard to Scotland, who sees the country now and who saw it twenty or thirty years ago.

Holland: High Wealth, Low Profits

The province of Holland, on the other hand, in proportion to the extent of its territory and the number of its people, is a richer country than England. The government there borrows at two percent, and private people of good credit at three percent. The wages of labor are said to be higher in Holland than in England, and the Dutch, it is well known, trade upon lower profits than any people in Europe. The trade of Holland, it has been pretended by some people, is decaying, and it may perhaps be true that some particular branches of it are so. But these symptoms seem to indicate sufficiently that there is no general decay. When profit diminishes, merchants are very apt to complain that trade is decaying, though the diminution of profit is the natural effect of its prosperity, or of more capital being employed in it than before. During the late war, the Dutch gained the whole carrying trade (transporting goods for other countries) of France, of which they still retain a very large share. The great property which they possess in both the French and English funds (government bonds) – about forty million, it is said, in the latter (in which I suspect, however, there is a considerable exaggeration) – and the great sums which they lend to private people in countries where the rate of interest is higher than in their own, are circumstances which no doubt demonstrate the excess (redundancy) of their capital. It shows that their capital has increased beyond what they can employ with tolerable profit in the proper business of their own country. But these circumstances do not demonstrate that that business has decreased. Just as the capital of a private man, though acquired by a particular trade, may increase beyond what he can employ in it, and yet that trade continue to increase too, so may likewise the capital of a great nation.

New Colonies: High Wages and High Profits

In our North American and West Indian colonies, not only the wages of labor but also the interest of money, and consequently the profits of capital, are higher than in England. In the different colonies, both the legal and the market rate of interest run from six to eight percent. High wages of labor and high profits of capital, however, are things that perhaps hardly ever go together, except in the peculiar circumstances of new colonies. A new colony must always, for some time, be more under-stocked with capital in proportion to the extent of its territory, and more under-peopled in proportion to the extent of its capital, than most other countries. They have more land than they have capital to cultivate. What capital they have, therefore, is applied to the cultivation only of what is most fertile and most favorably situated – the land near the seashore and along the banks of navigable rivers. Such land, too, is frequently purchased at a price below the value even of its natural produce. Capital employed in the purchase and improvement of such lands must yield a very large profit, and consequently allow for paying a very large interest. Its rapid accumulation in so profitable an employment enables the planter to increase the number of his workers faster than he can find them in a new settlement. Those whom he can find, therefore, are very generously rewarded. As the colony increases, the profits of capital gradually diminish. When the most fertile and best-situated lands have all been occupied, less profit can be made by the cultivation of what is inferior both in soil and situation, and less interest can be afforded for the capital which is so employed. In most of our colonies, accordingly, both the legal and the market rate of interest have been considerably reduced during the course of the present century. As riches, improvement, and population have increased, interest has declined. The wages of labor do not sink with the profits of capital. The demand for labor increases with the increase of capital, whatever its profits may be. And after profits have diminished, capital may not only continue to increase but to increase much faster than before. It is with industrious nations that are advancing in acquiring riches as it is with industrious individuals. A great amount of capital, though earning small profits, generally increases faster than a small amount of capital earning great profits. Money, says the proverb, makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little. The connection between the increase of capital and that of industry, or of the demand for useful labor, has partly been explained already but will be explained more fully later when discussing the accumulation of capital.

New Territory or Trade Can Raise Profits Temporarily

The acquisition of new territory, or of new branches of trade, may sometimes raise the profits of capital, and with them the interest of money, even in a country that is fast advancing in acquiring riches. The capital of the country, not being sufficient for the whole addition of business which such acquisitions present to the different people among whom it is divided, is applied to those particular branches only which afford the greatest profit. Part of what had before been employed in other trades is necessarily withdrawn from them and turned into some of the new and more profitable ones. In all those old trades, therefore, the competition becomes less than before. The market comes to be less fully supplied with many different sorts of goods. Their price necessarily rises more or less and yields a greater profit to those who deal in them. These dealers can, therefore, afford to borrow at a higher interest. For some time after the conclusion of the late war, not only private people of the best credit but also some of the greatest companies in London commonly borrowed at five percent. Before that, they had not been used to paying more than four or four and a half percent. The great addition of both territory and trade, from our acquisitions in North America and the West Indies, will sufficiently account for this, without supposing any decrease in the capital stock of the society. Such a great addition of new business to be carried on by the old capital must necessarily have diminished the quantity employed in many particular branches. In these branches, the competition being less, the profits must have been greater. I shall later have occasion to mention the reasons which lead me to believe that the capital stock of Great Britain was not diminished even by the enormous expense of the late war.

Diminishing Capital Stock Raises Profits

The decrease of the capital stock of the society, or of the funds destined for the maintenance of industry, however, as it lowers the wages of labor, also raises the profits of capital, and consequently the interest of money. Because the wages of labor are lowered, the owners of what capital remains in the society can bring their goods to market at less expense than before. And since less capital is employed in supplying the market than before, they can sell them at a higher price. Their goods cost them less, and they get more for them. Their profits, therefore, being increased at both ends, can well afford a large interest. The great fortunes so suddenly and so easily acquired in Bengal and the other British settlements in the East Indies may satisfy us that, as the wages of labor are very low, the profits of capital are very high in those ruined countries. The interest of money is proportionally high. In Bengal, money is frequently lent to farmers at forty, fifty, and sixty percent, and the succeeding crop is mortgaged for the payment. As the profits which can afford such an interest must eat up almost the whole rent of the landlord, such enormous rates of interest (usury) must in turn eat up the greater part of those profits. Before the fall of the Roman Republic, usury of the same kind seems to have been common in the provinces, under the ruinous administration of their proconsuls. The virtuous Brutus lent money in Cyprus at forty-eight percent, as we learn from the letters of Cicero.

In a country that had acquired its full potential of wealth – all that its soil, climate, and location relative to other countries allowed it to acquire – and which could, therefore, advance no further, and was not going backwards, both the wages of labor and the profits of capital would probably be very low.

• In a country fully populated in proportion to what its territory could maintain or its capital could employ, the competition for employment would necessarily be so great as to reduce the wages of labor to what was barely sufficient to keep up the number of laborers. And, the country being already fully peopled, that number could never be increased.
• In a country fully stocked with capital in proportion to all the business it had to transact, as great a quantity of capital would be employed in every particular branch as the nature and extent of the trade would allow. The competition, therefore, would everywhere be as great as possible, and consequently, the ordinary profit as low as possible.

But perhaps no country has ever yet reached this degree of wealth. China seems to have been stationary for a long time and had probably long ago acquired that full potential of riches which is consistent with the nature of its laws and institutions. But this potential may be much inferior to what, with different laws and institutions, the nature of its soil, climate, and situation might allow. A country that neglects or despises foreign commerce, and which allows the vessels of foreign nations into only one or two of its ports, cannot transact the same quantity of business which it might do with different laws and institutions. In a country too, where, though the rich or the owners of large capitals enjoy a good deal of security, the poor or the owners of small capitals enjoy hardly any, but are liable, under the pretense of justice, to be robbed and plundered at any time by lower-level officials (mandarins), the quantity of capital employed in all the different branches of business transacted within it can never be equal to what the nature and extent of that business might allow. In every different branch, the oppression of the poor must establish the monopoly of the rich, who, by controlling (engrossing) the whole trade themselves, will be able to make very large profits. Accordingly, twelve percent is said to be the common interest rate for money in China, and the ordinary profits of capital must be sufficient to afford this large interest.

A defect in the law may sometimes raise the rate of interest considerably above what the condition of the country, regarding its wealth or poverty, would require. When the law does not enforce the performance of contracts, it puts all borrowers nearly on the same footing as bankrupts or people of doubtful credit in better-regulated countries. The uncertainty of recovering the money makes the lender demand the same extremely high (usurious) interest which is usually required from bankrupts. Among the less civilized nations who overran the western provinces of the Roman Empire, the performance of contracts was left for many ages to the good faith of the contracting parties. The courts of justice of their kings seldom got involved. The high rate of interest which occurred in those ancient times may perhaps be partly accounted for by this cause.

When the law prohibits interest altogether, it does not prevent it. Many people must borrow, and nobody will lend without a payment for the use of their money that is suitable not only to what can be made by using it, but also to the difficulty and danger of evading the law. Mr. Montesquieu accounts for the high rate of interest among all Muslim (Mahometan) nations not by their poverty, but partly by this prohibition, and partly from the difficulty of recovering the money.

Lowest Rates of Profit and Interest

The lowest ordinary rate of profit must always be something more than what is sufficient to compensate for the occasional losses to which every employment of capital is exposed. It is this surplus only which is net or clear profit. What is called gross profit frequently includes not only this surplus but also what is retained for compensating such extraordinary losses. The interest which the borrower can afford to pay is in proportion to the clear profit only.

The lowest ordinary rate of interest must, in the same manner, be something more than sufficient to compensate for the occasional losses to which lending, even with reasonable prudence, is exposed. Were it not more, charity or friendship could be the only motives for lending.

The State of Holland: Approaching Full Complement of Riches?

In a country which had acquired its full potential of riches, where in every particular branch of business there was the greatest quantity of capital that could be employed in it, the ordinary rate of clear profit would be very small. Consequently, the usual market rate of interest which could be afforded out of it would be so low as to make it impossible for any but the very wealthiest people to live upon the interest of their money. All people of small or medium fortunes would be obliged to oversee the employment of their own capital themselves. It would be necessary that almost every person should be a business person, or engage in some sort of trade. The province of Holland seems to be approaching this state. It is considered unfashionable there not to be a person of business. Necessity makes it usual for almost every person to be so, and custom everywhere regulates fashion. Just as it is ridiculous not to dress like other people, so it is, in some measure, not to be employed like other people. As a person in a civilian profession seems awkward in an army camp or garrison, and is even in some danger of being despised there, so does an idle person among business people.

Highest Rate of Profit

The highest ordinary rate of profit may be such that, in the price of most commodities, it eats up the whole of what should go to the rent of the land. It leaves only what is sufficient to pay the labor of preparing and bringing them to market, according to the lowest rate at which labor can anywhere be paid – the bare subsistence of the laborer. The workman must always have been fed in some way or other while he was doing the work, but the landlord may not always have been paid. The profits of the trade which the servants of the East India Company carry on in Bengal may not perhaps be very far from this rate.

Proportion Between Interest and Profit

The proportion which the usual market rate of interest ought to bear to the ordinary rate of clear profit necessarily varies as profit rises or falls. In Great Britain, double the interest rate is considered what merchants call a good, moderate, reasonable profit – terms which I understand mean no more than a common and usual profit. In a country where the ordinary rate of clear profit is eight or ten percent, it may be reasonable that one half of it should go to interest, wherever business is carried on with borrowed money. The capital is at the risk of the borrower, who, in a way, insures it to the lender. Four or five percent may, in most trades, be both a sufficient profit upon the risk of this insurance and a sufficient payment for the trouble of employing the capital. But the proportion between interest and clear profit might not be the same in countries where the ordinary rate of profit was either a good deal lower or a good deal higher. If it were a good deal lower, one half of it perhaps could not be afforded for interest; and more might be afforded if it were a good deal higher.

Low Profits Can Compensate for High Wages

In countries which are fast advancing to riches, the low rate of profit may, in the price of many commodities, compensate for the high wages of labor. This can enable those countries to sell as cheaply as their less thriving neighbors, among whom the wages of labor may be lower.

Impact of Profits vs. Wages on Prices

In reality, high profits tend much more to raise the price of work than high wages do. If in the linen manufacture, for example, the wages of the different working people – the flax-dressers, the spinners, the weavers, etc. – should all be increased by twopence a day, it would be necessary to raise the price of a piece of linen only by a number of twopences equal to the number of people employed on it, multiplied by the number of days they were so employed. That part of the price of the commodity which consisted of wages would, through all the different stages of manufacture, rise only in arithmetical proportion to this rise of wages (like simple addition). But if the profits of all the different employers of those working people should be raised by five percent, that part of the price of the commodity which consisted of profit would, through all the different stages of manufacture, rise in geometrical proportion to this rise of profit (like compounding).

• The employer of the flax-dressers, when selling his flax, would require an additional five percent upon the whole value of the materials and wages he advanced to his workmen.
• The employer of the spinners would require an additional five percent both upon the increased price of the flax and upon the wages of the spinners.
• And the employer of the weavers would require a similar five percent both upon the increased price of the linen yarn and upon the wages of the weavers. In raising the price of commodities, the rise of wages operates in the same manner as simple interest does in the accumulation of debt. The rise of profit operates like compound interest. Our merchants and master manufacturers complain much about the bad effects of high wages in raising prices and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the harmful effects of their own gains. They complain only of those of other people.

CHAPTER X: WAGES AND PROFIT IN DIFFERENT JOBS AND INVESTMENTS

The whole of the advantages and disadvantages of the different employments of labor and capital must, in the same neighborhood, be either perfectly equal or continually tending towards equality. If, in the same neighborhood, there was any employment clearly either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments. This, at least, would be the case in a society where things were left to follow their natural course, where there was perfect liberty, and where every person was perfectly free both to choose what occupation he thought proper and to change it as often as he thought proper. Every person’s interest would prompt him to seek the advantageous and to shun the disadvantageous employment.

Money wages and profits, indeed, are extremely different everywhere in Europe according to the different employments of labor and capital. But this difference arises partly from certain circumstances in the employments themselves. These circumstances, either really or at least in people’s imaginations, make up for small money earnings in some jobs and counterbalance great money earnings in others. The difference also arises partly from the policy of Europe, which nowhere leaves things at perfect liberty.

The particular consideration of these circumstances and of that policy will divide this chapter into two parts.

PART I: Inequalities Arising from the Nature of the Employments Themselves

The five following are the principal circumstances which, as far as I have been able to observe, make up for small money earnings in some employments and counterbalance great ones in others:

1. The agreeableness or disagreeableness of the employments themselves.
2. The easiness and cheapness, or the difficulty and expense of learning them.
3. The constancy or inconstancy of employment in them.
4. The small or great trust which must be placed in those who exercise them.
5. The probability or improbability of success in them.

First: Agreeableness or Disagreeableness of Employments

The wages of labor vary with the ease or hardship, the cleanliness or dirtiness, the honorableness or dishonorableness of the employment.

• Thus, in most places, taking the year round, a journeyman tailor (a skilled tailor working for a master) earns less than a journeyman weaver. His work is much easier.
• A journeyman weaver earns less than a journeyman smith (blacksmith). His work is not always easier, but it is much cleaner.
• A journeyman blacksmith, though a craftsman, seldom earns as much in twelve hours as a collier (coal miner), who is only a laborer, does in eight. The blacksmith’s work is not quite so dirty, is less dangerous, and is carried on in daylight and above ground. Honor makes a great part of the reward of all honorable professions. In terms of money earnings, all things considered, they are generally under-paid, as I shall try to show later. Disgrace has the contrary effect.
• The trade of a butcher is a crude and unpleasant business, but it is in most places more profitable than most common trades.
• The most detestable of all employments, that of a public executioner, is, in proportion to the quantity of work done, better paid than any common trade whatever.

Hunting and fishing, the most important employments of mankind in an early, undeveloped state of society, become in its advanced state their most agreeable amusements. People then pursue for pleasure what they once followed from necessity. In an advanced state of society, therefore, the people who follow as a trade what other people pursue as a pastime are all very poor. Fishermen have been so since ancient times. A poacher (someone who hunts or fishes illegally) is everywhere a very poor man in Great Britain. In countries where the strictness of the law allows no poachers, the licensed hunter is not in a much better condition. The natural taste for these employments makes more people follow them than can live comfortably by them. The produce of their labor, in proportion to its quantity, always comes too cheaply to market to afford anything but the most meager subsistence to the laborers.

Disagreeableness and disgrace affect the profits of capital in the same manner as the wages of labor. The keeper of an inn or tavern, who is never master of his own house and who is exposed to the rudeness of every drunkard, exercises neither a very agreeable nor a very reputable business. But there is hardly any common trade in which a small amount of capital yields so great a profit.

Second: Cost of Learning the Business

The wages of labor vary with the easiness and cheapness, or the difficulty and expense, of learning the business.

When any expensive machine is built, the extraordinary work to be performed by it before it is worn out must be expected to replace the capital invested in it, with at least the ordinary profits. A person educated at the expense of much labor and time for any of those employments which require extraordinary skill may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labor, will repay him the whole expense of his education, with at least the ordinary profits of an equally valuable capital. It must do this, too, in a reasonable time, considering the very uncertain duration of human life, in the same manner as one considers the more certain duration of a machine.

The difference between the wages of skilled labor and those of common labor is founded upon this principle.

The policy of Europe considers the labor of all mechanics, craftsmen (artificers), and manufacturers as skilled labor, and that of all country laborers (farm workers) as common labor. It seems to suppose the former to be of a more precise and delicate nature than the latter. It is so perhaps in some cases, but in most cases, it is quite otherwise, as I shall try to show later. The laws and customs of Europe, therefore, in order to qualify any person for exercising the one type of labor (skilled), impose the necessity of an apprenticeship, though with different degrees of strictness in different places. They leave the other type of labor (common) free and open to everybody. During the apprenticeship, the whole labor of the apprentice belongs to his master. In the meantime, he must, in many cases, be maintained by his parents or relations, and in almost all cases must be clothed by them. Some money, too, is commonly given to the master for teaching him his trade. Those who cannot give money give time, or become bound for more than the usual number of five years – an arrangement which, though it is not always advantageous to the master (on account of the usual idleness of apprentices), is always disadvantageous to the apprentice. In country labor, on the contrary, the laborer, while he is employed in the easier parts of his business, learns the more difficult parts. His own labor maintains him through all the different stages of his employment. It is reasonable, therefore, that in Europe the wages of mechanics, craftsmen, and manufacturers should be somewhat higher than those of common laborers. They are so accordingly, and their superior earnings make them in most places be considered as a superior rank of people. This superiority, however, is generally very small. The daily or weekly earnings of journeymen in the more common sorts of manufactures, such as those of plain linen and woolen cloth, computed on average, are, in most places, very little more than the day wages of common laborers. Their employment, indeed, is more steady and uniform, and the superiority of their earnings, taking the whole year together, may be somewhat greater. It seems clearly, however, to be no greater than what is sufficient to compensate for the superior expense of their education.

Education in the ingenious arts (like fine arts and complex crafts) and in the liberal professions (like law or medicine) is still more tedious and expensive.

The money payment, therefore, for painters and sculptors, and for lawyers and physicians, ought to be much more generous; and it usually is.

The profits of capital, however, seem to be very little affected by the easiness or difficulty of learning the trade in which it is employed. All the different ways in which capital is commonly used in great towns seem, in reality, to be almost equally easy and equally difficult to learn. One branch of either foreign or domestic trade cannot generally be a much more complicated business than another.

Third: Constancy or Inconstancy of Employment

The wages of labor in different occupations vary with how steady or unsteady the employment is.

Employment is much more constant in some trades than in others.

• In most manufacturing jobs, a journeyman (a skilled worker who has completed an apprenticeship) can be pretty sure of having work almost every day of the year that he is able to work.
• A mason or bricklayer, on the other hand, cannot work in hard frost or in bad weather. His employment at all times depends on occasional calls from customers. As a result, he is liable to be frequently without any work. What he earns, therefore, while he is employed, must not only support him while he is idle but also compensate him for those anxious and depressing moments that the thought of such an insecure situation must sometimes cause. Where the calculated earnings of most manufacturers, accordingly, are nearly on a level with the day wages of common laborers, those of masons and bricklayers are generally from one and a half to double those wages.
  • Where common laborers earn four or five shillings a week, masons and bricklayers frequently earn seven or eight.
  • Where common laborers earn six shillings, masons and bricklayers often earn nine or ten.
  • And where common laborers earn nine or ten shillings, as in London, masons and bricklayers commonly earn fifteen and eighteen. No type of skilled labor, however, seems easier to learn than that of masons and bricklayers. Chairmen (men who carried people in sedan chairs) in London, during the summer season, are said sometimes to be employed as bricklayers. The high wages of these workmen, therefore, are not so much a reward for their skill as compensation for the inconstancy of their employment.

A house carpenter seems to practice a rather more precise and skillful trade than a mason. In most places, however (for it is not universally so), his day wages are somewhat lower. His employment, though it depends a lot on occasional calls from customers, does not depend on them quite as entirely as a mason’s does. It is also not liable to be interrupted by the weather.

When trades that generally offer constant employment happen, in a particular place, not to do so, the wages of the workmen always rise a good deal above their ordinary proportion to those of common labor. In London, almost all journeymen craftsmen (artificers) are liable to be hired and dismissed by their masters from day to day, and from week to week, in the same manner as day-laborers in other places. The lowest order of craftsmen, journeymen tailors, accordingly, earn half a crown (two shillings and sixpence) a day there, though eighteenpence (one shilling and sixpence) may be considered the wages of common labor. In small towns and country villages, the wages of journeymen tailors frequently are hardly equal to those of common labor; but in London, they are often many weeks without employment, particularly during the summer.

When the inconstancy of employment is combined with the hardship, disagreeableness, and dirtiness of the work, it sometimes raises the wages of the most common labor above those of the most skillful craftsmen. A collier (coal miner) working by the piece is supposed, at Newcastle, to earn commonly about double, and in many parts of Scotland about three times, the wages of common labor. His high wages arise entirely from the hardship, disagreeableness, and dirtiness of his work. His employment may, on most occasions, be as constant as he pleases. The coal-heavers in London (men who unload coal from ships) practice a trade which in hardship, dirtiness, and disagreeableness almost equals that of colliers. And from the unavoidable irregularity in the arrivals of coal-ships, the employment of most of them is necessarily very inconstant. If colliers, therefore, commonly earn double and triple the wages of common labor, it ought not to seem unreasonable that coal-heavers should sometimes earn four and five times those wages. In an inquiry made into their condition a few years ago, it was found that at the rate at which they were then paid, they could earn from six to ten shillings a day. Six shillings are about four times the wages of common labor in London, and in every particular trade, the lowest common earnings may always be considered as those of the vast majority. However extravagant those earnings may appear, if they were more than sufficient to compensate for all the disagreeable circumstances of the business, there would soon be so great a number of competitors (in a trade which has no exclusive privilege) that it would quickly reduce them to a lower rate.

The constancy or inconstancy of employment cannot affect the ordinary profits of capital in any particular trade. Whether the capital is or is not constantly employed depends not upon the trade, but upon the trader.

Fourth: The Amount of Trust Reposed in Workmen

The wages of labor vary according to the small or great trust which must be placed in the workmen.

The wages of goldsmiths and jewelers are everywhere superior to those of many other workmen, not only of equal but of much superior skill, because of the precious materials with which they are entrusted.

We trust our health to the physician; our fortune, and sometimes our life and reputation, to the lawyer and attorney. Such confidence could not safely be placed in people of very mean or low social standing. Their reward must be such, therefore, as may give them that rank in society which so important a trust requires. The long time and the great expense which must be laid out in their education, when combined with this circumstance, necessarily increase still further the price of their labor.

When a person employs only his own capital in trade, there is no trust involved in terms of that capital. The credit which he may get from other people depends not upon the nature of his trade, but upon their opinion of his fortune, honesty (probity), and prudence. The different rates of profit, therefore, in the different branches of trade, cannot arise from the different degrees of trust placed in the traders.

Fifth: Probability of Success in Employments

The wages of labor in different employments vary according to the probability or improbability of success in them.

The probability that any particular person shall ever be qualified for the employment to which he is educated is very different in different occupations.

• In most mechanic trades, success is almost certain.
• But success is very uncertain in the liberal professions (those requiring higher education, like law or medicine). Put your son as an apprentice to a shoemaker, and there is little doubt he will learn to make a pair of shoes. But send him to study law, and it is at least twenty to one odds if he ever makes enough progress to earn a living by that business.

In a perfectly fair lottery, those who draw the prizes ought to gain all that is lost by those who draw blanks. In a profession where twenty fail for every one that succeeds, that one successful person ought to gain all that should have been gained by the unsuccessful twenty. The lawyer (counsellor at law) who, perhaps at nearly forty years of age, begins to make something by his profession, ought to receive payment not only for his own very long and expensive education but also for that of more than twenty others who are never likely to make anything by it. However extravagant the fees of lawyers may sometimes appear, their real payment is never equal to this. Compute in any particular place what is likely to be annually gained, and what is likely to be annually spent, by all the different workmen in any common trade, such as that of shoemakers or weavers, and you will find that the former sum (gains) will generally exceed the latter (expenses). But make the same computation with regard to all the lawyers and law students in all the different law schools (inns of court), and you will find that their annual gains bear but a very small proportion to their annual expenses, even if you rate the gains as high, and the expenses as low, as can reasonably be done. The lottery of the law, therefore, is very far from being a perfectly fair lottery. That profession, as well as many other liberal and honorable professions, is, in terms of money earnings, clearly under-paid.

Those professions keep their level, however, with other occupations. Notwithstanding these discouragements, all the most generous and liberal spirits are eager to crowd into them. Two different causes contribute to recommend them:

1. First, the desire for the reputation which comes with superior excellence in any of them.
2. Secondly, the natural confidence which every person has, more or less, not only in his own abilities but also in his own good fortune.

To excel in any profession in which few even reach mediocrity is the most decisive mark of what is called genius or superior talents. The public admiration which comes with such distinguished abilities always makes up a part of their reward – a greater or smaller part in proportion as the admiration is higher or lower. It makes a considerable part of that reward in the profession of medicine; a still greater part perhaps in that of law; in poetry and philosophy, it makes almost the whole reward.

There are some very agreeable and beautiful talents whose possession commands a certain sort of admiration, but whose exercise for the sake of gain is considered (whether from reason or prejudice) as a sort of public prostitution. The money payment, therefore, of those who exercise them in this manner must be sufficient not only to pay for the time, labor, and expense of acquiring the talents but also for the discredit which comes with using them as a means of earning a living. The very high (exorbitant) rewards of players (actors), opera singers, opera dancers, etc., are founded upon these two principles: the rarity and beauty of the talents, and the discredit of employing them in this manner. It seems absurd at first sight that we should despise their persons and yet reward their talents with the most lavish generosity. While we do the one, however, we must of necessity do the other. Should public opinion or prejudice ever alter with regard to such occupations, their money payment would quickly diminish. More people would apply to them, and the competition would quickly reduce the price of their labor. Such talents, though far from being common, are by no means as rare as is imagined. Many people possess them in great perfection but disdain to make this use of them. Many more are capable of acquiring them if anything could be made honorably by them.

The excessive pride or arrogant overconfidence (overweening conceit) which most people have in their own abilities is an ancient evil remarked upon by philosophers and moralists of all ages. Their absurd presumption in their own good fortune has been less taken notice of. It is, however, if possible, still more universal. There is no person living who, when in tolerable health and spirits, does not have some share of it. The chance of gain is, by every person, more or less overvalued, and the chance of loss is, by most people, undervalued. Hardly any person who is in tolerable health and spirits values the chance of loss more than it is worth.

That the chance of gain is naturally overvalued, we may learn from the universal success of lotteries. The world has neither ever seen, nor ever will see, a perfectly fair lottery – or one in which the whole gain compensated for the whole loss – because the person running the lottery (the undertaker) could make no profit from it. In state lotteries, the tickets are really not worth the price which is paid by the original subscribers, and yet they commonly sell in the market for a twenty, thirty, and sometimes forty percent advance. The vain hope of winning some of the great prizes is the sole cause of this demand. The most sensible people hardly look upon it as foolish to pay a small sum for the chance of gaining ten or twenty thousand pounds, though they know that even that small sum is perhaps twenty or thirty percent more than the chance is actually worth. In a lottery in which no prize exceeded twenty pounds, though in other respects it approached much nearer to a perfectly fair one than the common state lotteries, there would not be the same demand for tickets. To have a better chance for some of the great prizes, some people purchase several tickets, and others buy small shares in a still greater number. There is not, however, a more certain proposition in mathematics than that the more tickets you risk money on, the more likely you are to be a loser. Risk money on all the tickets in the lottery, and you lose for certain; and the greater the number of your tickets, the nearer you approach to this certainty.

That the chance of loss is frequently undervalued, and hardly ever valued at more than it is worth, we may learn from the very moderate profit of insurers. To make insurance (either from fire or sea-risk) a trade at all, the common premium (price of insurance) must be sufficient to compensate for the common losses, to pay the expense of management, and to afford such a profit as might have been drawn from an equal capital employed in any common trade. The person who pays no more than this clearly pays no more than the real value of the risk, or the lowest price at which he can reasonably expect to insure it. But though many people have made a little money by insurance, very few have made a great fortune. From this consideration alone, it seems clear enough that the ordinary balance of profit and loss is not more advantageous in this than in other common trades by which so many people make fortunes. Moderate, however, as the premium of insurance commonly is, many people despise the risk too much to care to pay it. Taking the whole kingdom on average, nineteen houses in twenty, or rather perhaps ninety-nine in a hundred, are not insured against fire. Sea risk is more alarming to most people, and the proportion of ships insured to those not insured is much greater. Many ships sail, however, at all seasons, and even in time of war, without any insurance. This may sometimes perhaps be done without any imprudence. When a great company, or even a great merchant, has twenty or thirty ships at sea, they may, in a way, insure one another. The premium saved upon them all may more than compensate for such losses as they are likely to meet with in the common course of chances. The neglect of insurance upon shipping, however, in the same manner as upon houses, is, in most cases, the effect not of such careful calculation, but of mere thoughtless rashness and arrogant contempt of the risk.

The contempt of risk and the presumptuous hope of success are in no period of life more active than at the age at which young people choose their professions. How little the fear of misfortune is then capable of balancing the hope of good luck appears still more clearly in the readiness of common people to enlist as soldiers, or to go to sea, than in the eagerness of those of better social standing to enter into what are called the liberal professions.

What a common soldier may lose is obvious enough. Without regarding the danger, however, young volunteers never enlist so readily as at the beginning of a new war. Though they have hardly any chance of promotion (preferment), they imagine, in their youthful fancies, a thousand occasions of acquiring honor and distinction which never occur. These romantic hopes make up the whole price of their blood. Their pay is less than that of common laborers, and in actual service, their fatigues are much greater.

The lottery of the sea is not altogether so disadvantageous as that of the army. The son of a respectable laborer or craftsman may frequently go to sea with his father’s consent; but if he enlists as a soldier, it is always without it. Other people see some chance of his making something by the one trade (the sea); nobody but himself sees any chance of his making anything by the other (the army). The great admiral is less the object of public admiration than the great general, and the highest success in the sea service promises a less brilliant fortune and reputation than equal success in the land service. The same difference runs through all the lower degrees of promotion in both. By the rules of social standing (precedency), a captain in the navy ranks with a colonel in the army; but he does not rank with him in common estimation. As the great prizes in the lottery of the sea are less, the smaller ones must be more numerous. Common sailors, therefore, more frequently get some fortune and promotion than common soldiers; and the hope of these prizes is what principally recommends the trade. Though their skill and dexterity are much superior to that of almost any craftsman, and though their whole life is one continual scene of hardship and danger, yet for all this dexterity and skill, for all these hardships and dangers, while they remain in the condition of common sailors, they receive hardly any other payment but the pleasure of exercising the one and of surmounting the other. Their wages are not greater than those of common laborers at the port which regulates the rate of seamen’s wages. As they are continually going from port to port, the monthly pay of those who sail from all the different ports of Great Britain is more nearly on a level than that of any other workmen in those different places; and the rate of the port to and from which the greatest number sail, that is the port of London, regulates that of all the rest.

When their master needs their labor, he gives them, besides their housing and land, two pecks of oatmeal a week, worth about sixteenpence sterling. During a great part of the year, he has little or no need for their labor. The cultivation of their own small piece of land is not enough to occupy the time which is left at their own disposal. When such part-time occupiers were more numerous than they are at present, they are said to have been willing to give their spare time for a very small payment to anybody, and to have worked for lower wages than other laborers. In ancient times, they seem to have been common all over Europe. In countries that were poorly cultivated and even worse inhabited, most landlords and farmers could not otherwise provide themselves with the extraordinary number of workers that country labor requires at certain seasons. The daily or weekly payment which such laborers occasionally received from their masters was clearly not the whole price of their labor. Their small plot of land and house (tenement) made up a considerable part of it. This daily or weekly payment, however, seems to have been considered as the whole of it by many writers who have collected the prices of labor and provisions in ancient times, and who have taken pleasure in representing both as wonderfully low.

The produce of such part-time labor often comes cheaper to market than would otherwise be suitable for its nature. Stockings in many parts of Scotland are knitted much cheaper than they can anywhere be made on a loom. They are the work of servants and laborers who get the main part of their subsistence from some other employment. More than a thousand pairs of Shetland stockings are annually imported into Leith (the port of Edinburgh), for which the price is from fivepence to sevenpence a pair. At Lerwick, the small capital of the Shetland Islands, tenpence a day, I have been assured, is a common price for common labor. In the same islands, they knit worsted (wool) stockings to the value of a guinea (21 shillings) a pair and upwards.

The spinning of linen yarn is carried on in Scotland in nearly the same way as the knitting of stockings: by servants who are chiefly hired for other purposes. Those who try to get their whole livelihood by either of these trades earn but a very meager subsistence. In most parts of Scotland, she is a good spinner who can earn twentypence a week.

In wealthy (opulent) countries, the market is generally so extensive that any one trade is sufficient to employ the whole labor and capital of those who engage in it. Instances of people living by one employment and at the same time getting some little advantage from another occur chiefly in poor countries. The following instance, however, of something of the same kind is to be found in the capital of a very rich one. There is no city in Europe, I believe, in which house-rent is more expensive than in London. And yet I know no capital in which a furnished apartment can be hired so cheaply. Lodging is not only much cheaper in London than in Paris; it is much cheaper than in Edinburgh for the same degree of quality. And what may seem extraordinary, the dearness of house-rent is the cause of the cheapness of lodging. The dearness of house-rent in London arises not only from those causes which make it expensive in all great capitals – the dearness of labor, the dearness of all building materials (which must generally be brought from a great distance), and above all the dearness of ground-rent (every landlord acting like a monopolist and frequently demanding a higher rent for a single acre of bad land in a town than can be had for a hundred acres of the best land in the country). But it also arises in part from the peculiar manners and customs of the people, which oblige every head of a family to hire a whole house from top to bottom. A dwelling-house in England means everything that is contained under the same roof. In France, Scotland, and many other parts of Europe, it frequently means no more than a single floor or story. A tradesman in London is obliged to hire a whole house in that part of the town where his customers live. His shop is on the ground floor, and he and his family sleep in the attic (garret). He tries to pay a part of his house-rent by letting the two middle stories to lodgers. He expects to maintain his family by his trade, and not by his lodgers. In contrast, at Paris and Edinburgh, the people who let lodgings commonly have no other means of subsistence. The price of the lodging must therefore pay not only the rent of the house but also the whole expense of their family.

PART II: Inequalities Caused by the Policy of Europe

Such are the inequalities in the whole of the advantages and disadvantages of different employments of labor and capital, which the lack of any of the three conditions mentioned earlier (being well known, in a natural state, and the sole employment) must cause, even where there is the most perfect liberty. But the policy of Europe, by not leaving things at perfect liberty, causes other inequalities of much greater importance.

It does this chiefly in the three following ways:

1. By restraining competition in some employments to a smaller number of people than would otherwise be disposed to enter them.
2. By increasing competition in others beyond what it naturally would be.
3. By obstructing the free circulation of labor and capital, both from employment to employment and from place to place.

First: Restraining Competition

The policy of Europe causes a very important inequality in the overall advantages and disadvantages of different employments of labor and capital by restricting competition in some jobs to fewer people than might otherwise want to do them.

The exclusive privileges of corporations (guilds or trade associations) are the principal means it uses for this purpose.

The exclusive privilege of an incorporated trade necessarily restricts competition in the town where it is established to those who are “free of the trade” (members of the corporation). To have served an apprenticeship in the town, under a properly qualified master, is commonly the necessary requirement for obtaining this freedom. The by-laws of the corporation sometimes regulate the number of apprentices any master is allowed to have, and almost always the number of years each apprentice is obliged to serve. The intention of both regulations is to restrict competition to a much smaller number than might otherwise be disposed to enter the trade. Limiting the number of apprentices restricts competition directly. A long term of apprenticeship restricts it more indirectly, but just as effectively, by increasing the expense of education.

• In Sheffield, no master cutler can have more than one apprentice at a time, by a by-law of the corporation.
• In Norfolk and Norwich, no master weaver can have more than two apprentices, under pain of forfeiting five pounds a month to the king.
• No master hatter can have more than two apprentices anywhere in England, or in the English plantations, under pain of forfeiting five pounds a month (half to the king and half to whoever sues for it). Both these regulations, though they have been confirmed by a public law of the kingdom, are clearly dictated by the same corporation spirit which enacted the by-law of Sheffield. The silk weavers in London had hardly been incorporated a year when they enacted a by-law preventing any master from having more than two apprentices at a time. It required a particular act of parliament to cancel this by-law.

Seven years seems anciently to have been, all over Europe, the usual term established for the duration of apprenticeships in most incorporated trades. All such incorporations were anciently called “universities,” which indeed is the proper Latin name for any incorporation whatever. “The university of smiths,” “the university of tailors,” etc., are expressions commonly found in the old charters of ancient towns. When those particular incorporations which are now specifically called universities were first established, the number of years it was necessary to study to obtain the degree of Master of Arts appears clearly to have been copied from the terms of apprenticeship in common trades, whose incorporations were much older. Just as having worked seven years under a properly qualified master was necessary to entitle any person to become a master and to take on apprentices himself in a common trade, so having studied seven years under a properly qualified master was necessary to entitle him to become a master, teacher, or doctor (words which were anciently synonymous) in the liberal arts, and to have scholars or apprentices (words also originally synonymous) study under him.

By the 5th of Elizabeth (a law commonly called the Statute of Apprenticeship), it was enacted that no person should in the future practice any trade, craft, or specialized skill (mystery) at that time practiced in England, unless he had previously served an apprenticeship of at least seven years. What before had been the by-law of many particular corporations became in England the general and public law for all trades carried on in market towns. For though the words of the statute are very general and seem plainly to include the whole kingdom, by interpretation its operation has been limited to market towns. It has been held that in country villages a person may practice several different trades, even if he has not served a seven years’ apprenticeship to each. This is because these trades are necessary for the convenience of the inhabitants, and the number of people is frequently not sufficient to supply each trade with a particular set of workers.

By a strict interpretation of the words, too, the operation of this statute has been limited to those trades which were established in England before the 5th of Elizabeth (when the law was passed). It has never been extended to trades that have been introduced since that time. This limitation has given rise to several distinctions which, considered as rules of governance, appear as foolish as can well be imagined. It has been judged, for example, that a coachmaker can neither himself make nor employ journeymen to make his coach-wheels but must buy them from a master wheelwright, because this latter trade had been practiced in England before the 5th of Elizabeth. But a wheelwright, though he has never served an apprenticeship to a coachmaker, may either himself make or employ journeymen to make coaches, because the trade of a coachmaker is not within the statute (not practiced in England at the time the law was made). The manufactures of Manchester, Birmingham, and Wolverhampton are, many of them, on this account, not within the statute, as they were not practiced in England before the 5th of Elizabeth.

In France, the duration of apprenticeships is different in different towns and in different trades. In Paris, five years is the term required in a great number of them. But before any person can be qualified to practice the trade as a master, he must, in many of them, serve five years more as a journeyman. During this latter term, he is called the “companion” of his master, and the term itself is called his “companionship.”

In Scotland, there is no general law which universally regulates the duration of apprenticeships. The term is different in different corporations. Where it is long, a part of it may generally be redeemed by paying a small fine. In most towns, too, a very small fine is sufficient to purchase the freedom of any corporation. The weavers of linen and hempen cloth (the principal manufactures of the country), as well as all other craftsmen who support them (wheel-makers, reel-makers, etc.), may practice their trades in any incorporated town without paying any fine. In all incorporated towns, all persons are free to sell butcher’s meat on any lawful day of the week. Three years is a common term of apprenticeship in Scotland, even in some very precise and skilled trades. In general, I know of no country in Europe in which corporation laws are so little oppressive.

The Injustice of Restricting Labor

The property which every man has in his own labor, as it is the original foundation of all other property, is also the most sacred and inviolable. The inheritance (patrimony) of a poor man lies in the strength and skill of his hands. To hinder him from employing this strength and skill in whatever manner he thinks proper, without injury to his neighbor, is a plain violation of this most sacred property. It is a clear encroachment upon the just liberty both of the workman and of those who might be disposed to employ him. As it hinders the one from working at what he thinks proper, it also hinders the others from employing whom they think proper. To judge whether he is fit to be employed may surely be trusted to the discretion of the employers, whose interest it so much concerns. The pretended anxiety of the law-maker lest they should employ an improper person is clearly as inappropriate as it is oppressive.

The institution of long apprenticeships can give no security that substandard workmanship will not frequently be exposed for public sale. When this happens, it is generally the effect of fraud, and not of inability. The longest apprenticeship can give no security against fraud. Quite different regulations are necessary to prevent this abuse. The sterling mark upon silver plate, and the stamps upon linen and woolen cloth, give the purchaser much greater security than any statute of apprenticeship. He generally looks at these marks, but never thinks it worthwhile to inquire whether the workman had served a seven years’ apprenticeship.

Long apprenticeships have no tendency to train young people in industry (hard work). A journeyman who works by the piece is likely to be industrious because he benefits from every exertion of his industry. An apprentice is likely to be idle, and almost always is so, because he has no immediate interest to be otherwise. In the lesser employments, the “sweets” (rewards) of labor consist entirely in the payment for that labor. Those who are soonest in a condition to enjoy these rewards are likely soonest to develop a liking for work and to acquire the early habit of industry. A young man naturally develops an aversion to labor when for a long time he receives no benefit from it. Boys who are put out as apprentices from public charities are generally bound for more than the usual number of years, and they generally turn out very idle and worthless.

Apprenticeships were altogether unknown to the ancients. The mutual duties of master and apprentice make a considerable article in every modern legal code. Roman law is perfectly silent about them. I know no Greek or Latin word (I might venture, I believe, to assert that there is none) which expresses the idea we now attach to the word “Apprentice”: a servant bound to work at a particular trade for the benefit of a master, for a term of years, on condition that the master shall teach him that trade.

Long apprenticeships are altogether unnecessary. The arts which are much superior to common trades, such as those of making clocks and watches, contain no such mystery as to require a long course of instruction. The first invention of such beautiful machines, indeed, and even that of some of the instruments employed in making them, must, no doubt, have been the work of deep thought and long time, and may justly be considered as among the happiest efforts of human ingenuity. But when both have been fairly invented and are well understood, to explain to any young man, in the completest manner, how to apply the instruments and how to construct the machines, cannot well require more than the lessons of a few weeks; perhaps those of a few days might be sufficient. In the common mechanic trades, those of a few days might certainly be sufficient. The dexterity of hand, indeed, even in common trades, cannot be acquired without much practice and experience. But a young man would practice with much more diligence and attention if, from the beginning, he worked as a journeyman, being paid in proportion to the little work which he could do, and paying in his turn for the materials which he might sometimes spoil through awkwardness and inexperience. His education would generally in this way be more effective, and always less tedious and expensive. The master, indeed, would be a loser. He would lose all the wages of the apprentice, which he now saves, for seven years together. In the end, perhaps, the apprentice himself would be a loser. In a trade so easily learned, he would have more competitors, and his wages, when he came to be a complete workman, would be much less than at present. The same increase in competition would reduce the profits of the masters as well as the wages of the workmen. The trades, the crafts, the specialized skills, would all be losers. But the public would be a gainer, the work of all craftsmen coming in this way much cheaper to market.

It is to prevent this reduction of price, and consequently of wages and profit, by restraining that free competition which would most certainly cause it, that all corporations, and most corporation laws, have been established. To set up a corporation, no other authority in ancient times was required in many parts of Europe but that of the incorporated town in which it was established. In England, indeed, a charter from the king was also necessary. But this prerogative of the crown seems to have been reserved more for forcing money from the subjects than for the defense of common liberty against such oppressive monopolies.

Upon paying a fine to the king, the charter (official permission) to form a corporation seems generally to have been readily granted. When any particular class of craftsmen or traders decided to act as a corporation without a charter, these “unofficial guilds” (adulterine guilds, as they were called) were not always shut down on that account. Instead, they were often obliged to pay an annual fine to the king for permission to exercise the privileges they had taken without official right. The immediate oversight of all corporations, and of the by-laws they might enact for their own government, belonged to the incorporated town in which they were established. Whatever discipline was exercised over them usually came not from the king, but from that larger town corporation, of which these smaller ones were only parts or members.

Towns vs. Countryside: An Unequal Exchange

The government of incorporated towns was entirely in the hands of traders and craftsmen. It was clearly in the interest of every particular class of them to prevent the market from being “over-stocked,” as they commonly put it, with their own particular type of industry – which in reality means to keep it always under-stocked. Each class was eager to establish regulations suitable for this purpose. Provided it was allowed to do so, each class was willing to let every other class do the same. As a consequence of such regulations, indeed, each class was obliged to buy the goods they needed from every other class within the town at a somewhat higher price than they otherwise might have. But in compensation, they were able to sell their own goods just as much dearer. So, as far as dealings within the town went, it was “as broad as long,” as they say; in the dealings of the different classes within the town with one another, none of them lost out because of these regulations. But in their dealings with the countryside, they were all great gainers. And it is these dealings with the countryside that make up the whole trade which supports and enriches every town.

Every town gets its entire subsistence (food and basic needs), and all the materials for its industry, from the country. It pays for these chiefly in two ways:

1. First, by sending back to the country a part of those materials, now worked up and manufactured. In this case, their price is increased by the wages of the workmen and the profits of their masters or immediate employers.
2. Secondly, by sending to the country a part of both the raw materials and manufactured produce from either other countries or distant parts of the same country, which have been imported into the town. In this case, too, the original price of those goods is increased by the wages of the carriers or sailors, and by the profits of the merchants who employ them.

What is gained on the first of these two branches of commerce is the advantage the town makes from its manufactures. What is gained on the second is the advantage of its inland and foreign trade. The wages of the workmen and the profits of their different employers make up the whole of what is gained on both. Therefore, whatever regulations tend to increase those wages and profits beyond what they otherwise would be, tend to enable the town to purchase the produce of a greater quantity of the country’s labor with a smaller quantity of its own labor. They give the traders and craftsmen in the town an advantage over the landlords, farmers, and laborers in the country. They break down the natural equality that would otherwise exist in the commerce carried on between them. The whole annual produce of the labor of society is annually divided between these two different sets of people (town and country). By means of these regulations, a greater share of it is given to the inhabitants of the town than would otherwise fall to them, and a lesser share to those of the country.

The price which the town really pays for the provisions and materials annually imported into it is the quantity of manufactures and other goods annually exported from it. The dearer the latter (town goods) are sold, the cheaper the former (country goods) are bought. The industry of the town becomes more advantageous, and that of the country less so.

Why Town Industry is More Advantageous in Europe

That the industry carried on in towns is, everywhere in Europe, more advantageous than that which is carried on in the country, we may satisfy ourselves by one very simple and obvious observation, without entering into any very precise calculations. In every country of Europe, we find at least a hundred people who have acquired great fortunes from small beginnings by trade and manufactures (the industry which properly belongs to towns), for every one person who has done so by that which properly belongs to the country (the raising of raw produce by the improvement and cultivation of land). Industry, therefore, must be better rewarded – the wages of labor and the profits of capital must clearly be greater – in the one situation than in the other. But capital and labor naturally seek the most advantageous employment. They naturally, therefore, go as much as they can to the town and desert the country.

The inhabitants of a town, being collected into one place, can easily combine. Accordingly, the most insignificant trades carried on in towns have, in some place or other, been incorporated. Even where they have never been incorporated, the “corporation spirit” – the jealousy of strangers, the reluctance to take apprentices, or to communicate the secrets of their trade – generally prevails in them. This spirit often teaches them, by voluntary associations and agreements, to prevent that free competition which they cannot prohibit by by-laws. The trades which employ but a small number of hands run most easily into such combinations. Half a dozen wool-combers, perhaps, are necessary to keep a thousand spinners and weavers at work. By combining not to take apprentices, they can not only monopolize the employment but also reduce the whole manufacture into a sort of slavery to themselves and raise the price of their labor much above what is due to the nature of their work.

The inhabitants of the country, dispersed in distant places, cannot easily combine. They have not only never been incorporated, but the corporation spirit has never prevailed among them. No apprenticeship has ever been thought necessary to qualify for farming (husbandry), the great trade of the country. However, after what are called the fine arts and the liberal professions, there is perhaps no trade which requires such a great variety of knowledge and experience. The innumerable volumes which have been written upon farming in all languages may satisfy us that, among the wisest and most learned nations, it has never been regarded as a matter very easily understood. And from all those volumes, we shall in vain attempt to collect that knowledge of its various and complicated operations which is commonly possessed even by the common farmer – however contemptuously the very contemptible authors of some of them may sometimes pretend to speak of farmers. There is hardly any common mechanic trade, on the contrary, of which all the operations may not be as completely and distinctly explained in a pamphlet of very few pages as it is possible for words illustrated by figures to explain them. In the history of the arts, now being published by the French Academy of Sciences, several of them are actually explained in this manner. The direction of farming operations, besides, which must be varied with every change of the weather, as well as with many other accidents, requires much more judgment and discretion than that of manufacturing operations, which are always the same or very nearly the same.

Not only the art of the farmer (the general direction of farming operations) but many lesser branches of country labor require much more skill and experience than most mechanic trades. The man who works upon brass and iron works with instruments and upon materials whose temper (hardness and consistency) is always the same, or very nearly the same. But the man who plows the ground with a team of horses or oxen works with instruments (the animals) whose health, strength, and temper are very different on different occasions. The condition of the materials which he works upon (the soil) is as variable as that of the instruments which he works with, and both require to be managed with much judgment and discretion. The common plowman, though generally regarded as the pattern of stupidity and ignorance, is seldom lacking in this judgment and discretion. He is less accustomed, indeed, to social interaction than the mechanic who lives in a town. His voice and language are rougher and more difficult to be understood by those who are not used to them. His understanding, however, being accustomed to considering a greater variety of objects, is generally much superior to that of the mechanic, whose whole attention from morning till night is commonly occupied in performing one or two very simple operations. How much the lower ranks of people in the country are really superior to those of the town is well known to every man whom either business or curiosity has led to converse much with both. Accordingly, in China and India (Indostan), both the rank and the wages of country laborers are said to be superior to those of most craftsmen and manufacturers. They would probably be so everywhere if corporation laws and the corporation spirit did not prevent it.

The superiority which the industry of the towns has everywhere in Europe over that of the country is not altogether owing to corporations and corporation laws. It is supported by many other regulations. The high duties (taxes) upon foreign manufactures and upon all goods imported by foreign (alien) merchants all tend to the same purpose. Corporation laws enable the inhabitants of towns to raise their prices without fearing to be undersold by the free competition of their own countrymen. Those other regulations secure them equally against the competition of foreigners. The increase in price caused by both is everywhere finally paid by the landlords, farmers, and laborers of the country, who have seldom opposed the establishment of such monopolies. They have commonly neither the inclination nor the fitness to enter into combinations; and the loud arguments and clever but false reasoning (sophistry) of merchants and manufacturers easily persuade them that the private interest of a part, and of a subordinate part of the society, is the general interest of the whole.

In Great Britain, the superiority of the industry of the towns over that of the country seems to have been greater formerly than in the present times. The wages of country labor are approaching nearer to those of manufacturing labor, and the profits of capital employed in agriculture to those of trading and manufacturing capital, than they are said to have done in the last century or in the beginning of the present one. This change may be regarded as the necessary, though very late, consequence of the extraordinary encouragement given to the industry of the towns. The capital accumulated in them eventually becomes so great that it can no longer be employed with the old level of profit in that type of industry which is peculiar to them. That industry has its limits like every other; and the increase of capital, by increasing competition, necessarily reduces the profit. The lowering of profit in the town forces capital out to the country, where, by creating a new demand for country labor, it necessarily raises its wages. It then spreads itself, if I may say so, over the face of the land. By being employed in agriculture, it is in part restored to the country, at the expense of which, in a great measure, it had originally been accumulated in the town. That everywhere in Europe the greatest improvements of the country have been owing to such overflowings of the capital originally accumulated in the towns, I shall try to show later. At the same time, I will demonstrate that, though some countries have by this course attained a considerable degree of wealth, this process is in itself necessarily slow, uncertain, liable to be disturbed and interrupted by innumerable accidents, and in every respect contrary to the order of nature and of reason. The interests, prejudices, laws, and customs which have given rise to it, I shall try to explain as fully and clearly as I can in the third and fourth books of this inquiry.

On Combinations and Regulations

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some scheme to raise prices. It is impossible indeed to prevent such meetings by any law which either could be executed or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to make such assemblies easier, much less to make them necessary.

• A regulation which obliges all those of the same trade in a particular town to enter their names and places of residence in a public register makes such assemblies easier. It connects individuals who might never otherwise have known one another and gives every man of the trade a way to find every other man in it.
• A regulation which enables those of the same trade to tax themselves in order to provide for their poor, their sick, their widows, and orphans, by giving them a common interest to manage, makes such assemblies necessary.

An incorporation not only makes them necessary but makes the act of the majority binding upon the whole group. In a free trade, an effective combination cannot be established except by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind. The majority of a corporation can enact a by-law with proper penalties, which will limit competition more effectively and more durably than any voluntary combination whatever.

The pretense that corporations are necessary for the better government of a trade is without any foundation. The real and effective discipline which is exercised over a workman is not that of his corporation, but that of his customers. It is the fear of losing their business which restrains his frauds and corrects his negligence. An exclusive corporation necessarily weakens the force of this discipline. A particular set of workmen must then be employed, whether they behave well or ill. It is on this account that in many large incorporated towns, no decent workmen are to be found, even in some of the most necessary trades. If you want your work tolerably executed, it must be done in the suburbs, where the workmen, having no exclusive privilege, have nothing but their character to depend upon. You must then smuggle it into the town as well as you can.

It is in this manner that the policy of Europe, by restraining competition in some employments to a smaller number than would otherwise be disposed to enter them, causes a very important inequality in the whole of the advantages and disadvantages of the different employments of labor and capital.

Second Way Policy Creates Inequality: Increasing Competition

Secondly, the policy of Europe, by increasing competition in some employments beyond what it naturally would be, causes another inequality of an opposite kind in the whole of the advantages and disadvantages of the different employments of labor and capital.

It has been considered so important that a proper number of young people should be educated for certain professions that sometimes the public, and sometimes the piety of private founders, have established many pensions, scholarships, exhibitions, bursaries, etc., for this purpose. These draw many more people into those trades than could otherwise expect to follow them. In all Christian countries, I believe, the education of most churchmen is paid for in this manner. Very few of them are educated entirely at their own expense. The long, tedious, and expensive education, therefore, of those who are self-funded will not always get them a suitable reward. This is because the church is crowded with people who, in order to get employment, are willing to accept a much smaller payment than such an education would otherwise have entitled them to. In this manner, the competition of the poor (those subsidized) takes away the reward of the rich (those who paid for their own education). It would be improper, no doubt, to compare either a curate (assistant priest) or a chaplain with a journeyman in any common trade. The pay of a curate or chaplain, however, may very properly be considered as of the same nature as the wages of a journeyman. All three are paid for their work according to the contract which they may happen to make with their respective superiors. Until after the middle of the fourteenth century, five merks (an old Scottish coin, containing about as much silver as ten pounds of our present money) was in England the usual pay of a curate or a salaried parish priest, as we find it regulated by the decrees of several different national church councils. At the same period, fourpence a day (containing the same quantity of silver as a shilling of our present money) was declared to be the pay of a master mason, and threepence a day (equal to ninepence of our present money) that of a journeyman mason. The wages of both these laborers, therefore, supposing them to have been constantly employed, were much superior to those of the curate.

A law in the 12th year of Queen Anne’s reign (Chapter 12) declared: “That whereas for want of sufficient maintenance and encouragement to curates, the cures [parishes] have in several places been meanly supplied, the bishop is, therefore, empowered to appoint by writing under his hand and seal a sufficient certain stipend or allowance, not exceeding fifty and not less than twenty pounds a year.” Forty pounds a year is considered very good pay for a curate (assistant priest) at present. Despite this act of parliament, there are many curacies under twenty pounds a year. There are journeymen shoemakers in London who earn forty pounds a year, and there is hardly an industrious workman of any kind in that city who does not earn more than twenty. This last sum indeed does not exceed what is frequently earned by common laborers in many country parishes. Whenever the law has attempted to regulate the wages of workmen, it has always been to lower them rather than to raise them. But the law has on many occasions attempted to raise the wages of curates and, for the dignity of the church, to oblige the rectors (head priests) of parishes to give them more than the wretched maintenance which they themselves might be willing to accept. In both cases, the law seems to have been equally ineffective. It has never been able to either raise the wages of curates or to sink those of laborers to the degree that was intended. This is because it has never been able to hinder either the curates from being willing to accept less than the legal allowance (on account of their poor situation and the large number of competitors) or the laborers from receiving more (on account of the contrary competition of those who expected to gain either profit or pleasure from employing them).

The well-paid church positions (great benefices) and other high church ranks (ecclesiastical dignities) support the honor of the church, despite the poor circumstances of some of its lower-ranking members. The respect paid to the profession also makes some compensation even to them for the meagerness of their money payment. In England, and in all Roman Catholic countries, the “lottery of the church” (the chance of obtaining a lucrative position) is in reality much more advantageous than is necessary. The example of the churches of Scotland, of Geneva, and of several other Protestant churches, may satisfy us that in so respectable a profession, in which education is so easily obtained (due to subsidies), the hopes of much more moderate church positions will draw a sufficient number of learned, decent, and respectable men into holy orders.

In professions where there are no such endowed positions, such as law and medicine, if an equal proportion of people were educated at public expense, the competition would soon be so great as to greatly reduce their money reward. It might then not be worthwhile for any man to educate his son for either of those professions at his own expense. They would be entirely abandoned to those who had been educated by those public charities. The sheer number and necessities of these publicly educated individuals would oblige them generally to content themselves with a very miserable payment, leading to the entire degradation of the now respectable professions of law and medicine.

That unfortunate group of people commonly called “men of letters” (scholars and writers) are in much the same situation that lawyers and physicians probably would be in under the foregoing supposition. In every part of Europe, most of them have been educated for the church but have been prevented by different reasons from actually entering holy orders. They have generally, therefore, been educated at public expense, and their numbers are everywhere so great as to commonly reduce the price of their labor to a very small (paltry) payment.

Before the invention of the art of printing, the only employment by which a man of letters could make anything by his talents was that of a public or private teacher, or by communicating to other people the curious and useful knowledge which he had acquired himself. This is still surely a more honorable, a more useful, and in general even a more profitable employment than that other of writing for a bookseller, which the art of printing has created. The time and study, the genius, knowledge, and application required to qualify an eminent teacher of the sciences are at least equal to what is necessary for the greatest practitioners in law and medicine. But the usual reward of an eminent teacher bears no proportion to that of a lawyer or physician. This is because the teaching profession is crowded with poor (indigent) people who have been brought up to it at public expense, whereas the other two professions are burdened with very few who have not been educated at their own expense. The usual payment, however, of public and private teachers, small as it may appear, would undoubtedly be less than it is if the competition of those even poorer men of letters who write for bread was not taken out of the market. Before the invention of printing, a “scholar” and a “beggar” seem to have been very nearly synonymous terms. The different governors of universities before that time appear to have often granted licenses to their scholars to beg.

In ancient times, before any charities of this kind had been established for the education of poor people for the learned professions, the rewards of eminent teachers appear to have been much more considerable. Isocrates, in what is called his discourse against the sophists (a group of teachers), reproaches the teachers of his own times with inconsistency. “They make the most magnificent promises to their scholars,” he says, “and undertake to teach them to be wise, to be happy, and to be just, and in return for so important a service they stipulate the paltry reward of four or five minae [an ancient Greek currency unit].” “They who teach wisdom,” he continues, “ought certainly to be wise themselves; but if any man were to sell such a bargain for such a price, he would be convicted of the most evident folly.” He certainly does not mean here to exaggerate the reward, and we may be assured that it was not less than he represents it. Four minae were equal to thirteen pounds, six shillings, and eightpence in Smith’s time; five minae to sixteen pounds, thirteen shillings, and fourpence. Something not less than the largest of those two sums, therefore, must at that time have been usually paid to the most eminent teachers at Athens. Isocrates himself demanded ten minae, or thirty-three pounds, six shillings, and eightpence, from each scholar. When he taught at Athens, he is said to have had a hundred scholars. I understand this to be the number whom he taught at one time, or who attended what he would call one course of lectures – a number which will not appear extraordinary for so great a city and so famous a teacher, who also taught what was at that time the most fashionable of all sciences, rhetoric. He must have made, therefore, by each course of lectures, a thousand minae, or £3,333 6s. 8d (a very large sum in Smith’s day). A thousand minae, accordingly, is said by Plutarch in another place to have been his Didactron, or usual price of teaching. Many other eminent teachers in those times appear to have acquired great fortunes. Gorgias made a present to the temple of Delphi of his own statue in solid gold. We must not, I presume, suppose that it was as large as life size. His way of living, as well as that of Hippias and Protagoras, two other eminent teachers of those times, is represented by Plato as splendid, even to the point of being showy (ostentatious). Plato himself is said to have lived with a good deal of magnificence. Aristotle, after having been tutor to Alexander the Great, and most generously (munificently) rewarded, as it is universally agreed, both by him and his father Philip, still thought it worthwhile to return to Athens to resume teaching at his school. Teachers of the sciences were probably less common in those times than they became an age or two afterwards, when competition had probably somewhat reduced both the price of their labor and the admiration for their persons. The most eminent of them, however, appear always to have enjoyed a degree of consideration much superior to any in the same profession in present times. The Athenians sent Carneades the Academic (a philosopher of Plato’s school) and Diogenes the Stoic on a solemn embassy to Rome. Though their city (Athens) had then declined from its former grandeur, it was still an independent and considerable republic. Carneades, too, was a Babylonian by birth, and as there never was a people more jealous of admitting foreigners to public offices than the Athenians, their consideration for him must have been very great.

This inequality (many educated people receiving low pay due to subsidies) is, on the whole, perhaps rather advantageous than hurtful to the public. It may somewhat degrade the profession of a public teacher, but the cheapness of literary education is surely an advantage which greatly overbalances this minor inconvenience. The public, too, might derive still greater benefit from it if the constitution of those schools and colleges in which education is carried on was more reasonable than it is at present through most of Europe.

Third Way Policy Creates Inequality: Obstructing Free Circulation of Labor and Capital

Thirdly, the policy of Europe, by obstructing the free circulation of labor and capital both from employment to employment, and from place to place, causes in some cases a very inconvenient inequality in the whole of the advantages and disadvantages of their different employments.

The Statute of Apprenticeship obstructs the free circulation of labor from one employment to another, even in the same place. The exclusive privileges of corporations obstruct it from one place to another, even in the same employment.

It frequently happens that while high wages are given to the workmen in one manufacture, those in another are obliged to content themselves with bare subsistence. The one is in an advancing state and therefore has a continual demand for new hands. The other is in a declining state, and the oversupply (superabundance) of hands is continually increasing. These two manufactures may sometimes be in the same town, and sometimes in the same neighborhood, without being able to lend the least assistance to one another. The Statute of Apprenticeship may oppose it in one case, and both that and an exclusive corporation in the other. In many different manufactures, however, the operations are so much alike that the workmen could easily change trades with one another if those absurd laws did not hinder them. The arts of weaving plain linen and plain silk, for example, are almost entirely the same. That of weaving plain wool is somewhat different, but the difference is so insignificant that either a linen or a silk weaver might become a tolerable workman in a very few days. If any of those three capital manufactures, therefore, were decaying, the workmen might find a resource in one of the other two which was in a more prosperous condition. Their wages would neither rise too high in the thriving manufacture nor sink too low in the decaying one. The linen manufacture indeed is, in England, by a particular statute, open to everybody. But as it is not much cultivated throughout most of the country, it can afford no general resource to the workmen of other decaying manufactures. These workmen, wherever the Statute of Apprenticeship takes place, have no other choice but either to seek parish relief (“come upon the parish”) or to work as common laborers, for which, by their habits, they are much worse qualified than for any sort of manufacture that bears any resemblance to their own. They generally, therefore, choose to seek parish relief.

Whatever obstructs the free circulation of labor from one employment to another also obstructs that of capital. The quantity of capital which can be employed in any branch of business depends very much upon the quantity of labor which can be employed in it. Corporation laws, however, give less obstruction to the free circulation of capital from one place to another than to that of labor. It is everywhere much easier for a wealthy merchant to obtain the privilege of trading in an incorporated town than for a poor craftsman to obtain that of working in it.

The obstruction which corporation laws give to the free circulation of labor is common, I believe, to every part of Europe. That which is given to it by the Poor Laws is, as far as I know, peculiar to England. It consists in the difficulty a poor man finds in obtaining a “settlement” (the right to receive support from a parish), or even in being allowed to practice his trade in any parish but that to which he legally belongs. It is the labor of craftsmen and manufacturers only whose free circulation is obstructed by corporation laws. The difficulty of obtaining settlements obstructs even that of common labor. It may be worthwhile to give some account of the rise, progress, and present state of this disorder, perhaps the greatest of any in the governance (police) of England.

When, by the destruction of monasteries (which had provided charity), the poor had been deprived of the support of those religious houses, after some other ineffective attempts for their relief, it was enacted by the 43rd of Elizabeth, chapter 2, that every parish should be bound to provide for its own poor. Overseers of the poor were to be annually appointed who, with the churchwardens, should raise sufficient sums for this purpose through a parish tax (rate).

By this statute, the necessity of providing for their own poor was strictly imposed upon every parish. Who were to be considered the poor of each parish therefore became a question of some importance. This question, after some variation, was at last determined by the 13th and 14th of Charles II. It was then enacted that forty days’ undisturbed residence should gain any person a settlement in any parish. However, within that time it should be lawful for two justices of the peace, upon complaint made by the churchwardens or overseers of the poor, to remove any new inhabitant to the parish where he was last legally settled – unless he either rented a property of ten pounds a year or could give such security for the financial relief of the parish where he was then living as those justices should judge sufficient.

Some frauds, it is said, were committed as a consequence of this statute. Parish officers sometimes bribed their own poor to go secretly (clandestinely) to another parish and, by keeping themselves concealed for forty days, to gain a settlement there, to the relief of the parish to which they properly belonged. It was therefore enacted by the 1st of James II that the forty days’ undisturbed residence necessary to gain a settlement should be counted only from the time of his delivering a written notice, stating his place of abode and the number of his family, to one of the churchwardens or overseers of the parish where he came to live.

But parish officers, it seems, were not always more honest with regard to their own parish than they had been with regard to other parishes. They sometimes secretly allowed (connived at) such intrusions, receiving the notice but taking no proper steps as a consequence. Since every person in a parish was supposed to have an interest in preventing as much as possible their parish from being burdened by such intruders, it was further enacted by the 3rd of William III that the forty days’ residence should be counted only from the publication of such written notice on Sunday in the church, immediately after divine service.

“After all,” says Doctor Burn (a legal commentator), “this kind of settlement, by continuing forty days after publication of notice in writing, is very seldom obtained; and the design of the acts is not so much for gaining of settlements, as for the avoiding of them, by persons coming into a parish secretly: for the giving of notice is only putting pressure on the parish to remove the person. But if a person’s situation is such that it is doubtful whether he is actually removable or not, he shall by giving notice compel the parish either to allow him a settlement uncontested (by letting him continue forty days) or, by removing him, to test the legality of it.”

This statute, therefore, made it almost impracticable for a poor man to gain a new settlement in the old way, by forty days’ residence. But so that it might not appear to completely prevent the common people of one parish from ever establishing themselves securely in another, it appointed four other ways by which a settlement might be gained without any notice delivered or published:

1. By being taxed for parish rates and paying them.
2. By being elected into an annual parish office and serving in it for a year.
3. By serving an apprenticeship in the parish.
4. By being hired into service there for a year and continuing in the same service for the whole of it.

Nobody can gain a settlement by either of the first two ways except by the public act of the whole parish. The parish members are too well aware of the consequences to accept any newcomer who has nothing but his labor to support him, either by taxing him or by electing him into a parish office.

No married man can easily gain any settlement in either of the last two ways. An apprentice is rarely ever married. It is expressly enacted that no married servant shall gain a settlement by being hired for a year. The principal effect of introducing settlement by service has been to largely end the old fashion of hiring for a year. This practice had previously been so customary in England that even today, if no particular term is agreed upon, the law intends that every servant is hired for a year. But masters are not always willing to give their servants a settlement by hiring them in this manner. Servants are not always willing to be so hired because, as every last settlement cancels all previous ones, they might thereby lose their original settlement in the places of their birth, the home of their parents and relations.

It is clear that no independent workman, whether a laborer or a craftsman, is likely to gain a new settlement (right to live and receive support in a new parish) either by apprenticeship or by service under the Poor Laws. Therefore, when such a person carried his industry to a new parish, he was liable to be removed, no matter how healthy and industrious he was, simply on the whim (caprice) of any churchwarden or overseer of the poor. This was unless he either:

• Rented a property worth ten pounds a year (a thing impossible for someone who has nothing but his labor to live by).
• Or could give such security for the financial relief of the parish as two justices of the peace should judge sufficient. What security they would require, indeed, was left entirely to their discretion. But they could not reasonably require less than thirty pounds, as it had been enacted that the purchase of even a freehold estate (outright ownership) of less than thirty pounds’ value would not gain any person a settlement, because it was not considered sufficient for the financial relief of the parish. But this is a security which hardly any man who lives by labor can give; and much greater security was frequently demanded.

Certificates of Settlement

To restore in some measure the free circulation of labor which these different statutes had almost entirely taken away, the invention of certificates was introduced. By a law of the 8th and 9th years of William III’s reign, it was enacted that:

• If any person should bring a certificate from the parish where he was last legally settled (signed by the churchwardens and overseers of the poor, and allowed by two justices of the peace), every other parish should be obliged to receive him.
• He should not be removable merely because he was likely to become chargeable (needing support), but only upon his actually becoming chargeable.
• If he did become chargeable, the parish which granted the certificate would be obliged to pay the expense both of his maintenance and of his removal. And to give the most perfect security to the parish where such a certificated man should come to live, it was further enacted by the same statute that he should gain no settlement there by any means whatever, except either by renting a property of ten pounds a year or by serving on his own account in an annual parish office for one whole year. Consequently, he could not gain settlement by notice, by service, by apprenticeship, or by paying parish rates. By a law in the 12th year of Queen Anne’s reign, too, it was further enacted that neither the servants nor apprentices of such a certificated man could gain any settlement in the parish where he resided under such a certificate.

How far this invention of certificates restored the free circulation of labor which the preceding statutes had almost entirely taken away, we may learn from the following very wise observation by Doctor Burn. “It is obvious,” he says, “that there are several good reasons for requiring certificates with persons coming to settle in any place; namely, that persons residing under them can gain no settlement, neither by apprenticeship, nor by service, nor by giving notice, nor by paying parish rates; that they can settle neither apprentices nor servants; that if they become chargeable, it is certainly known where to remove them, and the parish shall be paid for the removal, and for their maintenance in the meantime; and that if they fall sick, and cannot be removed, the parish which gave the certificate must maintain them: none of all which can happen without a certificate. Which reasons will hold proportionally for parishes not granting certificates in ordinary cases; for it is far more than an equal chance that they will have the certificated persons back again, and in a worse condition.” The moral of this observation seems to be that certificates ought always to be required by the parish where any poor man comes to live, and that they ought very seldom to be granted by the parish which he proposes to leave. “There is somewhat of hardship in this matter of certificates,” says the same very intelligent author in his History of the Poor Laws, “by putting it in the power of a parish officer to imprison a man, as it were, for life; however inconvenient it may be for him to continue at that place where he has had the misfortune to acquire what is called a settlement, or whatever advantage he may propose to himself by living elsewhere.”

Though a certificate carries with it no testimonial of good behavior, and certifies nothing but that the person belongs to the parish to which he really does belong, it is entirely up to the discretion of the parish officers either to grant or to refuse it. A mandamus (a legal order) was once sought, says Doctor Burn, to compel the churchwardens and overseers to sign a certificate; but the court of King’s Bench rejected the motion as a very strange attempt.

The very unequal price of labor which we frequently find in England in places at no great distance from one another is probably due to the obstruction which the law of settlements gives to a poor man who would carry his industry from one parish to another without a certificate. A single man, indeed, who is healthy and industrious, may sometimes reside by permission (sufferance) without one. But a man with a wife and family who should attempt to do so would in most parishes be sure of being removed. And if the single man should afterwards marry, he would generally be removed likewise. The scarcity of workers in one parish, therefore, cannot always be relieved by their oversupply in another, as it is constantly in Scotland, and, I believe, in all other countries where there is no difficulty in obtaining settlement. In such countries, though wages may sometimes rise a little in the neighborhood of a great town, or wherever else there is an extraordinary demand for labor, and sink gradually as the distance from such places increases, until they fall back to the common rate of the country, yet we never meet with those sudden and unexplainable differences in the wages of neighboring places which we sometimes find in England. There, it is often more difficult for a poor man to pass the artificial boundary of a parish than an arm of the sea or a ridge of high mountains – natural boundaries which sometimes separate very distinctly different rates of wages in other countries.

To remove a man who has committed no minor wrongdoing (misdemeanor) from the parish where he chooses to reside is an evident violation of natural liberty and justice. The common people of England, however, so jealous of their liberty, but like the common people of most other countries never rightly understanding what it consists of, have now for more than a century suffered themselves to be exposed to this oppression without a remedy. Though men of reflection, too, have sometimes complained of the law of settlements as a public grievance, yet it has never been the object of any general popular outcry, such as that against general warrants (a type of arrest warrant) – an abusive practice undoubtedly, but one that was not likely to cause any general oppression. There is hardly a poor man in England of forty years of age, I will venture to say, who has not at some part of his life felt himself most cruelly oppressed by this ill-conceived law of settlements.

Conclusion on Wage Regulation

I shall conclude this long chapter by observing that, though in ancient times it was usual to set (rate) wages, first by general laws extending over the whole kingdom, and afterwards by particular orders of the justices of the peace in every particular county, both these practices have now entirely fallen into disuse. “By the experience of above four hundred years,” says Doctor Burn, “it seems time to lay aside all endeavours to bring under strict regulations, what in its own nature seems incapable of minute limitation; for if all persons in the same kind of work were to receive equal wages, there would be no emulation [desire to excel], and no room left for industry or ingenuity.”

Particular acts of parliament, however, still attempt sometimes to regulate wages in particular trades and in particular places. For example, the 8th of George III prohibits, under heavy penalties, all master tailors in London and within five miles of it from giving, and their workmen from accepting, more than two shillings and sevenpence halfpenny a day, except in the case of a general mourning. Whenever the legislature attempts to regulate the differences between masters and their workmen, its advisors are always the masters.

• When the regulation, therefore, is in favor of the workmen, it is always just and equitable.
• But it is sometimes otherwise when in favor of the masters. Thus, the law which obliges masters in several different trades to pay their workmen in money and not in goods is quite just and equitable. It imposes no real hardship upon the masters. It only obliges them to pay that value in money which they pretended to pay, but did not always really pay, in goods. This law is in favor of the workmen. But the 8th of George III (regulating tailor wages) is in favor of the masters. When masters combine in order to reduce the wages of their workmen, they commonly enter into a private bond or agreement not to give more than a certain wage under a certain penalty. Were the workmen to enter into a contrary combination of the same kind, not to accept a certain wage under a certain penalty, the law would punish them very severely. If it dealt impartially, it would treat the masters in the same manner. But the 8th of George III enforces by law that very regulation which masters sometimes attempt to establish by such combinations. The complaint of the workmen, that it puts the ablest and most industrious upon the same footing as an ordinary workman, seems perfectly well founded.

In ancient times, too, it was usual to attempt to regulate the profits of merchants and other dealers by setting (rating) the price both of provisions and other goods. The “assize of bread” (official regulation of bread prices) is, as far as I know, the only remnant of this ancient usage. Where there is an exclusive corporation, it may perhaps be proper to regulate the price of the first necessary of life. But where there is none, competition will regulate it much better than any assize. The method of fixing the assize of bread established by the 31st of George II could not be put into practice in Scotland, on account of a defect in the law; its execution depended upon the office of clerk of the market, which does not exist there. This defect was not remedied until the 3rd of George III. The want of an assize occasioned no noticeable inconvenience, and the establishment of one, in the few places where it has yet taken place, has produced no noticeable advantage. In most towns of Scotland, however, there is an incorporation of bakers who claim exclusive privileges, though these are not very strictly guarded.

The proportion between the different rates of both wages and profit in the different employments of labor and capital seems not to be much affected, as has already been observed, by the riches or poverty, or the advancing, stationary, or declining state of the society. Such revolutions in public welfare, though they affect the general rates of both wages and profit, must in the end affect them equally in all different employments. The proportion between them, therefore, must remain the same, and cannot well be altered, at least for any considerable time, by any such revolutions.

CHAPTER XI

OF THE RENT OF LAND

Rent, considered as the price paid for the use of land, is naturally the highest which the tenant can afford to pay in the actual circumstances of the land. In adjusting the terms of the lease, the landlord tries to leave him no greater share of the produce than what is sufficient to:

• Keep up the capital (stock) from which he furnishes the seed.
• Pay the labor.
• Purchase and maintain the cattle and other farming tools (instruments of husbandry).
• Together with the ordinary profits of farming capital in the neighborhood.

This is clearly the smallest share with which the tenant can content himself without being a loser, and the landlord seldom means to leave him any more. Whatever part of the produce – or, what is the same thing, whatever part of its price – is over and above this share, the landlord naturally tries to reserve for himself as the rent of his land. This is clearly the highest rent the tenant can afford to pay in the actual circumstances of the land. Sometimes, indeed, the generosity, or more frequently the ignorance, of the landlord makes him accept somewhat less than this portion. And sometimes too, though more rarely, the ignorance of the tenant makes him agree to pay somewhat more, or to content himself with somewhat less than the ordinary profits of farming capital in the neighborhood. This portion, however, may still be considered as the natural rent of land, or the rent for which it is naturally intended that land should generally be let.

The rent of land, it may be thought, is frequently no more than a reasonable profit or interest for the capital laid out by the landlord on its improvement. This, no doubt, may be partly the case on some occasions; for it can hardly ever be more than partly the case. The landlord demands a rent even for unimproved land, and the supposed interest or profit upon the expense of improvement is generally an addition to this original rent. Besides, these improvements are not always made with the landlord’s capital, but sometimes with that of the tenant. When the lease comes to be renewed, however, the landlord commonly demands the same increase in rent as if the improvements had all been made by his own capital.

He sometimes demands rent for what is altogether incapable of human improvement. Kelp is a type of seaweed which, when burnt, yields an alkaline salt useful for making glass, soap, and for several other purposes. It grows in several parts of Great Britain, particularly in Scotland, only upon such rocks as lie within the high-water mark. These rocks are twice every day covered by the sea, and their produce, therefore, was never increased by human industry. The landlord, however, whose estate is bounded by a kelp shore of this kind, demands a rent for it as much as for his corn fields.

The sea in the neighborhood of the islands of Shetland is more than commonly abundant in fish, which make up a great part of the subsistence of their inhabitants. But in order to profit by the produce of the water, they must have a home upon the neighboring land. The rent of the landlord is in proportion, not to what the farmer can make from the land, but to what he can make both from the land and from the water. It is partly paid in sea-fish; and one of the very few instances in which rent makes a part of the price of that commodity is to be found in that country.

Rent as a Monopoly Price

The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price. It is not at all proportioned to what the landlord may have invested in the improvement of the land, or to what he can afford to take, but to what the farmer can afford to give.

Only such parts of the produce of land can commonly be brought to market whose ordinary price is sufficient to replace the capital which must be employed in bringing them there, together with its ordinary profits.

• If the ordinary price is more than this, the surplus part of it will naturally go to the rent of the land.
• If it is not more, though the commodity may be brought to market, it can afford no rent to the landlord. Whether the price is or is not more depends upon the demand.

There are some parts of the produce of land for which the demand must always be such as to afford a greater price than what is sufficient to bring them to market; and there are others for which the demand either may or may not be such as to afford this greater price.

• The former must always afford a rent to the landlord.
• The latter sometimes may, and sometimes may not, according to different circumstances.

Rent, it is to be observed, therefore, enters into the composition of the price of commodities in a different way from wages and profit.

• High or low wages and profit are the causes of high or low price.
• High or low rent is the effect of it. It is because high or low wages and profit must be paid in order to bring a particular commodity to market that its price is high or low. But it is because its price is high or low – a great deal more, or very little more, or no more, than what is sufficient to pay those wages and profit – that it affords a high rent, or a low rent, or no rent at all.

The particular consideration, first, of those parts of the produce of land which always afford some rent; secondly, of those which sometimes may and sometimes may not afford rent; and, thirdly, of the variations which, in the different periods of improvement, naturally take place in the relative value of those two different sorts of raw produce, when compared both with one another and with manufactured commodities, will divide this chapter into three parts.

PART I: The Produce of Land Which Always Affords Rent

As men, like all other animals, naturally multiply in proportion to their means of subsistence, food is always, more or less, in demand. It can always purchase or command a greater or smaller quantity of labor, and somebody can always be found who is willing to do something in order to obtain it. The quantity of labor, indeed, which food can purchase is not always equal to what it could maintain if managed in the most economical manner, because of the high wages which are sometimes given to labor. But it can always purchase such a quantity of labor as it can maintain, according to the rate at which that sort of labor is commonly maintained in the neighborhood.

But land, in almost any situation, produces a greater quantity of food than what is sufficient to maintain all the labor necessary for bringing it to market, even in the most generous way that labor is ever maintained. The surplus, too, is always more than sufficient to replace the capital (stock) which employed that labor, together with its profits. Therefore, something always remains to provide a rent to the landlord.

Even the most barren, wild lands (desert moors) in Norway and Scotland produce some sort of pasture for cattle. The milk and the increase in the herd (newborn cattle) are always more than enough, not only to:

• Maintain all the labor necessary for tending them.
• Pay the ordinary profit to the farmer or owner of the herd or flock.
• But also to afford some small rent to the landlord. The rent increases in proportion to the goodness of the pasture. The same extent of ground not only maintains a greater number of cattle, but as they are brought within a smaller area (compass), less labor is needed to tend them and to collect their produce. The landlord gains both ways: by the increase of the produce and by the decrease of the labor which must be maintained out of it.

The rent of land not only varies with its fertility, whatever its produce may be, but also with its situation (location), whatever its fertility.

• Land in the neighborhood of a town yields a greater rent than land equally fertile in a distant part of the country.
• Though it may cost no more labor to cultivate the one than the other, it must always cost more to bring the produce of the distant land to market.
• A greater quantity of labor, therefore, must be maintained out of its produce.
• The surplus, from which both the profit of the farmer and the rent of the landlord are drawn, must be diminished. But in remote parts of the country, the rate of profit, as has already been shown, is generally higher than in the neighborhood of a large town. Therefore, a smaller proportion of this diminished surplus must belong to the landlord.

Improvements That Equalize Rent

Good roads, canals, and navigable rivers, by reducing the expense of transportation (carriage), put the remote parts of the country more nearly on a level with those in the neighborhood of the town. They are, for that reason, the greatest of all improvements.

• They encourage the cultivation of remote areas, which must always be the most extensive part of the country.
• They are advantageous to the town by breaking down the monopoly of the country in its immediate neighborhood (which previously had an advantage in supplying the town).
• They are advantageous even to that part of the country near the town. Though they introduce some rival commodities into the old market, they open many new markets for its produce. Monopoly, besides, is a great enemy to good management. Good management can never be universally established except as a consequence of that free and universal competition which forces everybody to resort to it for the sake of self-defense. It is not more than fifty years ago that some of the counties in the neighborhood of London petitioned Parliament against the extension of toll roads (turnpike roads) into the more remote counties. Those remoter counties, they claimed, due to the cheapness of labor, would be able to sell their grass and corn cheaper in the London market than themselves. This, they argued, would reduce their rents and ruin their cultivation. Their rents, however, have risen, and their cultivation has been improved since that time.

Rent from Cornfields vs. Pastures

A cornfield of moderate fertility produces a much greater quantity of food for humans than the best pasture of equal extent. Though its cultivation requires much more labor, the surplus which remains after replacing the seed and maintaining all that labor is also much greater. If a pound of butcher’s meat, therefore, was never supposed to be worth more than a pound of bread, this greater surplus from cornfields would everywhere be of greater value and constitute a greater fund for both the profit of the farmer and the rent of the landlord. It seems to have done so universally in the early beginnings of agriculture.

But the relative values of these two different types of food, bread and butcher’s meat, are very different in the different periods of agriculture.

• In its early beginnings, the unimproved wild lands, which then occupy most of the country, are all abandoned to cattle. There is more butcher’s meat than bread. Bread, therefore, is the food for which there is the greatest competition, and which consequently brings the highest price. At Buenos Aires, we are told by Ulloa (a Spanish explorer), four reals (about twenty-one and a half pence sterling at that time) was, forty or fifty years ago, the ordinary price of an ox chosen from a herd of two or three hundred. He says nothing of the price of bread, probably because he found nothing remarkable about it. An ox there, he says, costs little more than the labor of catching him. But corn can nowhere be grown without a great deal of labor. In a country which lies upon the River Plate (at that time the direct road from Europe to the silver mines of Potosi), the money price of labor could not be very cheap.
• It is otherwise when cultivation is extended over most of the country. There is then more bread than butcher’s meat. The competition changes its direction, and the price of butcher’s meat becomes greater than the price of bread.

Furthermore, with the extension of cultivation, the unimproved wild lands become insufficient to supply the demand for butcher’s meat. A great part of the cultivated lands must be employed in rearing and fattening cattle. The price of these cattle, therefore, must be sufficient to pay not only the labor necessary for tending them but also the rent which the landlord and the profit which the farmer could have earned from such land if it were used for growing crops (tillage). The cattle bred upon the most uncultivated moors, when brought to the same market, are, in proportion to their weight or goodness, sold at the same price as those which are reared upon the most improved land. The proprietors of those moors profit by this and raise the rent of their land in proportion to the price of their cattle. It is not more than a century ago that in many parts of the highlands of Scotland, butcher’s meat was as cheap as, or cheaper than, even bread made of oatmeal. The union with England opened the market of England to Highland cattle. Their ordinary price is at present about three times greater than at the beginning of the century, and the rents of many Highland estates have tripled and quadrupled in the same time. In almost every part of Great Britain, a pound of the best butcher’s meat is, in the present times, generally worth more than two pounds of the best white bread; and in plentiful years, it is sometimes worth three or four pounds.

It is thus that in the progress of improvement, the rent and profit of unimproved pasture come to be regulated in some measure by the rent and profit of what is improved land, and these again by the rent and profit of corn land. Corn is an annual crop. Butcher’s meat is a crop that requires four or five years to grow. As an acre of land, therefore, will produce a much smaller quantity of meat than of corn, the inferiority of the quantity must be compensated by the superiority of the price. If it was more than compensated, more corn land would be turned into pasture. And if it was not compensated, part of what was in pasture would be brought back into growing corn.

This equality, however, between the rent and profit of grass and those of corn – of the land whose immediate produce is food for cattle, and of that whose immediate produce is food for men – must be understood to take place only throughout most of the improved lands of a great country. In some particular local situations, it is quite otherwise, and the rent and profit of grass are much superior to what can be made from corn.

Thus, in the neighborhood of a great town, the demand for milk and for forage (food) for horses frequently contributes, together with the high price of butcher’s meat, to raise the value of grass above what may be called its natural proportion to that of corn. This local advantage, it is evident, cannot be communicated to lands at a distance.

Particular circumstances have sometimes made some countries so populous that the whole territory, like the lands in the neighborhood of a great town, has not been sufficient to produce both the grass and the corn necessary for the subsistence of their inhabitants. Their lands, therefore, have been principally employed in the production of grass, the more bulky commodity, which cannot be so easily brought from a great distance. Corn, the food of the great body of the people, has been chiefly imported from foreign countries. Holland is at present in this situation, and a considerable part of ancient Italy seems to have been so during the prosperity of the Romans. To feed cattle well, old Cato said (as we are told by Cicero), was the first and most profitable thing in the management of a private estate; to feed them tolerably well, the second; and to feed them ill, the third. To plow land for crops, he ranked only in the fourth place of profit and advantage. Farming crops, indeed, in that part of ancient Italy which lay in the neighborhood of Rome, must have been very much discouraged by the distributions of corn which were frequently made to the people, either for free (gratuitously) or at a very low price. This corn was brought from the conquered provinces, of which several, instead of paying taxes, were obliged to furnish a tenth part of their produce at a stated price (about sixpence a peck) to the republic. The low price at which this corn was distributed to the people must necessarily have sunk the price of what could be brought to the Roman market from Latium (the ancient territory of Rome) and must have discouraged its cultivation in that country.

In an open country too, where the principal produce is corn, a well-enclosed piece of grass will frequently rent higher than any cornfield in its neighborhood. It is convenient for maintaining the cattle employed in cultivating the corn, and its high rent is, in this case, not so properly paid from the value of its own produce as from that of the corn lands which are cultivated by means of it. Its rent is likely to fall if ever the neighboring lands are completely enclosed. The present high rent of enclosed land in Scotland seems due to the scarcity of enclosure and will probably last no longer than that scarcity. The advantage of enclosure is greater for pasture than for corn. It saves the labor of guarding the cattle, which also feed better when they are not liable to be disturbed by their keeper or his dog.

But where there is no local advantage of this kind, the rent and profit of corn, or whatever else is the common vegetable food of the people, must naturally regulate, upon the land which is fit for producing it, the rent and profit of pasture.

The use of artificial grasses, of turnips, carrots, cabbages, and the other methods which have been adopted to make an equal quantity of land feed a greater number of cattle than when in natural grass, should somewhat reduce, it might be expected, the superiority which, in an improved country, the price of butcher’s meat naturally has over that of bread. It seems accordingly to have done so. There is some reason for believing that, at least in the London market, the price of butcher’s meat in proportion to the price of bread is a good deal lower in the present times than it was in the beginning of the last century (the 1600s).

Historical Meat and Wheat Prices

In the appendix of the Life of Prince Henry, Doctor Birch has given us an account of the prices of butcher’s meat as commonly paid by that prince. It is there said that the four quarters of an ox weighing six hundred pounds usually cost him nine pounds ten shillings, or thereabouts; that is, thirty-one shillings and eightpence per hundred pounds weight. Prince Henry died on November 6, 1612, in the nineteenth year of his age.

In March 1764, there was a parliamentary inquiry into the causes of the high price of provisions at that time. It was then, among other proof to the same purpose, given in evidence by a Virginia merchant that in March 1763, he had supplied his ships (victualled) for twenty-four or twenty-five shillings per hundredweight of beef, which he considered as the ordinary price. Whereas, in that expensive (dear) year of 1764, he had paid twenty-seven shillings for the same weight and sort. This high price in 1764 is, however, four shillings and eightpence cheaper per hundredweight than the ordinary price paid by Prince Henry. And it must be observed, only the best beef is fit to be salted for those distant voyages.

The price paid by Prince Henry amounts to about 3 and 4/5 pence per pound weight of the whole carcass, coarse and choice pieces taken together. At that rate, the choice pieces could not have been sold by retail for less than 4½ pence or 5 pence per pound.

In the parliamentary inquiry in 1764, the witnesses stated the price of the choice pieces of the best beef to the consumer to be 4 pence and 4¼ pence per pound, and the coarse pieces generally to be from seven farthings (1¾ pence) to 2½ pence and 2¾ pence. This, they said, was generally one halfpenny dearer than the same sort of pieces had usually been sold in the month of March. But even this high price is still a good deal cheaper than what we can well suppose the ordinary retail price to have been in the time of Prince Henry.

During the first twelve years of the last century (1601-1612), the average price of the best wheat at the Windsor market was £1 18s. 3 and 1/6d. per quarter of nine Winchester bushels (a unit of volume). But in the twelve years preceding 1764, including that year, the average price of the same measure of the best wheat at the same market was £2 1s. 9½d. In the first twelve years of the last century, therefore, wheat appears to have been a good deal cheaper, and butcher’s meat a good deal dearer, than in the twelve years preceding 1764, including that year.

Rent of Specialized Land Uses

In all great countries, most of the cultivated lands are employed in producing either food for men or food for cattle. The rent and profit of these regulate the rent and profit of all other cultivated land. If any particular produce afforded less, the land would soon be turned into corn or pasture; and if any afforded more, some part of the lands in corn or pasture would soon be turned to that produce.

Those productions, indeed, which require either a greater original expense of improvement, or a greater annual expense of cultivation, in order to fit the land for them, appear commonly to afford, the one a greater rent, the other a greater profit than corn or pasture. This superiority, however, will seldom be found to amount to more than a reasonable interest or compensation for this superior expense.

In a hop garden, a fruit garden, or a kitchen garden, both the rent of the landlord and the profit of the farmer are generally greater than in a corn or grass field. But to bring the ground into this condition requires more expense. Hence a greater rent becomes due to the landlord. It also requires more attentive and skillful management. Hence a greater profit becomes due to the farmer. The crop too, at least in the hop and fruit garden, is more uncertain (precarious). Its price, therefore, besides compensating for all occasional losses, must afford something like the profit of insurance. The generally humble (mean) and always moderate circumstances of gardeners may satisfy us that their great skill is not commonly over-rewarded. Their delightful art is practiced by so many rich people for amusement that little advantage is to be made by those who practice it for profit, because the persons who should naturally be their best customers supply themselves with all their most precious productions.

The advantage which the landlord derives from such improvements seems at no time to have been greater than what was sufficient to compensate for the original expense of making them. In ancient farming (husbandry), after the vineyard, a well-watered kitchen garden seems to have been the part of the farm which was supposed to yield the most valuable produce. But Democritus, who wrote upon husbandry about two thousand years ago and who was regarded by the ancients as one of the fathers of the art, thought they did not act wisely who enclosed a kitchen garden. The profit, he said, would not compensate for the expense of a stone wall; and bricks (he meant, I suppose, bricks baked in the sun) crumbled (mouldered) with the rain and the winter storm and required continual repairs. Columella, who reports this judgment of Democritus, does not dispute it but proposes a very frugal method of enclosing with a hedge of brambles and briars, which, he says, he had found by experience to be both a lasting and an impenetrable fence; but which, it seems, was not commonly known in the time of Democritus. Palladius adopts the opinion of Columella, which had before been recommended by Varro. In the judgment of those ancient improvers, the produce of a kitchen garden had, it seems, been little more than sufficient to pay the extraordinary culture and the expense of watering; for in countries so near the sun, it was thought proper, in those times as in the present, to have the command of a stream of water which could be conducted to every bed in the garden. Throughout most of Europe, a kitchen garden is not at present supposed to deserve a better enclosure than that recommended by Columella. In Great Britain and some other northern countries, the finer fruits cannot be brought to perfection except with the assistance of a wall. Their price, therefore, in such countries must be sufficient to pay the expense of building and maintaining the walls they cannot be had without.

The fruit-wall often surrounds the kitchen garden, which thus enjoys the benefit of an enclosure that its own produce could seldom pay for.

Vineyards: A Special Case

That the vineyard, when properly planted and brought to perfection, was the most valuable part of the farm seems to have been an undisputed principle in ancient agriculture, as it is in modern times throughout all wine-producing countries. But whether it was advantageous to plant a new vineyard was a matter of dispute among the ancient Italian farmers, as we learn from Columella (a Roman writer on agriculture). He decides, like a true lover of all specialized cultivation, in favor of the vineyard. He tries to show, by comparing profit and expense, that it was a most advantageous improvement. Such comparisons, however, between the profit and expense of new projects are commonly very misleading, and in nothing more so than in agriculture. Had the gain actually made by such plantations been commonly as great as he imagined it might have been, there could have been no dispute about it. The same point is frequently a matter of controversy today in wine-producing countries. Their writers on agriculture, indeed – the lovers and promoters of high cultivation – seem generally disposed to decide with Columella in favor of the vineyard. In France, the anxiety of the owners of old vineyards to prevent the planting of any new ones seems to support their opinion. It also seems to indicate an awareness among those who have experience that this type of cultivation is currently more profitable in that country than any other. However, it also seems to indicate another opinion: that this superior profit can last no longer than the laws which currently restrict the free cultivation of the vine. In 1731, vineyard owners obtained an order from the council prohibiting both the planting of new vineyards and the renewal of old ones whose cultivation had been interrupted for two years, without special permission from the king. This permission was to be granted only after a report from the provincial administrator (intendant) certifying that he had examined the land and that it was incapable of any other type of farming. The excuse for this order was the scarcity of corn and pasture, and an oversupply of wine. But if this oversupply had been real, it would, without any council order, have effectively prevented the planting of new vineyards by reducing the profits of this type of cultivation below their natural proportion to those of corn and pasture. With regard to the supposed scarcity of corn caused by the multiplication of vineyards, corn is nowhere in France more carefully cultivated than in the wine provinces where the land is fit for producing it, as in Burgundy, Guienne, and Upper Languedoc. The numerous workers employed in growing grapes necessarily encourage the cultivation of corn by providing a ready market for its produce. To diminish the number of those who are capable of paying for corn is surely a most unpromising way to encourage its cultivation. It is like a policy that would promote agriculture by discouraging manufactures.

The rent and profit of those productions, therefore, which require either a greater original expense of improvement to fit the land for them, or a greater annual expense of cultivation, though often much superior to those of corn and pasture, are in reality regulated by the rent and profit of those common crops when they do no more than compensate for such extraordinary expense.

Scarce Land and High Rents

It sometimes happens, indeed, that the quantity of land which can be suited for some particular produce is too small to supply the effectual demand. The whole produce can then be sold to those who are willing to give somewhat more than what is sufficient to pay the whole rent, wages, and profit necessary for growing and bringing it to market, according to their natural rates (or according to the rates paid for most other cultivated land). The surplus part of the price which remains after covering the whole expense of improvement and cultivation may commonly, in this case, and in this case only, bear no regular proportion to the similar surplus in corn or pasture. It may exceed it by almost any degree, and most of this excess naturally goes to the rent of the landlord.

For example, the usual and natural proportion between the rent and profit of wine and those of corn and pasture must be understood to apply only to vineyards that produce nothing but good common wine. This is the kind of wine that can be grown almost anywhere, on any light, gravelly, or sandy soil, and which has nothing to recommend it but its strength and wholesomeness. It is with such vineyards only that the common land of the country can be brought into competition; for with those of a peculiar quality, it is evident that it cannot.

The vine is more affected by differences in soil than any other fruit tree. From some soils, it derives a flavor which no amount of cultivation or management is supposed to be able to equal on any other soil. This flavor, real or imaginary, is sometimes peculiar to the produce of a few vineyards. Sometimes it extends through most of a small district, and sometimes through a considerable part of a large province. The whole quantity of such special wines that is brought to market falls short of the effectual demand – that is, the demand of those who would be willing to pay the whole rent, profit, and wages necessary for preparing and bringing them there, according to the ordinary rate paid for common vineyards. The whole quantity, therefore, can be sold to those who are willing to pay more, which necessarily raises the price above that of common wine. The difference is greater or less according as the fashionableness and scarcity of the wine make the competition of the buyers more or less eager. Whatever the difference may be, most of it goes to the rent of the landlord. For though such vineyards are generally more carefully cultivated than most others, the high price of the wine seems to be not so much the effect as the cause of this careful cultivation. In so valuable a produce, the loss caused by negligence is so great as to force even the most careless to pay attention. A small part of this high price, therefore, is sufficient to pay the wages for the extraordinary labor bestowed upon their cultivation and the profits of the extraordinary capital which puts that labor into motion.

Sugar Colonies: Like Precious Vineyards

The sugar colonies possessed by European nations in the West Indies may be compared to those precious vineyards. Their whole produce falls short of the effectual demand of Europe. It can be sold to those who are willing to give more than what is sufficient to pay the whole rent, profit, and wages necessary for preparing and bringing it to market, according to the rate at which these are commonly paid for any other produce. In Cochin-china (part of modern Vietnam), the finest white sugar commonly sells for three piasters per quintal (about thirteen shillings and sixpence in British money of Smith’s time), as we are told by Mr. Poivre, a very careful observer of the agriculture of that country. What is there called the quintal weighs from 150 to 200 Paris pounds, or about 175 Paris pounds on average. This reduces the price of one hundredweight English to about eight shillings sterling – not a fourth part of what is commonly paid for the brown or muscovado (raw) sugars imported from British colonies, and not a sixth part of what is paid for the finest white sugar. Most of the cultivated lands in Cochin-china are employed in producing corn and rice, the food of the great body of the people. The respective prices of corn, rice, and sugar there are probably in their natural proportion. This is the proportion that naturally occurs in the different crops of most cultivated land, and which repays the landlord and farmer, as nearly as can be calculated, according to what is usually the original expense of improvement and the annual expense of cultivation. But in British sugar colonies, the price of sugar bears no such proportion to that of the produce of a rice or corn field either in Europe or in America. It is commonly said that a sugar planter expects that the rum and molasses (by-products of sugar production) should cover the whole expense of his cultivation, and that his sugar should be all clear profit. If this is true (for I do not claim to affirm it), it is as if a corn farmer expected to cover the expense of his cultivation with the chaff and the straw, and that the grain should be all clear profit. We frequently see societies of merchants in London and other trading towns purchase wasteland in British sugar colonies. They expect to improve and cultivate these lands with profit by means of managers (factors) and agents, despite the great distance and the uncertain returns due to the defective administration of justice in those countries. Nobody will attempt to improve and cultivate in the same manner the most fertile lands of Scotland, Ireland, or the corn provinces of North America, though more regular returns might be expected from the more exact administration of justice in these countries.

Tobacco Cultivation

In Virginia and Maryland, the cultivation of tobacco is preferred, as more profitable, to that of corn. Tobacco might be cultivated with advantage throughout most of Europe. But in almost every part of Europe, it has become a principal subject of taxation. To collect a tax from every different farm in the country where this plant might happen to be cultivated would be more difficult, it has been supposed, than to levy one upon its importation at the custom-house. For this reason, the cultivation of tobacco has been most absurdly prohibited throughout most of Europe. This necessarily gives a sort of monopoly to the countries where it is allowed. As Virginia and Maryland produce the greatest quantity of it, they share largely, though with some competitors, in the advantage of this monopoly. The cultivation of tobacco, however, seems not to be as advantageous as that of sugar. I have never even heard of any tobacco plantation that was improved and cultivated by the capital of merchants who resided in Great Britain. Our tobacco colonies do not send us home such wealthy planters as we frequently see arrive from our sugar islands. Though the preference given in those colonies to the cultivation of tobacco over that of corn would suggest that the effectual demand of Europe for tobacco is not completely supplied, it probably is more nearly so than that for sugar. And though the present price of tobacco is probably more than sufficient to pay the whole rent, wages, and profit necessary for preparing and bringing it to market (according to the rate at which they are commonly paid in corn land), it must not be so much more as the present price of sugar. Our tobacco planters, accordingly, have shown the same fear of an oversupply of tobacco which the proprietors of the old vineyards in France have of an oversupply of wine. By an act of their assembly, they have restricted its cultivation to six thousand plants (supposed to yield a thousand pounds of tobacco) for every enslaved African (Negro) between sixteen and sixty years of age. Such an enslaved person, over and above this quantity of tobacco, can manage, they reckon, four acres of Indian corn. To prevent the market from being overstocked, too, they have sometimes, in plentiful years, (we are told by Dr. Douglas, though I suspect he has been misinformed) burnt a certain quantity of tobacco for every enslaved person, in the same manner as the Dutch are said to do with spices. If such drastic methods are necessary to keep up the present price of tobacco, the superior advantage of its culture over that of corn, if it still has any, will not probably last long.

How Food Rent Regulates Other Rents

It is in this manner that the rent of cultivated land, of which the produce is human food, regulates the rent of most other cultivated land. No particular produce can long afford less rent, because the land would immediately be turned to another use. And if any particular produce commonly affords more, it is because the quantity of land which can be suited for it is too small to supply the effectual demand.

In Europe, corn is the principal produce of land which serves immediately for human food. Except in particular situations, therefore, the rent of corn land in Europe regulates that of all other cultivated land. Britain need not envy either the vineyards of France or the olive plantations of Italy. Except in particular situations, the value of these is regulated by that of corn, in which the fertility of Britain is not much inferior to that of either of those two countries.

Impact of Different Staple Foods on Rent

If in any country the common and favorite vegetable food of the people should be drawn from a plant of which the most common land, with the same or nearly the same cultivation, produced a much greater quantity than the most fertile land does of corn, the rent of the landlord, or the surplus quantity of food which would remain to him after paying the labor and replacing the capital of the farmer (together with its ordinary profits), would necessarily be much greater. Whatever was the rate at which labor was commonly maintained in that country, this greater surplus could always maintain a greater quantity of it, and consequently enable the landlord to purchase or command a greater quantity of it. The real value of his rent, his real power and authority, his command of the necessities and conveniences of life with which the labor of other people could supply him, would necessarily be much greater.

A rice field produces a much greater quantity of food than the most fertile cornfield. Two crops in the year, from thirty to sixty bushels each, are said to be the ordinary produce of an acre. Though its cultivation, therefore, requires more labor, a much greater surplus remains after maintaining all that labor. In those rice countries, therefore, where rice is the common and favorite vegetable food of the people, and where the cultivators are chiefly maintained with it, a greater share of this greater surplus should belong to the landlord than in corn countries. In Carolina, where the planters (as in other British colonies) are generally both farmers and landlords, and where rent consequently is mixed up with profit, the cultivation of rice is found to be more profitable than that of corn. This is true even though their fields produce only one crop in the year, and though, due to the prevalence of European customs, rice is not there the common and favorite vegetable food of the people. A good rice field is a bog at all seasons, and at one season a bog covered with water. It is unfit for corn, or pasture, or vineyard, or, indeed, for any other vegetable produce that is very useful to humans. And the lands which are fit for those purposes are not fit for rice. Even in rice countries, therefore, the rent of rice lands cannot regulate the rent of other cultivated land, which can never be turned to growing rice.

The food produced by a field of potatoes is not inferior in quantity to that produced by a field of rice, and much superior to what is produced by a field of wheat. Twelve thousand pounds of potatoes from an acre of land is not a greater produce than two thousand pounds of wheat. The food or solid nourishment, indeed, which can be drawn from each of those two plants is not altogether in proportion to their weight, because of the watery nature of potatoes. Allowing, however, half the weight of this root to be water (a very large allowance), such an acre of potatoes will still produce six thousand pounds of solid nourishment – three times the quantity produced by the acre of wheat. An acre of potatoes is cultivated with less expense than an acre of wheat; the fallow period (leaving land unplanted), which generally precedes the sowing of wheat, more than compensates for the hoeing and other extraordinary cultivation which is always given to potatoes. Should this root ever become in any part of Europe, like rice in some rice countries, the common and favorite vegetable food of the people, so as to occupy the same proportion of tilled lands which wheat and other sorts of grain for human food do at present, the same quantity of cultivated land would maintain a much greater number of people. And the laborers being generally fed with potatoes, a greater surplus would remain after replacing all the capital and maintaining all the labor employed in cultivation. A greater share of this surplus, too, would belong to the landlord. Population would increase, and rents would rise much beyond what they are at present. The land which is fit for potatoes is fit for almost every other useful vegetable. If potatoes occupied the same proportion of cultivated land which corn does at present, they would regulate, in the same manner, the rent of most other cultivated land.

In some parts of Lancashire, it is pretended, I have been told, that bread made of oatmeal is a more sustaining (heartier) food for laboring people than wheaten bread. I have frequently heard the same doctrine held in Scotland. I am, however, somewhat doubtful of the truth of it. The common people in Scotland, who are fed with oatmeal, are in general neither so strong nor so handsome as the same rank of people in England who are fed with wheaten bread.

The common people in Scotland neither work so well nor look so well as those in England. Since there isn’t the same difference between the wealthy or upper-class people (people of fashion) in the two countries, experience would seem to show that the food of the common people in Scotland (oatmeal) is not as suitable for the human body as that of their neighbors of the same rank in England (wheaten bread).

But it seems to be different with potatoes. The men who carried people in sedan chairs (chairmen), porters, and men who unloaded coal (coal-heavers) in London, and those unfortunate women who live by prostitution – who are perhaps the strongest men and the most beautiful women in the British territories – are said to be mostly from the lowest rank of people in Ireland, who are generally fed with this root. No food can offer more decisive proof of its nourishing quality, or of its being particularly suitable for the health of the human body.

It is difficult to preserve potatoes throughout the year, and impossible to store them like corn for two or three years together. The fear of not being able to sell them before they rot discourages their cultivation. This is, perhaps, the chief obstacle to potatoes ever becoming in any great country, like bread, the principal vegetable food of all the different ranks of the people.

PART II

The Produce of Land Which Sometimes Does, and Sometimes Does Not, Afford Rent

Human food seems to be the only product of land that always and necessarily provides some rent to the landlord. Other sorts of produce sometimes may and sometimes may not provide rent, according to different circumstances.

After food, clothing and lodging are the two great wants of mankind. Land in its original, undeveloped state can provide the materials for clothing and lodging to a much greater number of people than it can feed. In its improved state, it can sometimes feed a greater number of people than it can supply with those materials – at least in the way they require them and are willing to pay for them.

• In the undeveloped state, therefore, there is always a great oversupply of these materials (for clothing and lodging), which are frequently, for that reason, of little or no value.
• In the improved state, there is often a scarcity of these materials, which necessarily increases their value.
• In the undeveloped state, a great part of them is thrown away as useless. The price of what is used is considered equal only to the labor and expense of preparing it for use and can, therefore, provide no rent to the landlord.
• In the improved state, all materials are made use of, and there is frequently a demand for more than can be obtained. Somebody is always willing to give more for every part of them than what is sufficient to pay the expense of bringing them to market. Their price, therefore, can always provide some rent to the landlord.

Materials for Clothing

The skins of larger animals were the original materials for clothing. Among nations of hunters and shepherds, therefore, whose food consists chiefly of the flesh of these animals, every man, by providing himself with food, also provides himself with the materials for more clothing than he can wear. If there were no foreign commerce, most of these skins would be thrown away as things of no value. This was probably the case among the hunting nations of North America before their country was discovered by Europeans. They now exchange their surplus furs (peltry) for blankets, firearms, and brandy, which gives the furs some value. In the present commercial state of the known world, even the most undeveloped nations, I believe, where land property is established, have some foreign commerce of this kind. They find among their wealthier neighbors such a demand for all the materials of clothing which their land produces (and which can neither be processed nor consumed at home) that it raises their price above what it costs to send them to those wealthier neighbors. It therefore provides some rent to the landlord. When most of the Highland cattle were consumed on their own hills, the exportation of their hides was the most considerable part of the commerce of that country. What they were exchanged for provided some addition to the rent of the Highland estates. The wool of England, which in old times could neither be consumed nor processed at home, found a market in Flanders, which was then wealthier and more industrious. Its price provided something towards the rent of the land which produced it. In countries not better cultivated than England was then, or than the Highlands of Scotland are now, and which had no foreign commerce, the materials for clothing would clearly be so overabundant that a great part of them would be thrown away as useless, and no part could provide any rent to the landlord.

Materials for Lodging

The materials for lodging cannot always be transported as far as those for clothing and do not so readily become an object of foreign commerce. When they are overabundant in the country which produces them, it frequently happens, even in the present commercial state of the world, that they are of no value to the landlord.

• A good stone quarry in the neighborhood of London would provide a considerable rent. In many parts of Scotland and Wales, it provides none.
• Timber suitable for building is of great value in a populous and well-cultivated country, and the land which produces it provides a considerable rent. But in many parts of North America, the landlord would be much obliged to anybody who would carry away most of his large trees.
• In some parts of the Highlands of Scotland, the bark is the only part of the wood which, for want of roads and water transport, can be sent to market. The timber is left to rot upon the ground. When the materials for lodging are so overabundant, the part made use of is worth only the labor and expense of preparing it for that use. It provides no rent to the landlord, who generally grants the use of it to whoever takes the trouble of asking for it. The demand of wealthier nations, however, sometimes enables him to get a rent for it. The paving of the streets of London has enabled the owners of some barren rocks on the coast of Scotland to draw a rent from what never provided any before. The woods of Norway and of the coasts of the Baltic find a market in many parts of Great Britain which they could not find at home, and thereby provide some rent to their proprietors.

Population, Food, and Other Wants

Countries are populous not in proportion to the number of people whom their produce can clothe and lodge, but in proportion to the number of those whom it can feed. When food is provided, it is easy to find the necessary clothing and lodging. But though clothing and lodging materials may be at hand, it may often be difficult to find food. In some parts even of the British territories, what is called a house may be built by one day’s labor of one man. The simplest type of clothing, the skins of animals, requires somewhat more labor to dress and prepare them for use. They do not, however, require a great deal. Among undeveloped (savage and barbarous) nations, a hundredth part, or little more than a hundredth part, of the labor of the whole year will be sufficient to provide them with such clothing and lodging as satisfy most of the people. All the other ninety-nine parts are frequently no more than enough to provide them with food.

But when, by the improvement and cultivation of land, the labor of one family can provide food for two, the labor of half the society becomes sufficient to provide food for the whole. The other half, therefore, or at least most of them, can be employed in providing other things, or in satisfying the other wants and fancies of mankind. Clothing and lodging, household furniture, and what is called “Equipage” (carriages, horses, and related finery) are the principal objects of most of those wants and fancies. The rich man consumes no more food than his poor neighbor. In quality it may be very different, and to select and prepare it may require more labor and art; but in quantity, it is very nearly the same. But compare the spacious palace and great wardrobe of the one with the hovel and the few rags of the other, and you will see that the difference between their clothing, lodging, and household furniture is almost as great in quantity as it is in quality. The desire for food is limited in every man by the narrow capacity of the human stomach; but the desire for the conveniences and ornaments of building, dress, equipage, and household furniture seems to have no limit or certain boundary. Those, therefore, who have command of more food than they themselves can consume are always willing to exchange the surplus (or, what is the same thing, the price of it) for gratifications of this other kind. What is over and above satisfying the limited desire for food is given for the amusement of those desires which cannot be satisfied but seem to be altogether endless. The poor, in order to obtain food, exert themselves to gratify those fancies of the rich. To obtain food more certainly, they compete with one another in the cheapness and perfection of their work. The number of workmen increases with the increasing quantity of food, or with the growing improvement and cultivation of the lands. And as the nature of their business allows for the utmost subdivisions of labor, the quantity of materials which they can work up increases in a much greater proportion than their numbers. Hence arises a demand for every sort of material which human invention can employ, either usefully or ornamentally, in building, dress, equipage, or household furniture – for the minerals and resources found deep in the ground (fossils and minerals contained in the bowels of the earth), the precious metals, and the precious stones.

Food is in this manner not only the original source of rent, but every other part of the produce of land which afterwards provides rent derives that part of its value from the improvement of the powers of labor in producing food, by means of the improvement and cultivation of land.

Those other parts of the produce of land, however, which afterwards provide rent, do not provide it always. Even in improved and cultivated countries, the demand for them is not always such as to afford a greater price than what is sufficient to pay the labor and replace, together with its ordinary profits, the capital which must be employed in bringing them to market. Whether the price is or is not high enough for rent depends upon different circumstances.

Rent from Mines (e.g., Coal Mines)

Whether a coal mine, for example, can provide any rent depends partly upon its fertility and partly upon its situation (location).

A mine of any kind may be said to be either fertile or barren according as the quantity of mineral which can be brought from it by a certain quantity of labor is greater or less than what can be brought by an equal quantity from most other mines of the same kind.

• Some coal mines that are advantageously situated cannot be worked because of their barrenness. The produce does not pay the expense. They can provide neither profit nor rent.
• There are some mines whose produce is barely sufficient to pay the labor and replace, together with its ordinary profits, the capital employed in working them. They provide some profit to the mine operator (undertaker of the work) but no rent to the landlord. They can be worked advantageously by nobody but the landlord, who, being himself the operator of the work, gets the ordinary profit of the capital which he employs in it. Many coal mines in Scotland are worked in this manner and can be worked in no other. The landlord will allow nobody else to work them without paying some rent, and nobody can afford to pay any.
• Other coal mines in the same country, sufficiently fertile, cannot be worked because of their situation. A quantity of mineral sufficient to cover the expense of working could be brought from the mine by the ordinary, or even less than the ordinary, quantity of labor. But in an inland country, thinly inhabited, and without either good roads or water transport, this quantity could not be sold.

Coals are a less agreeable fuel than wood; they are said, too, to be less wholesome. The expense of coals, therefore, at the place where they are consumed, must generally be somewhat less than that of wood.

The price of wood, in turn, varies with the state of agriculture, in nearly the same manner and for exactly the same reason as the price of cattle. In the early stages of a country’s development, most of it is covered with wood, which is then merely an obstacle of no value to the landlord, who would gladly give it to anybody for the cutting. As agriculture advances, the woods are partly cleared by the progress of farming, and partly go to decay because of the increased number of cattle. These cattle, though they do not increase in the same proportion as corn (which is entirely the product of human industry), yet multiply under the care and protection of men. Men store up in the season of plenty what may maintain cattle in the season of scarcity. Throughout the year, men furnish them with a greater quantity of food than uncultivated nature provides. By destroying and eliminating their enemies, men secure them in the free enjoyment of all that nature provides. Numerous herds of cattle, when allowed to wander through the woods, though they do not destroy the old trees, prevent any young ones from coming up, so that in the course of a century or two, the whole forest goes to ruin. The scarcity of wood then raises its price. It provides a good rent, and the landlord sometimes finds that he can hardly employ his best lands more advantageously than in growing timber (barren timber, meaning for construction, not fruit-bearing), for which the greatness of the profit often compensates for the long wait for returns. This seems in the present times to be nearly the state of things in several parts of Great Britain, where the profit of planting trees is found to be equal to that of either corn or pasture. The advantage which the landlord derives from planting trees can nowhere exceed, at least for any considerable time, the rent which corn or pasture could provide him. In an inland country which is highly cultivated, it will frequently not fall much short of this rent. On the sea-coast of a well-improved country, indeed, if coals can conveniently be had for fuel, it may sometimes be cheaper to bring timber for building from less cultivated foreign countries than to raise it at home. In the new town of Edinburgh, built within these few years, there is not, perhaps, a single stick of Scotch timber.

Whatever the price of wood may be, if the price of coals is such that the expense of a coal fire is nearly equal to that of a wood fire, we may be assured that at that place, and in those circumstances, the price of coals is as high as it can be. It seems to be so in some of the inland parts of England, particularly in Oxfordshire, where it is usual, even in the fires of the common people, to mix coals and wood together, and where the difference in the expense of those two sorts of fuel cannot, therefore, be very great.

Coals, in the “coal countries” (regions where coal is abundant), are everywhere much below this highest price. If they were not, they could not bear the expense of distant transport, either by land or by water. Only a small quantity could be sold. The coal masters (mine operators) and coal proprietors (landowners of mines) find it more in their interest to sell a great quantity at a price somewhat above the lowest, than a small quantity at the highest. The most fertile coal mine, too, regulates the price of coals at all the other mines in its neighborhood. Both the proprietor and the operator of the work find that he can get a greater rent (for the proprietor) or a greater profit (for the operator) by somewhat underselling all their neighbors. Their neighbors are soon obliged to sell at the same price, though they cannot so well afford it, and though it always diminishes, and sometimes takes away altogether, both their rent and their profit. Some works are abandoned altogether; others can afford no rent and can be worked only by the proprietor.

The lowest price at which coals can be sold for any considerable time is, like that of all other commodities, the price which is barely sufficient to replace, together with its ordinary profits, the capital which must be employed in bringing them to market. At a coal mine for which the landlord can get no rent, but which he must either work himself or leave it alone altogether, the price of coals must generally be nearly about this price.

Rent, even where coals provide one, generally has a smaller share in their price than in that of most other raw products of land. The rent of an estate above ground commonly amounts to what is supposed to be a third of the gross produce, and it is generally a fixed (certain) rent, independent of occasional variations in the crop. In coal mines, a fifth of the gross produce is a very great rent; a tenth is the common rent. It is seldom a fixed rent but depends upon the occasional variations in the produce. These variations are so great that, in a country where thirty years’ worth of income (thirty years’ purchase) is considered a moderate price for the property of a landed estate, ten years’ purchase is regarded as a good price for that of a coal mine.

The value of a coal mine to the proprietor frequently depends as much upon its situation (location) as upon its fertility. That of a metallic mine depends more upon its fertility and less upon its situation. The coarse metals (like iron), and still more the precious metals (like gold and silver), when separated from the ore, are so valuable that they can generally bear the expense of very long land transport and of the most distant sea transport. Their market is not confined to the countries in the neighborhood of the mine but extends to the whole world. The copper of Japan is an article of commerce in Europe; the iron of Spain in Chile and Peru. The silver of Peru finds its way not only to Europe but from Europe to China.

The price of coals in Westmoreland or Shropshire (English counties) can have little effect on their price at Newcastle (another English coal region); and their price in the Lyon region of France (Lionnois) can have none at all on English prices. The productions of such distant coal mines can never be brought into competition with one another. But the productions of the most distant metallic mines frequently can, and in fact commonly are. The price, therefore, of the coarse metals, and still more that of the precious metals, at the most fertile mines in the world, must necessarily more or less affect their price at every other mine. The price of copper in Japan must have some influence upon its price at the copper mines in Europe. The price of silver in Peru – or the quantity either of labor or of other goods which it will purchase there – must have some influence on its price, not only at the silver mines of Europe but also at those of China. After the discovery of the mines of Peru, most of the silver mines of Europe were abandoned. The value of silver was so much reduced that their produce could no longer pay the expense of working them, or replace, with a profit, the food, clothes, lodging, and other necessaries which were consumed in that operation.

This was also the case with the mines of Cuba and St. Domingo, and even with the ancient mines of Peru, after the richer mines of Potosi were discovered.

The price of every metal at every mine, therefore, being regulated to some extent by its price at the most fertile mine in the world that is actually worked, means that most mines can do very little more than pay the expense of working them. They can seldom provide a very high rent to the landlord. Rent, accordingly, seems at most mines to make up only a small share in the price of coarse metals (like tin or lead), and an even smaller share in that of precious metals (like gold and silver). Labor and profit make up the greater part of the price for both.

A sixth part of the gross produce may be considered the average rent of the tin mines of Cornwall, which are the most fertile known in the world, as we are told by the Reverend Mr. Borlace, vice-warden of the stannaries (the tin-mining district). Some mines, he says, provide more, and some do not provide that much. A sixth part of the gross produce is also the rent of several very fertile lead mines in Scotland.

In the silver mines of Peru, we are told by Frezier and Ulloa (explorers and writers), the proprietor (owner of the land) frequently demands no other payment from the mine operator (undertaker) except that he will grind the ore at the proprietor’s mill, paying him the ordinary fee (multure) or price of grinding. Until 1736, indeed, the tax of the King of Spain amounted to one-fifth of the standard silver. This tax might have been considered the real rent of most of the silver mines of Peru, the richest known in the world. If there had been no tax, this fifth would naturally have belonged to the landlord, and many mines might have been worked which could not then be worked because they could not afford this tax. The tax of the Duke of Cornwall upon tin is supposed to amount to more than five percent (or one-twentieth part) of the value. Whatever his proportion, it would naturally also belong to the proprietor of the mine if tin were duty-free. But if you add one-twentieth to one-sixth, you will find that the whole average rent of the tin mines of Cornwall was to the whole average rent of the silver mines of Peru (before the tax reduction) roughly as thirteen is to twelve. But the silver mines of Peru are not now able to pay even this low rent (if the tax is considered rent), and the tax upon silver was, in 1736, reduced from one-fifth to one-tenth. Even this one-tenth tax upon silver gives more temptation to smuggling than the one-twentieth tax upon tin. Smuggling must be much easier for precious metals than for bulky commodities like tin. The tax of the King of Spain, accordingly, is said to be very poorly paid, while that of the Duke of Cornwall is very well paid. Rent, therefore, probably makes a greater part of the price of tin at the most fertile tin mines than it does of silver at the most fertile silver mines in the world. After replacing the capital employed in working these different mines, together with its ordinary profits, the remainder (residue) which is left for the proprietor is greater, it seems, in the coarse metal (tin) than in the precious metal (silver).

Neither are the profits of the operators of silver mines commonly very great in Peru. The same most respectable and well-informed authors tell us that when any person undertakes to work a new mine in Peru, he is universally looked upon as a man destined for bankruptcy and ruin and is, on that account, shunned and avoided by everybody. Mining, it seems, is considered there in the same light as here: as a lottery, in which the prizes do not compensate for all the losing tickets (blanks), though the greatness of some prizes tempts many investors (adventurers) to throw away their fortunes in such unprosperous projects.

As the sovereign (ruler), however, derives a considerable part of his revenue from the produce of silver mines, the law in Peru gives every possible encouragement to the discovery and working of new ones. Whoever discovers a new mine is entitled to measure off 246 feet in length according to what he supposes to be the direction of the vein, and half as much in breadth. He becomes the proprietor of this portion of the mine and can work it without paying any acknowledgment to the landlord of the surrounding area. The interest of the Duke of Cornwall has led to a regulation nearly of the same kind in that ancient duchy. In waste and unenclosed lands, any person who discovers a tin mine may mark out its limits to a certain extent, which is called “bounding a mine.” The “bounder” becomes the real proprietor of the mine and may either work it himself or lease it to another, without the consent of the owner of the land, to whom, however, a very small payment must be made when the mine is worked. In both regulations, the sacred rights of private property are sacrificed to the supposed interests of public revenue.

The same encouragement is given in Peru to the discovery and working of new gold mines; and for gold, the king’s tax amounts only to a twentieth part of the standard metal. It was once a fifth, and afterwards a tenth, as in silver; but it was found that the work could not bear even the lowest of these two taxes. If it is rare, however, say the same authors, Frezier and Ulloa, to find a person who has made his fortune by a silver mine, it is still much rarer to find one who has done so by a gold mine. This twentieth part seems to be the whole rent which is paid by most gold mines in Chile and Peru. Gold, too, is much more liable to be smuggled than even silver. This is not only because of the superior value of the metal in proportion to its bulk but also because of the peculiar way in which nature produces it. Silver is very seldom found pure (virgin) but, like most other metals, is generally mineralized (combined) with some other substance. It is impossible to separate it from this substance in quantities that will pay for the expense, except by a very laborious and tedious operation. This operation cannot well be carried on except in workhouses built for the purpose and therefore exposed to the inspection of the king’s officers. Gold, on the contrary, is almost always found pure. It is sometimes found in pieces of some size. Even when mixed in small and almost invisible particles with sand, earth, and other materials, it can be separated from them by a very short and simple operation, which can be carried on in any private house by anybody who has a small quantity of mercury. If the king’s tax, therefore, is poorly paid on silver, it is likely to be much worse paid on gold; and rent must make a much smaller part of the price of gold than even of silver.

Lowest and Highest Prices of Precious Metals

The lowest price at which the precious metals can be sold, or the smallest quantity of other goods for which they can be exchanged during any considerable time, is regulated by the same principles which fix the lowest ordinary price of all other goods. The capital which must commonly be employed, and the food, clothes, and lodging which must commonly be consumed in bringing them from the mine to the market, determine this lowest price. It must at least be sufficient to replace that capital, with the ordinary profits.

Their highest price, however, seems not to be necessarily determined by anything but the actual scarcity or plenty of those metals themselves. It is not determined by the price of any other commodity, in the same manner as the price of coals is limited by the price of wood (beyond which no scarcity can ever raise the price of coal). Increase the scarcity of gold to a certain degree, and the smallest bit of it may become more precious than a diamond and exchange for a greater quantity of other goods.

Demand for Precious Metals: Utility and Beauty

The demand for these metals arises partly from their utility and partly from their beauty. If you exclude iron, they are more useful than perhaps any other metal. As they are less liable to rust and impurity, they can more easily be kept clean. Utensils for the table or the kitchen are often more agreeable for that reason when made of them. A silver boiler is cleaner than one made of lead, copper, or tin; and the same quality would make a gold boiler still better than a silver one. Their principal merit, however, arises from their beauty, which makes them particularly fit for ornaments of dress and furniture. No paint or dye can give so splendid a color as gilding (covering with a thin layer of gold). The merit of their beauty is greatly enhanced by their scarcity. With most rich people, the chief enjoyment of riches consists in the display (parade) of riches. In their eyes, this display is never so complete as when they appear to possess those decisive marks of wealth (opulence) which nobody can possess but themselves. In their eyes, the merit of an object which is in any degree either useful or beautiful is greatly enhanced by its scarcity, or by the great labor which it requires to collect any considerable quantity of it – a labor which nobody can afford to pay but themselves. Such objects they are willing to purchase at a higher price than things much more beautiful and useful but more common. These qualities of utility, beauty, and scarcity are the original foundation of the high price of these metals, or of the great quantity of other goods for which they can everywhere be exchanged. This value existed before, and was independent of, their being employed as coin. It was this quality which fitted them for that employment. That employment as coin, however, by causing a new demand and by diminishing the quantity which could be employed in any other way, may have afterwards contributed to keep up or increase their value.

Demand for Precious Stones

The demand for precious stones arises altogether from their beauty. They are of no use but as ornaments. The merit of their beauty is greatly enhanced by their scarcity, or by the difficulty and expense of getting them from the mine. Wages and profit accordingly make up, on most occasions, almost the whole of their high price. Rent comes in only for a very small share, frequently for no share at all. Only the most fertile mines provide any considerable rent. When Tavernier, a jeweler, visited the diamond mines of Golconda and Visiapour in India, he was informed that the sovereign of the country, for whose benefit they were worked, had ordered all of them to be shut up, except those which yielded the largest and finest stones. The others, it seems, were not worth the working for the proprietor.

Rent of Mines and Relative Fertility

As the price of both precious metals and precious stones is regulated all over the world by their price at the most fertile mine, the rent which a mine of either can provide to its proprietor is in proportion, not to its absolute fertility, but to what may be called its relative fertility – that is, to its superiority over other mines of the same kind. If new mines were discovered that were as much superior to those of Potosi (famous silver mines in Bolivia) as Potosi’s mines were superior to those of Europe, the value of silver might be so much reduced as to make even the mines of Potosi not worth working. Before the discovery of the Spanish West Indies, the most fertile mines in Europe may have provided as great a rent to their proprietor as the richest mines in Peru do at present. Though the quantity of silver was much less, it might have exchanged for an equal quantity of other goods, and the proprietor’s share might have enabled him to purchase or command an equal quantity either of labor or of commodities. The value both of the produce and of the rent – the real revenue which they provided both to the public and to the proprietor – might have been the same.

The most abundant mines of either precious metals or precious stones could add little to the wealth of the world. A product whose value is principally derived from its scarcity is necessarily made less valuable (degraded) by its abundance. A set of silverware (service of plate), and the other unnecessary (frivolous) ornaments of dress and furniture, could be purchased for a smaller quantity of labor, or for a smaller quantity of commodities. This reduction in price would be the sole advantage the world could derive from that abundance.

Contrast with Land Estates

It is otherwise with estates above ground (farmland). The value of both their produce and their rent is in proportion to their absolute fertility, not their relative fertility. Land which produces a certain quantity of food, clothes, and lodging can always feed, clothe, and lodge a certain number of people. Whatever the landlord’s proportion of the produce may be, it will always give him a proportional command of the labor of those people and of the commodities with which that labor can supply him. The value of the most barren lands is not diminished by the neighborhood of the most fertile. On the contrary, it is generally increased by it. The great number of people maintained by the fertile lands provide a market for many parts of the produce of the barren lands, which they could never have found among only those whom their own produce could maintain.

Food Abundance Drives Demand for Other Riches

Whatever increases the fertility of land in producing food increases not only the value of the lands upon which the improvement is made but also contributes to increasing the value of many other lands by creating a new demand for their produce. That abundance of food, which many people have at their disposal beyond what they themselves can consume (as a consequence of the improvement of land), is the great cause of the demand for both precious metals and precious stones, as well as for every other convenience and ornament of dress, lodging, household furniture, and equipage (carriages and horses). Food not only constitutes the principal part of the riches of the world, but it is the abundance of food which gives the principal part of their value to many other sorts of riches. The poor inhabitants of Cuba and St. Domingo, when they were first discovered by the Spaniards, used to wear little bits of gold as ornaments in their hair and other parts of their dress. They seemed to value them as we would any little pebbles of somewhat more than ordinary beauty. They considered them as just worth the picking up, but not worth refusing to anybody who asked for them. They gave them to their new guests at the first request, without seeming to think that they had made them any very valuable present. They were astonished to observe the rage of the Spaniards to obtain them. They had no notion that there could anywhere be a country in which many people had at their disposal so great an excess of food (which was always so scanty among themselves) that for a very small quantity of those glittering trinkets (baubles) they would willingly give as much food as might maintain a whole family for many years. If the natives could have been made to understand this, the passion of the Spaniards would not have surprised them.

PART III

Variations in the Proportion between the Respective Values of Land Produce that Always Affords Rent and Produce that Sometimes Does and Sometimes Does Not

The increasing abundance of food, as a consequence of increasing improvement and cultivation of land, must necessarily increase the demand for every part of the produce of land which is not food, and which can be applied either to use or to ornament. In the whole progress of improvement, it might therefore be expected that there should be only one main variation in the comparative values of these two different sorts of produce. The value of that sort of produce which sometimes does and sometimes does not provide rent (like materials for clothing, lodging, minerals) should constantly rise in proportion to the value of that which always provides some rent (food). As art and industry advance, the materials of clothing and lodging, the useful minerals from the earth, the precious metals, and the precious stones should gradually come to be more and more in demand. They should gradually exchange for a greater and greater quantity of food, or in other words, should gradually become dearer and dearer relative to food. This, accordingly, has been the case with most of these things on most occasions. It would have been the case with all of them on all occasions if particular accidents had not, on some occasions, increased the supply of some of them in a still greater proportion than the demand.

The value of a freestone quarry (a quarry for good building stone), for example, will necessarily increase with the increasing improvement and population of the country around it, especially if it should be the only one in the neighborhood. But the value of a silver mine, even though there should not be another within a thousand miles of it, will not necessarily increase with the improvement of the country in which it is situated. The market for the produce of a freestone quarry can seldom extend more than a few miles around it, and the demand must generally be in proportion to the improvement and population of that small district. But the market for the produce of a silver mine may extend over the whole known world. Unless the world in general, therefore, is advancing in improvement and population, the demand for silver might not be at all increased by the improvement even of a large country in the neighborhood of the mine. Even if the world in general were improving, yet if, in the course of its improvement, new mines should be discovered which are much more fertile than any which had been known before, then even though the demand for silver would necessarily increase, the supply might increase in so much a greater proportion that the real price of that metal might gradually fall. That is, any given quantity (a pound weight of it, for example) might gradually purchase or command a smaller and smaller quantity of labor, or exchange for a smaller and a smaller quantity of corn (the principal part of the laborer’s subsistence).

The great market for silver is the commercial and civilized part of the world. If, by the general progress of improvement, the demand of this market should increase, while at the same time the supply did not increase in the same proportion, the value of silver would gradually rise in proportion to that of corn.

In that case, any given quantity of silver would exchange for a greater and greater quantity of corn. In other words, the average money price of corn would gradually become cheaper and cheaper.

If, on the contrary, the supply of silver, due to some accident, should increase for many years in a greater proportion than the demand for it, then silver would gradually become cheaper and cheaper. In other words, the average money price of corn would, despite all improvements in farming, gradually become dearer and dearer.

But if, on the other hand, the supply of silver should increase in nearly the same proportion as the demand for it, silver would continue to purchase or exchange for nearly the same quantity of corn. The average money price of corn would then, despite all improvements, continue to be very nearly the same.

These three scenarios seem to cover all the possible combinations of events that can happen in the progress of economic improvement. During the four centuries before the present one, if we may judge by what has happened in both France and Great Britain, each of these three different combinations seems to have taken place in the European market, and in nearly the same order, too, in which I have presented them here.

DIGRESSION CONCERNING THE VARIATIONS IN THE VALUE OF SILVER DURING THE COURSE OF THE LAST FOUR CENTURIES

First Period: Mid-1300s to around 1570

Around 1350, and for some time before, the average price of a quarter of wheat (eight bushels) in England seems to have been no less than four ounces of silver (Tower weight). This was equal to about twenty shillings in the money of Adam Smith’s time (the late 1700s). From this price, it appears to have fallen gradually to about two ounces of silver per quarter, equal to about ten shillings in Smith’s money. This lower price is what we find it estimated at in the beginning of the sixteenth century (early 1500s), and it seems to have stayed at that level until about 1570.

Evidence for Earlier, Higher Wheat Prices (in silver terms)

In 1350, during the 25th year of King Edward III’s reign, a law called The Statute of Labourers was enacted. The introduction to this law complained a lot about the boldness (insolence) of servants, who were trying to get higher wages from their masters. The law, therefore, ordered that all servants and laborers should, in the future, be content with the same wages and “liveries” (which in those times meant not only clothes but also food allowances) that they had been used to receiving in the 20th year of the king’s reign and the four preceding years. Because of this, their livery wheat (wheat given as part of their allowance) was not to be valued higher than tenpence a bushel. The master always had the option to give them either the wheat or the money. Tenpence a bushel, therefore, must have been considered a very moderate price for wheat in 1350. This is because it required a special law to force servants to accept it instead of their usual food allowance. It had also been considered a reasonable price ten years before that, in the 16th year of the king’s reign, which the law referred to. But in the 16th year of Edward III, tenpence contained about half an ounce of silver (Tower weight). This was nearly equal to half-a-crown (two shillings and sixpence) in Smith’s money. Therefore, four ounces of silver (Tower weight) – equal to six shillings and eightpence in the money of those times, and nearly twenty shillings in Smith’s money – must have been considered a moderate price for a quarter (eight bushels) of wheat.

This statute is surely better evidence of what was considered a moderate price for grain in those times than the prices from some particular years. Historians and other writers have generally recorded those prices because they were extraordinarily high or low. It is therefore difficult to form any judgment from them about what the ordinary price might have been. Besides this, there are other reasons for believing that in the beginning of the fourteenth century (early 1300s), and for some time before, the common price of wheat was not less than four ounces of silver per quarter, and that other grains were priced in proportion.

In 1309, Ralph de Born, the prior of St Augustine’s in Canterbury, gave a feast on his installation day. William Thorn, a historian, preserved not only the menu but also the prices of many items. At that feast:

• Fifty-three quarters of wheat were consumed, costing nineteen pounds, or seven shillings and twopence a quarter. This was equal to about twenty-one shillings and sixpence in Smith’s money.
• Fifty-eight quarters of malt cost seventeen pounds ten shillings, or six shillings a quarter (about eighteen shillings in Smith’s money).
• Twenty quarters of oats cost four pounds, or four shillings a quarter (about twelve shillings in Smith’s money). The prices of malt and oats here seem higher than their usual proportion to the price of wheat. These prices were not recorded because they were extraordinarily high or low but are mentioned accidentally as the actual prices paid for large quantities of grain consumed at a feast famous for its magnificence.

In 1262 (the 51st year of Henry III’s reign), an ancient statute called The Assize of Bread and Ale was revived. The king stated in the introduction that this law had been made in the times of his ancestors, sometime kings of England. It is probably, therefore, at least as old as the time of his grandfather Henry II (mid-1100s) and may have been as old as the Norman Conquest (1066). It regulated the price of bread according to the price of wheat, which might range from one shilling to twenty shillings per quarter in the money of those times. But statutes of this kind are generally presumed to provide equally for all deviations from the middle price – for those below it as well as for those above it. Therefore, ten shillings per quarter – containing six ounces of silver (Tower weight) and equal to about thirty shillings in Smith’s money – must, on this assumption, have been considered the middle price of wheat when this statute was first enacted. It must have continued to be so in the 51st year of Henry III. We cannot therefore be very wrong in supposing that the middle price was not less than one-third of the highest price at which this statute regulated the price of bread, or about six shillings and eightpence in the money of those times (containing four ounces of silver, Tower weight).

From these different facts, therefore, we seem to have some reason to conclude that, around the middle of the fourteenth century and for a considerable time before, the average or ordinary price of a quarter of wheat was not supposed to be less than four ounces of silver (Tower weight).

Wheat Prices Fall (in silver terms)

From about the middle of the fourteenth century to the beginning of the sixteenth century (roughly 1350 to 1500), what was considered the reasonable and moderate – that is, the ordinary or average – price of wheat seems to have sunk gradually to about one-half of this earlier price. It eventually fell to about two ounces of silver (Tower weight) per quarter, equal to about ten shillings in Smith’s money. It continued to be estimated at this price until about 1570.

In the household account book of Henry, the fifth Earl of Northumberland, written in 1512, there are two different estimates for wheat. In one, it is computed at six shillings and eightpence per quarter; in the other, at only five shillings and eightpence. In 1512, six shillings and eightpence contained only two ounces of silver (Tower weight) and was equal to about ten shillings in Smith’s money.

From the 25th year of Edward III’s reign (1350) to the beginning of the reign of Elizabeth I (1558), for over two hundred years, six shillings and eightpence appears from several different statutes to have continued to be considered the moderate and reasonable (that is, the ordinary average) price of wheat. However, the quantity of silver contained in that nominal sum (six shillings and eightpence) was continually diminishing during this period because of alterations made to the coins. But the increase in the value of silver itself had, it seems, compensated for the decrease in the quantity of silver in the same nominal sum so much that the legislature did not think it worthwhile to pay attention to this circumstance.

• Thus, in 1436, it was enacted that wheat might be exported without a license when the price was as low as six shillings and eightpence.
• In 1463, it was enacted that no wheat should be imported if the price was not above six shillings and eightpence per quarter. The legislature had imagined that when the price was so low, there could be no harm in exportation, but that when it rose higher, it became wise to allow importation. Six shillings and eightpence, therefore – containing about the same quantity of silver as thirteen shillings and fourpence in Smith’s money (one-third less than the same nominal sum contained in the time of Edward III) – had in those times been considered the moderate and reasonable price of wheat.

In 1554 (by the 1st and 2nd of Philip and Mary) and in 1558 (by the 1st of Elizabeth), the exportation of wheat was similarly prohibited whenever the price per quarter exceeded six shillings and eightpence. This amount did not then contain twopence more silver than the same nominal sum does in Smith’s present time. But it had soon been found that to restrict the exportation of wheat until the price was so very low was, in reality, to prohibit it altogether. In 1562, therefore (by the 5th of Elizabeth), the exportation of wheat was allowed from certain ports whenever the price per quarter did not exceed ten shillings. This sum contained nearly the same quantity of silver as the same nominal sum does in Smith’s present time. This price (ten shillings) had at this time, therefore, been considered the moderate and reasonable price of wheat. It agrees nearly with the estimation in the Northumberland household book from 1512.

That in France the average price of grain was similarly much lower at the end of the fifteenth and beginning of the sixteenth centuries than in the two centuries preceding has been observed both by Mr. Duprè de St. Maur and by the elegant author of the Essay on the Police of Grain. Its price during the same period had probably sunk in the same manner throughout most of Europe.

Reasons for Silver’s Increased Value Relative to Corn

This rise in the value of silver in proportion to that of corn may have been due to one or more of the following:

1. An increase in the demand for silver due to increasing improvement and cultivation in society, while the supply of silver remained the same.
2. The demand for silver remaining the same, but a gradual decrease in its supply because most of the known mines in the world were becoming exhausted, making them much more expensive to work.
3. A combination of these two circumstances.

At the end of the fifteenth and beginning of the sixteenth centuries (late 1400s and early 1500s), most of Europe was approaching a more settled form of government than it had enjoyed for several ages before. The increase of security would naturally increase industry and improvement. The demand for precious metals, as well as for every other luxury and ornament, would naturally increase with the increase of riches. A greater annual produce would require a greater quantity of coin to circulate it. A greater number of rich people would require a greater quantity of silver plate and other ornaments. It is natural to suppose, too, that most of the mines which then supplied the European market with silver might have been considerably exhausted and become more expensive to work. Many of them had been worked since the time of the Romans.

Challenging the Common View of Silver’s Value

However, it has been the opinion of most of those who have written about the prices of commodities in ancient times that, from the Norman Conquest (1066), or perhaps even from the invasion of Julius Caesar (55 BCE), until the discovery of the mines of America (late 1400s/early 1500s), the value of silver was continually diminishing. They seem to have been led into this opinion partly by the observations they made on the prices of both corn and some other raw products of the land, and partly by the popular notion that as the quantity of silver naturally increases in every country with the increase of wealth, so its value diminishes as its quantity increases.

In their observations upon the prices of corn, three different circumstances seem frequently to have misled them:

1. Mistaking Conversion Prices for Market Prices: In ancient times, almost all rents were paid in kind – in a certain quantity of corn, cattle, poultry, etc. Sometimes, however, the landlord would specify that he could choose to receive either the annual payment in kind or a certain sum of money instead of it. The price at which the payment in kind was exchanged for a sum of money is called the conversion price in Scotland. Since the option is always the landlord’s, it is necessary for the safety of the tenant that the conversion price should be below rather than above the average market price. In many places, accordingly, it is not much more than half of the market price. Throughout most of Scotland, this custom still continues with regard to poultry, and in some places with regard to cattle. It might probably have continued for corn as well, had not the institution of the public fiars (official annual valuations of the average market price of grains in each county, made under oath by a jury) put an end to it. This institution made it safe enough for the tenant, and much more convenient for the landlord, to convert the corn rent at whatever the fiars price happened to be each year, rather than at any certain fixed price. But the writers who have collected corn prices from ancient times seem frequently to have mistaken what is called the conversion price in Scotland for the actual market price. Bishop Fleetwood, a writer on this topic, acknowledged on one occasion that he had made this mistake. However, as he wrote his book for a particular purpose, he did not make this acknowledgment until after transcribing this conversion price fifteen times. The price he recorded was eight shillings per quarter of wheat. This sum in 1423, the year he begins with, contained the same quantity of silver as sixteen shillings in Smith’s money. But in 1562, the year he ends with, it contained no more silver than the same nominal sum (eight shillings) does in Smith’s present time.

2. Misinterpreting Old Statutes of Assize: They have also been misled by the sloppy manner in which some ancient statutes for setting prices (statutes of assize) had sometimes been transcribed by lazy copiers, and sometimes perhaps actually composed by the legislature itself. The ancient statutes of assize seem to have always begun by determining what the price of bread and ale ought to be when the price of wheat and barley were at their lowest. They then proceeded gradually to determine what the prices should be as the prices of those two grains gradually rose above this lowest price. But the transcribers of those statutes seem frequently to have thought it sufficient to copy the regulation only as far as the first three or four lowest prices. They likely did this to save themselves labor, supposing that this was enough to show what proportion ought to be observed in all higher prices. Thus, in the Assize of Bread and Ale from the 51st year of Henry III’s reign (1262), the price of bread was regulated according to the different prices of wheat, from one shilling to twenty shillings per quarter, in the money of those times. But in the manuscripts from which all the different editions of the statutes before Mr. Ruffhead’s were printed, the copiers had never transcribed this regulation beyond the price of twelve shillings. Several writers, therefore, being misled by this faulty transcription, very naturally concluded that the middle price, or six shillings per quarter (equal to about eighteen shillings in Smith’s money), was the ordinary or average price of wheat at that time.

   In the Statute of Tumbrel and Pillory, enacted nearly about the same time, the price of ale is regulated according to every sixpence rise in the price of barley, from two shillings to four shillings per quarter. That four shillings, however, was not considered the highest price to which barley might frequently rise in those times, and that these prices were only given as an example of the proportion which ought to be observed in all other prices, whether higher or lower, we can infer from the last words of the statute: “et sic deinceps crescetur vel diminuetur per sex denarios.” The expression is very sloppy, but the meaning is plain enough: “That the price of ale is in this manner to be increased or diminished according to every sixpence rise or fall in the price of barley.” In the composition of this statute, the legislature itself seems to have been as negligent as the copiers were in the transcription of others.

   In an ancient manuscript of the Regiam Majestatem, an old Scotch law book, there is a statute of assize in which the price of bread is regulated according to all the different prices of wheat, from tenpence to three shillings per Scotch boll (equal to about half an English quarter). Three shillings Scotch, at the time when this assize is supposed to have been enacted, were equal to about nine shillings sterling in Smith’s money. Mr. Ruddiman seems to conclude from this that three shillings was the highest price to which wheat ever rose in those times and that tenpence, a shilling, or at most two shillings, were the ordinary prices. Upon consulting the manuscript, however, it appears clearly that all these prices are only set down as examples of the proportion which ought to be observed between the respective prices of wheat and bread. The last words of the statute are, “reliqua judicabis secundum præscripta habendo respectum ad pretium bladi.” This means: “You shall judge of the remaining cases according to what is above written, having respect to the price of corn.”

3. Focusing on Unusually Low Prices: Thirdly, they seem to have been misled, too, by the very low price at which wheat was sometimes sold in very ancient times. They seem to have imagined that because its lowest price was then much lower than in later times, its ordinary price must likewise have been much lower.

They might have found, however, that in those ancient times, the highest price of wheat was just as much above anything known in later times as its lowest price was below it. For example, Bishop Fleetwood gives us two prices for a quarter of wheat in 1270:

• One is four pounds sixteen shillings in the money of those times (equal to fourteen pounds eight shillings in Adam Smith’s money).
• The other is six pounds eight shillings (equal to nineteen pounds four shillings in Smith’s money). No price can be found at the end of the fifteenth or beginning of the sixteenth century that comes close to these extraordinarily high prices. The price of corn, though always liable to variation, varies most in those turbulent and disorderly societies. In such societies, the interruption of all commerce and communication prevents the plenty of one part of the country from relieving the scarcity of another. In the disorderly state of England under the Plantagenet kings (who governed from about the mid-twelfth to the late fifteenth century), one district might have plenty of food. Meanwhile, another district not far away, by having its crop destroyed either by some accident of the seasons or by the raid of some neighboring baron, might be suffering all the horrors of a famine. Yet, if the lands of some hostile lord lay between them, the one district might not be able to give the least assistance to the other. Under the vigorous administration of the Tudors (who governed England during the latter part of the fifteenth and through the whole of the sixteenth century), no baron was powerful enough to dare disturb public security, so conditions were more stable.

The reader will find at the end of this chapter all the prices of wheat which Bishop Fleetwood collected from 1202 to 1597, inclusive. These prices are reduced to the money of Adam Smith’s present times and organized by time into seven divisions of twelve years each. At the end of each division, the reader will also find the average price of the twelve years it consists of. In that long period, Fleetwood was able to collect the prices for only eighty years, so four years are missing to complete the last twelve-year period. I have therefore added, from the accounts of Eton College, the prices for 1598, 1599, 1600, and 1601. This is the only addition I have made. The reader will see that from the beginning of the thirteenth century until after the middle of the sixteenth century, the average price of each twelve-year period grows gradually lower and lower. Towards the end of the sixteenth century, it begins to rise again. The prices, indeed, which Fleetwood was able to collect seem to have been chiefly those that were remarkable for being extraordinarily high or low. I do not pretend that any very certain conclusion can be drawn from them. So far, however, as they prove anything at all, they confirm the account I have been trying to give. Fleetwood himself, however, seems, like most other writers, to have believed that during all this period the value of silver was continually diminishing because of its increasing abundance. The prices of corn which he himself collected certainly do not agree with this opinion. They agree perfectly with that of Mr. Duprè de St. Maur and with the one I have been trying to explain. Bishop Fleetwood and Mr. Duprè de St. Maur are the two authors who seem to have collected with the greatest diligence and accuracy the prices of things in ancient times. It is somewhat curious that, though their opinions are so very different, their facts, at least as far as they relate to the price of corn, should coincide so very exactly.

It is not, however, so much from the low price of corn as from that of some other raw products of the land that the most judicious writers have inferred the great value of silver in those very ancient times. Corn, it has been said, being a sort of manufactured good (requiring cultivation), was, in those undeveloped ages, much more expensive in proportion than most other commodities. By this, I suppose, they mean more expensive than most unmanufactured commodities, such as cattle, poultry, game of all kinds, etc. That in those times of poverty and less developed society these items were proportionally much cheaper than corn is undoubtedly true. But this cheapness was not the effect of the high value of silver, but of the low value of those commodities themselves. It was not because silver in such times would purchase or represent a greater quantity of labor, but because such commodities would purchase or represent a much smaller quantity of labor than in times of greater wealth and improvement. Silver must certainly be cheaper in Spanish America than in Europe – in the country where it is produced than in the country to which it is brought, at the expense of a long journey by both land and sea, including freight and insurance costs. Yet, Ulloa tells us that, not many years ago, at Buenos Aires, the price of an ox chosen from a herd of three or four hundred was one-and-twenty pence halfpenny sterling (about 21.5 pence). Mr. Byron tells us that sixteen shillings sterling was the price of a good horse in the capital of Chile. In a country naturally fertile, but where most of the land is uncultivated, cattle, poultry, game of all kinds, etc., can be acquired with very little labor. Therefore, they will purchase or command but a very small quantity of labor. The low money price for which they may be sold is no proof that the real value of silver is very high there, but rather that the real value of those commodities is very low.

Labor as the Real Measure of Value

Labor, it must always be remembered, and not any particular commodity or set of commodities, is the real measure of the value of both silver and all other commodities.

But in countries that are almost empty, or only thinly inhabited, cattle, poultry, game of all kinds, etc., are the spontaneous productions of nature. Nature frequently produces them in much greater quantities than the consumption of the inhabitants requires. In such a state of things, the supply commonly exceeds the demand. In different states of society, in different stages of improvement, therefore, such commodities will represent, or be equivalent to, very different quantities of labor.

In every state of society, in every stage of improvement, corn is the product of human industry. But the average produce of every sort of industry is always suited, more or less exactly, to the average consumption; the average supply to the average demand. In every different stage of improvement, besides, raising equal quantities of corn in the same soil and climate will, on average, require nearly equal quantities of labor. Or, what comes to the same thing, it will require the price of nearly equal quantities of labor. This is because the continual increase in the productive powers of labor in an improving state of cultivation is more or less counterbalanced by the continually increasing price of cattle, the principal instruments of agriculture. For all these reasons, therefore, we may be assured that equal quantities of corn will, in every state of society and in every stage of improvement, more nearly represent, or be equivalent to, equal quantities of labor than will equal quantities of any other raw product of the land. Corn, accordingly, as has already been observed, is, in all the different stages of wealth and improvement, a more accurate measure of value than any other commodity or set of commodities. In all those different stages, therefore, we can judge better of the real value of silver by comparing it with corn than by comparing it with any other commodity or set of commodities.

Corn, besides, or whatever else is the common and favorite vegetable food of the people, constitutes, in every civilized country, the principal part of the subsistence of the laborer. As a consequence of the extension of agriculture, the land of every country produces a much greater quantity of vegetable food than of animal food. The laborer everywhere lives chiefly upon the wholesome food that is cheapest and most abundant. Butcher’s meat, except in the most thriving countries or where labor is most highly rewarded, makes up only an insignificant part of his subsistence. Poultry makes up a still smaller part, and game no part at all. In France, and even in Scotland (where labor is somewhat better rewarded than in France), the laboring poor seldom eat butcher’s meat, except on holidays and other extraordinary occasions. The money price of labor, therefore, depends much more upon the average money price of corn (the subsistence of the laborer) than upon that of butcher’s meat or of any other raw product of land. The real value of gold and silver, therefore – the real quantity of labor which they can purchase or command – depends much more upon the quantity of corn which they can purchase or command than upon that of butcher’s meat or any other raw product of land.

Such slight observations, however, upon the prices of either corn or other commodities, would not probably have misled so many intelligent authors if they had not been influenced, at the same time, by the popular notion: that as the quantity of silver naturally increases in every country with the increase of wealth, so its value diminishes as its quantity increases. This notion, however, seems to be altogether groundless.

The quantity of precious metals may increase in any country from two different causes:

1. First, from the increased abundance of the mines which supply it.
2. Secondly, from the increased wealth of the people, from the increased produce of their annual labor. The first of these causes is no doubt necessarily connected with a decrease in the value of precious metals, but the second is not.

When more abundant mines are discovered, a greater quantity of precious metals is brought to market. Since the quantity of necessities and conveniences of life for which they must be exchanged is the same as before, equal quantities of the metals must be exchanged for smaller quantities of commodities. So far, therefore, as the increase in the quantity of precious metals in any country arises from the increased abundance of the mines, it is necessarily connected with some decrease in their value.

When, on the contrary, the wealth of any country increases – when the annual produce of its labor becomes gradually greater and greater – a greater quantity of coin becomes necessary to circulate a greater quantity of commodities. And the people, as they can afford it (as they have more commodities to give for it), will naturally purchase a greater and greater quantity of silverware and gold items (plate). The quantity of their coin will increase from necessity. The quantity of their plate will increase from vanity and showiness (ostentation), or for the same reason that the quantity of fine statues, pictures, and every other luxury and curiosity is likely to increase among them. But just as sculptors (statuaries) and painters are not likely to be worse rewarded in times of wealth and prosperity than in times of poverty and depression, so gold and silver are not likely to be paid for less.

The price of gold and silver, when the accidental discovery of more abundant mines does not keep it down, naturally rises with the wealth of every country. Whatever the state of the mines, it is at all times naturally higher in a rich than in a poor country. Gold and silver, like all other commodities, naturally seek the market where the best price is given for them, and the best price is commonly given for everything in the country which can best afford it. Labor, it must be remembered, is the ultimate price which is paid for everything. In countries where labor is equally well rewarded, the money price of labor will be in proportion to that of the subsistence of the laborer. But gold and silver will naturally exchange for a greater quantity of subsistence in a rich country than in a poor country – in a country which abounds with subsistence than in one which is only poorly supplied with it. If the two countries are a great distance apart, the difference may be very great. Though the metals naturally fly from the worse to the better market, it may be difficult to transport them in such quantities as to bring their price nearly to a level in both. If the countries are near, the difference will be smaller and may sometimes be hardly noticeable, because in this case, transportation will be easy. China is a much richer country than any part of Europe, and the difference between the price of subsistence in China and in Europe is very great. Rice in China is much cheaper than wheat is anywhere in Europe. England is a much richer country than Scotland, but the difference between the money price of corn in those two countries is much smaller and is only just perceptible. In proportion to the quantity or measure, Scotch corn generally appears to be a good deal cheaper than English; but in proportion to its quality, it is certainly somewhat dearer. Scotland receives almost every year very large supplies of corn from England, and every commodity must commonly be somewhat dearer in the country to which it is brought than in that from which it comes. English corn, therefore, must be dearer in Scotland than in England. Yet, in proportion to its quality (or to the quantity and goodness of the flour or meal which can be made from it), it cannot commonly be sold for a higher price there than the Scotch corn which comes to market in competition with it.

The difference between the money price of labor in China and in Europe is still greater than that between the money price of subsistence. This is because the real payment (recompense) of labor is higher in Europe than in China, as most of Europe is in an improving state, while China seems to be standing still. The money price of labor is lower in Scotland than in England because the real payment of labor is much lower; Scotland, though advancing to greater wealth, is advancing much more slowly than England. The frequency of emigration from Scotland, and the rarity of it from England, sufficiently prove that the demand for labor is very different in the two countries. The proportion between the real payment of labor in different countries, it must be remembered, is naturally regulated not by their actual wealth or poverty, but by their advancing, stationary, or declining condition.

Gold and silver, as they are naturally of the greatest value among the richest nations, are also naturally of the least value among the poorest nations. Among undeveloped societies (savages), the poorest of all nations, they are of hardly any value.

In great towns, corn is always dearer than in remote parts of the country. This, however, is the effect not of the real cheapness of silver, but of the real dearness of corn. It does not cost less labor to bring silver to the great town than to the remote parts of the country, but it costs a great deal more to bring corn.

In some very rich and commercial countries, such as Holland and the territory of Genoa, corn is expensive for the same reason that it is expensive in great towns: they do not produce enough to maintain their inhabitants. They are rich in the industry and skill of their craftsmen and manufacturers; in every sort of machinery which can make labor easier and shorter; in shipping, and in all the other instruments and means of transport and commerce. But they are poor in corn, which, as it must be brought to them from distant countries, must, by an addition to its price, pay for the transport from those countries. It does not cost less labor to bring silver to Amsterdam than to Gdansk (Dantzick), but it costs a great deal more to bring corn. The real cost of silver must be nearly the same in both places, but that of corn must be very different. Diminish the real wealth (opulence) of either Holland or the territory of Genoa, while the number of their inhabitants remains the same. Diminish their power of supplying themselves from distant countries. Then the price of corn, instead of sinking with the decrease in the quantity of their silver (which must necessarily accompany this decline either as its cause or as its effect), will rise to the price of a famine. When we are in want of necessities, we must part with all non-essential luxury items (superfluities). The value of these luxuries rises in times of wealth and prosperity, and sinks in times of poverty and distress. It is otherwise with necessities. Their real price – the quantity of labor which they can purchase or command – rises in times of poverty and distress and sinks in times of wealth and prosperity (which are always times of great abundance, for they could not otherwise be times of wealth and prosperity). Corn is a necessary; silver is only a non-essential item.

Whatever, therefore, may have been the increase in the quantity of precious metals during the period between the middle of the fourteenth and that of the sixteenth century which arose from the increase of wealth and improvement, it could have had no tendency to diminish their value either in Great Britain or in any other part of Europe.

Therefore, if those who collected prices of things in ancient times had no reason during this first period (mid-1300s to around 1570) to conclude that the value of silver was diminishing based on their observations of the prices of either corn or other commodities, they had even less reason to conclude it from any supposed increase of wealth and improvement in society.

Second Period: Around 1570 to Around 1640

But however varied the opinions of learned people may have been concerning the progress of the value of silver during this first period, they are unanimous about its progress during the second period.

From about 1570 to about 1640, a period of about seventy years, the change in the proportion between the value of silver and that of corn took a quite opposite course.

• Silver sunk in its real value, meaning it would exchange for a smaller quantity of labor than before.
• Corn rose in its money price. Instead of being commonly sold for about two ounces of silver per quarter (eight bushels), or about ten shillings in Adam Smith’s money, it came to be sold for six and eight ounces of silver per quarter, or about thirty and forty shillings in Smith’s money.

The discovery of the abundant mines of America seems to have been the sole cause of this decrease in the value of silver compared to that of corn. It is explained in the same manner by everybody, and there has never been any dispute either about the fact or about its cause. Most of Europe was, during this period, advancing in industry and improvement, and the demand for silver must consequently have been increasing. But the increase in the supply of silver had, it seems, so far exceeded the increase in demand that the value of that metal sunk considerably. It is to be observed that the discovery of the mines of America does not seem to have had any very noticeable effect on the prices of things in England until after 1570, even though the mines of Potosi had been discovered more than twenty years before.

From 1595 to 1620, inclusive, the average price of a quarter of nine bushels of the best wheat at Windsor market appears, from the accounts of Eton College, to have been £2 1s. 6d. and a fraction. From this sum, ignoring the fraction and deducting one-ninth (or about 4s. 7d.) to adjust for an eight-bushel quarter, the price comes out to have been about £1 16s. 10d. And from this sum, again ignoring a small fraction and deducting another ninth (about 4s. 1d.) for the difference between the price of the best wheat and that of middle-quality wheat, the price of middle wheat comes out to have been about £1 12s. 8d. This was about six and one-third ounces of silver.

From 1621 to 1636, inclusive, the average price of the same measure of the best wheat at the same market appears, from the same accounts, to have been £2 10s. Making similar deductions as in the previous case, the average price of a quarter of eight bushels of middle wheat comes out to have been £1 19s. 6d., or about seven and two-thirds ounces of silver.

Third Period: Around 1636/1640 to Adam Smith’s Present Time

Between 1630 and 1640, or around 1636, the effect of the discovery of the American mines in reducing the value of silver appears to have been completed. The value of silver seems never to have sunk lower in proportion to that of corn than it was about that time. It seems to have risen somewhat in the course of the present century (the 1700s), and it had probably begun to do so even some time before the end of the last century (the 1600s).

From 1637 to 1700, inclusive (the last sixty-four years of the 17th century), the average price of a quarter of nine bushels of the best wheat at Windsor market appears, from the same Eton College accounts, to have been £2 11s. and a fraction. This is only about one shilling dearer than it had been during the sixteen years before. But in the course of these sixty-four years, two events happened which must have produced a much greater scarcity of corn than the course of the seasons would otherwise have caused. These events, therefore, without supposing any further reduction in the value of silver, will much more than account for this very small increase in price.

1. The first of these events was the English Civil War. By discouraging farming and interrupting commerce, it must have raised the price of corn much above what the course of the seasons would otherwise have caused. It must have had this effect more or less at all the different markets in the kingdom, but particularly at those in the neighborhood of London, which needed to be supplied from the greatest distance. In 1648, accordingly, the price of the best wheat at Windsor market appears, from the same accounts, to have been £4 5s., and in 1649 to have been £4 per quarter of nine bushels. The excess of those two years above £2 10s. (the average price of the sixteen years preceding 1637) is £3 5s. When this excess is divided among the sixty-four last years of the 17th century, it alone very nearly accounts for that small increase in price which seems to have taken place in them. These, however, though the highest, are by no means the only high prices which seem to have been caused by the civil wars.

2. The second event was the bounty (subsidy) upon the exportation of corn, granted in 1688. Many people have thought that this bounty, by encouraging farming, may have, over a long course of years, caused a greater abundance, and consequently a greater cheapness, of corn in the home market than what would otherwise have occurred. How far the bounty could produce this effect at any time, I shall examine later. I shall only observe at present that, between 1688 and 1700, it had not had time to produce any such effect. During this short period, its only effect must have been to raise the price in the home market by encouraging the exportation of the surplus produce of every year, thereby preventing the abundance of one year from compensating for the scarcity of another. The scarcity which prevailed in England from 1693 to 1699, inclusive, though no doubt principally owing to bad seasons (and therefore extending through a considerable part of Europe), must have been somewhat increased by the bounty. In 1699, accordingly, the further exportation of corn was prohibited for nine months.

There was a third event which occurred in the course of the same period. Though it could not cause any scarcity of corn, nor perhaps any increase in the real quantity of silver usually paid for it, it must necessarily have caused some increase in the nominal sum (money price). This event was the great debasement of the silver coin by clipping (shaving off edges) and wearing. This evil had begun in the reign of Charles II and had gone on continually increasing until 1695. At that time, as we may learn from Mr. Lowndes (an official of the Mint), the current silver coin was, on average, nearly twenty-five percent below its standard value. But the nominal sum which constitutes the market price of every commodity is necessarily regulated not so much by the quantity of silver which, according to the standard, ought to be contained in it, as by that which, it is found by experience, actually is contained in it. This nominal sum, therefore, is necessarily higher when the coin is much debased than when it is near to its standard value.

In the course of the present century (the 1700s), the silver coin has not at any time been more below its standard weight than it is at present. But though very much worn down (defaced), its value has been kept up by that of the gold coin for which it is exchanged. For though before the recent recoinage of gold, the gold coin was also a good deal worn down, it was less so than the silver. In 1695, on the contrary, the value of the silver coin was not kept up by the gold coin; a guinea then commonly exchanged for thirty shillings of the worn and clipped silver. Before the recent recoinage of gold, the price of silver bullion was seldom higher than five shillings and sevenpence an ounce, which is only fivepence above the mint price. But in 1695, the common price of silver bullion was six shillings and fivepence an ounce, which is fifteenpence above the mint price. Even before the recent recoinage of gold, therefore, the coin (gold and silver together), when compared with silver bullion, was not supposed to be more than eight percent below its standard value. In 1695, on the contrary, it had been supposed to be near twenty-five percent below that value. But in the beginning of the present century (that is, immediately after the great recoinage in King William’s time), most of the current silver coin must have been still nearer to its standard weight than it is at present. In the course of the present century, too, there has been no great public calamity, such as the civil war, which could either discourage farming or interrupt the internal commerce of the country. And though the bounty on corn export, which has been in place through most of this century, must always raise the price of corn somewhat higher than it otherwise would be in the actual state of farming, it may also be supposed to have done something to lower the price of that commodity one way, as well as to raise it the other. This is because, in the course of this century, the bounty has had full time to produce all the good effects commonly attributed to it: to encourage farming and thereby to increase the quantity of corn in the home market (ideas I will discuss later). It is, by many people, supposed to have done more to lower the price than to raise it.

Accordingly, in the first sixty-four years of the present century (1701-1764), the average price of a quarter of nine bushels of the best wheat at Windsor market appears, by the accounts of Eton College, to have been £2 0s. 6d. and a fraction. This is about ten shillings and sixpence (or more than twenty-five percent) cheaper than it had been during the last sixty-four years of the last century. It is also about nine shillings and sixpence cheaper than it had been during the sixteen years preceding 1636 (when the discovery of the abundant American mines may be supposed to have produced its full effect), and about one shilling cheaper than it had been in the twenty-six years preceding 1620 (before that discovery can well be supposed to have produced its full effect). According to this account, the average price of middle-quality wheat during these first sixty-four years of the present century comes out to have been about thirty-two shillings per quarter of eight bushels.

The value of silver, therefore, seems to have risen somewhat in proportion to that of corn during the course of the present century. It had probably begun to do so even some time before the end of the last one.

In 1687, the price of a quarter of nine bushels of the best wheat at Windsor market was £1 5s. 2d., the lowest price it had ever been since 1595.

In 1688, Mr. Gregory King, a man famous for his knowledge in matters of this kind, estimated the average price of wheat in years of moderate plenty to be 3s. 6d. per bushel to the grower, or twenty-eight shillings per quarter. The grower’s price, I understand, is the same as what is sometimes called the contract price, or the price at which a farmer contracts for a certain number of years to deliver a certain quantity of corn to a dealer. As a contract of this kind saves the farmer the expense and trouble of marketing, the contract price is generally lower than what is supposed to be the average market price. Mr. King had judged twenty-eight shillings per quarter to be at that time the ordinary contract price in years of moderate plenty. Before the scarcity caused by the recent extraordinary run of bad seasons, it was, I have been assured, the ordinary contract price in all common years.

In 1688, the parliamentary bounty on the exportation of corn was granted. The country gentlemen, who then composed a still greater proportion of the legislature than they do at present, had felt that the money price of corn was falling. The bounty was a measure to raise it artificially to the high price at which it had frequently been sold in the times of Charles I and II. It was to take effect, therefore, until wheat was as high as forty-eight shillings per quarter – that is, twenty shillings (or five-sevenths) dearer than Mr. King had in that very year estimated the grower’s price to be in times of moderate plenty. If his calculations deserve any part of the reputation they have very universally obtained, forty-eight shillings per quarter was a price which, without some such measure as the bounty, could not at that time be expected, except in years of extraordinary scarcity. But the government of King William was not then fully settled. It was in no condition to refuse anything to the country gentlemen, from whom it was at that very time seeking support for the first establishment of the annual land tax.

The value of silver, therefore, in proportion to that of corn, had probably risen somewhat before the end of the last century. It seems to have continued to do so during most of the present century, though the necessary operation of the bounty must have hindered that rise from being as noticeable as it otherwise would have been in the actual state of farming.

• In plentiful years, the bounty, by causing an extraordinary exportation, necessarily raises the price of corn above what it otherwise would be in those years. To encourage farming by keeping up the price of corn even in the most plentiful years was the stated goal (avowed end) of the institution.
• In years of great scarcity, indeed, the bounty has generally been suspended. It must, however, have had some effect even upon the prices of many of those years. By the extraordinary exportation it causes in years of plenty, it must frequently hinder the plenty of one year from compensating for the scarcity of another.

Therefore, both in years of plenty and in years of scarcity, the bounty raises the price of corn above what it naturally would be in the actual state of farming. If, during the first sixty-four years of the present century, the average price has been lower than during the last sixty-four years of the last century, it must, in the same state of farming, have been much more so, had it not been for this operation of the bounty.

But without the bounty, it may be said, the state of farming would not have been the same. What may have been the effects of this institution upon the agriculture of the country, I shall try to explain later, when I come to discuss bounties specifically. I shall only observe at present that this rise in the value of silver, in proportion to that of corn, has not been peculiar to England. It has been observed to have taken place in France during the same period, and nearly in the same proportion too, by three very faithful, diligent, and laborious collectors of the prices of corn: Mr. Duprè de St. Maur, Mr. Messance, and the author of the Essay on the Police of Grain. But in France, until 1764, the exportation of grain was prohibited by law. It is somewhat difficult to suppose that nearly the same decrease in price which took place in one country (France), despite this prohibition, should in another (England) be owing to the extraordinary encouragement given to exportation.

It would be more proper, perhaps, to consider this variation in the average money price of corn as the effect rather of some gradual rise in the real value of silver in the European market than of any fall in the real average value of corn. Corn, as has already been observed, is, over distant periods, a more accurate measure of value than either silver or perhaps any other commodity. When, after the discovery of the abundant mines of America, corn rose to three and four times its former money price, this change was universally attributed not to any rise in the real value of corn, but to a fall in the real value of silver. If, during the first sixty-four years of the present century, therefore, the average money price of corn has fallen somewhat below what it had been during most of the last century, we should in the same manner attribute this change not to any fall in the real value of corn, but to some rise in the real value of silver in the European market.

The high price of corn during these last ten or twelve years, indeed, has caused a suspicion that the real value of silver still continues to fall in the European market. This high price of corn, however, seems clearly to have been the effect of extraordinarily unfavorable seasons and ought therefore to be regarded not as a permanent, but as a temporary and occasional event. The seasons for these last ten or twelve years have been unfavorable throughout most of Europe. The disorders in Poland have much increased the scarcity in all those countries which, in expensive years, used to be supplied from that market. Such a long run of bad seasons, though not a very common event, is by no means a unique one. Whoever has inquired much into the history of the prices of corn in former times will have no trouble recalling several other examples of the same kind. Ten years of extraordinary scarcity, besides, are no more wonderful than ten years of extraordinary plenty. The low price of corn from 1741 to 1750, both inclusive, may very well be set in opposition to its high price during these last eight or ten years.

From 1741 to 1750, the average price of a quarter of nine bushels of the best wheat at Windsor market, it appears from the accounts of Eton College, was only £1 13s. 9d. and a fraction. This is nearly 6 shillings and 3 pence below the average price of the first sixty-four years of the present century (the 1700s). The average price of a quarter of eight bushels of middle-quality wheat, according to this account, comes out to have been, during these ten years, only £1 6s. 8d.

Between 1741 and 1750, however, the bounty (subsidy) paid for exporting corn must have prevented the price of corn from falling as low in the home market as it naturally would have. During these ten years, the quantity of all sorts of grain exported, it appears from the custom-house books, amounted to no less than 8,029,156 quarters and one bushel. The bounty paid for this amounted to £1,514,962 17s. 4½d. In 1749, accordingly, Mr. Pelham, who was prime minister at that time, observed to the House of Commons that for the three preceding years a very extraordinary sum had been paid as bounty for the exportation of corn. He had good reason to make this observation, and in the following year, he might have had still better. In that single year (1750), the bounty paid amounted to no less than £324,176 10s. 6d. It is unnecessary to observe how much this forced exportation must have raised the price of corn above what it otherwise would have been in the home market.

At the end of the accounts annexed to this chapter (in the original book), the reader will find the particular account of those ten years separated from the rest. He will find there, too, the particular account of the preceding ten years, of which the average is also below, though not so much below, the general average of the first sixty-four years of the century. The year 1740, however, was a year of extraordinary scarcity. These twenty years preceding 1750 may very well be contrasted with the twenty years preceding 1770. Just as the former period (1730-1750) had prices a good deal below the general average of the century (despite one or two expensive years), the latter period (1750-1770) has had prices a good deal above it (despite one or two cheap years, like 1759). If the former period has not been as much below the general average as the latter has been above it, we ought probably to attribute it to the bounty. The change has clearly been too sudden to be ascribed to any change in the value of silver, which is always slow and gradual. The suddenness of the effect can be accounted for only by a cause which can operate suddenly: the accidental variation of the seasons.

Wages and the Value of Silver in Britain and France

The money price of labor in Great Britain has, indeed, risen during the course of the present century. This, however, seems to be the effect not so much of any decrease in the value of silver in the European market, as of an increase in the demand for labor in Great Britain. This increase in demand arises from the great and almost universal prosperity of the country. In France, a country not altogether so prosperous, the money price of labor has, since the middle of the last century (mid-1600s), been observed to sink gradually with the average money price of corn. Both in the last century and in the present, the day-wages of common labor there are said to have been pretty uniformly about one-twentieth of the average price of a “septier” of wheat (a French measure containing a little more than four Winchester bushels). In Great Britain, the real payment for labor (the real quantities of the necessities and conveniences of life which are given to the laborer) has, as already shown, increased considerably during the course of the present century. The rise in its money price seems to have been the effect, not of any decrease in the value of silver in the general market of Europe, but of a rise in the real price of labor in the particular market of Great Britain, owing to the peculiarly happy circumstances of the country.

The Impact of American Mines on Silver Value

For some time after the first discovery of America, silver would have continued to sell at its former price, or not much below it. The profits of mining would, for some time, have been very great, much above their natural rate. Those who imported that metal into Europe, however, would soon find that the whole annual importation could not be sold at this high price. Silver would gradually exchange for a smaller and smaller quantity of goods. Its price would sink gradually lower and lower until it fell to its natural price – that is, to what was just sufficient to pay, according to their natural rates, the wages of the labor, the profits of the capital, and the rent of the land which must be paid in order to bring it from the mine to the market. In most of the silver mines of Peru, the tax of the King of Spain, amounting to a tenth of the gross produce, eats up, as has already been observed, the whole rent of the land. This tax was originally a half; it soon afterwards fell to a third, then to a fifth, and at last, in 1736, to a tenth, at which rate it still continues. In most silver mines of Peru, this tax seems to be all that remains after replacing the capital of the mine operator (undertaker), together with its ordinary profits. It seems to be universally acknowledged that these profits, which were once very high, are now as low as they can possibly be while still carrying on their works.

The tax of the King of Spain was reduced to a fifth part of the registered silver in 1504, which was forty-one years before 1545, the date of the discovery of the mines of Potosi. In the course of ninety years, or before 1636, these mines (the most fertile in all America) had sufficient time to produce their full effect, or to reduce the value of silver in the European market as low as it could reasonably fall while it continued to pay this tax to the King of Spain. Ninety years is sufficient time to reduce any commodity, of which there is no monopoly, to its natural price, or to the lowest price at which, while it pays a particular tax, it can continue to be sold for any considerable time.

The price of silver in the European market might perhaps have fallen still lower. It might have become necessary either to reduce the tax upon it, not only to one-tenth (as in 1736) but to one-twentieth (in the same manner as the tax upon gold), or to give up working most of the American mines which are now worked. The gradual increase of the demand for silver, or the gradual enlargement of the market for the produce of the silver mines of America, is probably the cause which has prevented this from happening. This increased demand has not only kept up the value of silver in the European market but has perhaps even raised it somewhat higher than it was about the middle of the last century (mid-1600s).

Since the first discovery of America, the market for the produce of its silver mines has been growing gradually more and more extensive due to three main reasons:

1. The European Market Has Expanded: Since the discovery of America, most of Europe has been much improved. England, Holland, France, and Germany – even Sweden, Denmark, and Russia – have all advanced considerably in both agriculture and manufactures. Italy seems not to have gone backwards; its decline preceded the conquest of Peru, and since that time it seems rather to have recovered a little. Spain and Portugal, indeed, are supposed to have gone backwards. Portugal, however, is a very small part of Europe, and the decline of Spain is perhaps not as great as is commonly imagined. In the beginning of the sixteenth century, Spain was a very poor country, even in comparison with France (which has been so much improved since that time). It was the well-known remark of Emperor Charles V, who had traveled frequently through both countries, that everything abounded in France, but that everything was lacking in Spain. The increasing produce of the agriculture and manufactures of Europe must necessarily have required a gradual increase in the quantity of silver coin to circulate it. The increasing number of wealthy individuals must have required a similar increase in the quantity of their silverware (plate) and other silver ornaments.

2. America Itself is a New and Growing Market: America itself provides a new market for the produce of its own silver mines. As its advances in agriculture, industry, and population are much more rapid than those of the most thriving countries in Europe, its demand for silver must increase much more rapidly. The English colonies are an entirely new market which, partly for coin and partly for silverware, requires a continually increasing supply of silver throughout a great continent where there was never any demand before. Most of the Spanish and Portuguese colonies are also entirely new markets. New Granada, the Yucatan, Paraguay, and Brazil were, before discovery by Europeans, inhabited by undeveloped (savage) nations who had neither arts nor agriculture. A considerable degree of both has now been introduced into all of them. Even Mexico and Peru, though they cannot be considered as entirely new markets, are certainly much more extensive ones than they ever were before. After all the wonderful tales which have been published concerning the splendid state of those countries in ancient times, whoever reads, with any degree of sober judgment, the history of their first discovery and conquest will clearly see that in arts, agriculture, and commerce, their inhabitants were much more ignorant than the Tartars of the Ukraine are at present. Even the Peruvians, the more civilized nation of the two, though they made use of gold and silver as ornaments, had no coined money of any kind. Their whole commerce was carried on by barter, and there was accordingly hardly any division of labor among them. Those who cultivated the ground were obliged to build their own houses, make their own household furniture, their own clothes, shoes, and instruments of agriculture. The few craftsmen among them are said to have been all maintained by the sovereign, the nobles, and the priests, and were probably their servants or slaves. All the ancient arts of Mexico and Peru have never furnished one single manufactured item to Europe. The Spanish armies, though they hardly ever exceeded five hundred men, and frequently did not amount to half that number, found almost everywhere great difficulty in obtaining subsistence. The depopulation they are said to have caused almost wherever they went, in countries also represented as very populous and well-cultivated, sufficiently demonstrates that the story of this populousness and high cultivation is in great measure fabulous. The Spanish colonies are under a government in many respects less favorable to agriculture, improvement, and population than that of the English colonies. They seem, however, to be advancing in all these much more rapidly than any country in Europe. In a fertile soil and happy climate, the great abundance and cheapness of land (a circumstance common to all new colonies) is, it seems, so great an advantage as to compensate for many defects in civil government. Frezier, who visited Peru in 1713, represents Lima as containing between twenty-five and twenty-eight thousand inhabitants. Ulloa, who resided in the same country between 1740 and 1746, represents it as containing more than fifty thousand. The difference in their accounts of the population of several other principal towns in Chile and Peru is nearly the same. As there seems to be no reason to doubt the good information of either, it marks an increase which is hardly inferior to that of the English colonies. America, therefore, is a new market for the produce of its own silver mines, a market whose demand must increase much more rapidly than that of the most thriving country in Europe.

3. The East Indies is an Expanding Market: The East Indies is another market for the produce of the silver mines of America. It is a market which, from the time of the first discovery of those mines, has been continually taking off a greater and greater quantity of silver. Since that time, the direct trade between America and the East Indies (carried on by means of the Acapulco ships) has been continually increasing. The indirect trade by way of Europe has been increasing in a still greater proportion. During the sixteenth century, the Portuguese were the only European nation who carried on any regular trade to the East Indies. In the last years of that century, the Dutch began to encroach upon this monopoly and in a few years expelled them from their principal settlements in India. During most of the last century, those two nations divided the most considerable part of the East India trade between them, with the trade of the Dutch continually increasing even more than that of the Portuguese declined. The English and French carried on some trade with India in the last century, but it has been greatly increased in the course of the present one. The East India trade of the Swedes and Danes began in the course of the present century. Even the Russians (Muscovites) now trade regularly with China by a sort of caravan which goes overland through Siberia and Tartary to Pekin (Beijing). The East India trade of all these nations (if we except that of the French, which the last war had nearly annihilated) has been almost continually increasing. The increasing consumption of East India goods in Europe is, it seems, so great as to provide a gradual increase of employment for them all. Tea, for example, was a drug very little used in Europe before the middle of the last century. At present, the value of the tea annually imported by the English East India Company, for the use of their own countrymen, amounts to more than a million and a half pounds sterling a year. Even this is not enough; a great deal more is constantly smuggled into the country from the ports of Holland, from Gottenburg in Sweden, and from the coast of France too (as long as the French East India Company was prosperous). The consumption of Chinese porcelain, of spices from the Moluccas (Spice Islands), of textiles (piece goods) from Bengal, and of innumerable other articles, has increased very nearly in a similar proportion. Accordingly, the tonnage (carrying capacity) of all the European shipping employed in the East India trade at any one time during the last century was not, perhaps, much greater than that of the English East India Company alone before the recent reduction of their shipping.

But in the East Indies, particularly in China and India (Indostan), the value of precious metals, when Europeans first began to trade with those countries, was much higher than in Europe; and it still continues to be so. In rice-producing countries, which generally yield two, sometimes three, crops in the year (each of them more plentiful than any common crop of corn), the abundance of food must be much greater than in any corn country of equal extent. Such countries are accordingly much more populous. In them, too, the rich, having a greater oversupply of food to dispose of beyond what they themselves can consume, have the means of purchasing a much greater quantity of the labor of other people. The retinue (group of attendants) of a nobleman (grandee) in China or India, accordingly, is by all accounts much more numerous and splendid than that of the richest subjects in Europe. The same oversupply of food which they have at their disposal enables them to give a greater quantity of it for all those unique and rare productions which nature furnishes only in very small quantities, such as precious metals and precious stones – the great objects of competition among the rich. Therefore, even if the mines which supplied the Indian market had been as abundant as those which supplied the European market, such commodities (metals and stones) would naturally exchange for a greater quantity of food in India than in Europe. But the mines which supplied the Indian market with precious metals seem to have been a good deal less abundant, and those which supplied it with precious stones a good deal more so, than the mines which supplied Europe. Precious metals, therefore, would naturally exchange in India for somewhat a greater quantity of precious stones, and for a much greater quantity of food, than in Europe. The money price of diamonds (the greatest of all non-essentials) would be somewhat lower, and that of food (the first of all necessities) a great deal lower, in India than in Europe. But the real price of labor – the real quantity of the necessities of life which is given to the laborer – has already been observed to be lower both in China and India (the two great markets of India) than it is throughout most of Europe. The wages of the laborer there will purchase a smaller quantity of food. Since the money price of food is much lower in India than in Europe, the money price of labor there is lower on two accounts: both because of the small quantity of food it will purchase, and because of the low price of that food. But in countries of equal art and industry, the money price of most manufactures will be in proportion to the money price of labor. In manufacturing art and industry, China and India, though inferior, seem not to be much inferior to any part of Europe. The money price of most manufactures, therefore, will naturally be much lower in those great empires than it is anywhere in Europe.

Throughout most of Europe, the expense of land transport also greatly increases both the real and money price of most manufactured goods. It costs more labor, and therefore more money, to bring first the materials and afterwards the complete manufacture to market. In China and India, the extent and variety of inland navigation (by rivers and canals) save most of this labor, and consequently this money. This, in turn, further reduces both the real and money price of most of their manufactures. For all these reasons, precious metals are a commodity that it has always been, and still continues to be, extremely advantageous to carry from Europe to India. There is hardly any commodity that brings a better price there, or which, in proportion to the quantity of labor and commodities it costs in Europe, will purchase or command a greater quantity of labor and commodities in India. It is also more advantageous to carry silver to India than gold. This is because in China and most other markets of India, the proportion between the value of fine silver and fine gold is only about ten (or at most twelve) to one, whereas in Europe it is about fourteen or fifteen to one.

• In China and most other Indian markets, ten (or at most twelve) ounces of silver will purchase one ounce of gold.
• In Europe, it requires from fourteen to fifteen ounces of silver to purchase one ounce of gold. Therefore, in the cargoes of most European ships which sail to India, silver has generally been one of the most valuable articles. It is the most valuable article in the Acapulco ships which sail to Manilla (in the Philippines). The silver of the New World (America) seems in this manner to be one of the principal commodities by which commerce between the two extremities of the Old World (Europe and Asia) is carried on. It is largely by means of silver that these distant parts of the world are connected with one another.

To supply such a very widely extended market, the quantity of silver annually brought from the mines must not only be sufficient to support the continual increase of both coin and silverware (plate) required in all thriving countries. It must also be sufficient to repair the continual waste and consumption of silver which takes place in all countries where that metal is used.

Global Consumption of Precious Metals

The continual consumption of precious metals is very noticeable:

• In coin from wearing down.
• In silverware and gold items (plate) from both wearing and cleaning. For commodities whose use is so very widespread, this alone would require a very great annual supply. The consumption of these metals in some particular manufactures, though perhaps not greater overall than this gradual wearing down, is, however, much more noticeable because it is much more rapid. In the manufactures of Birmingham alone, the quantity of gold and silver annually employed in gilding and plating (and thereby made unfit to ever appear again in the shape of those metals) is said to amount to more than fifty thousand pounds sterling. From this, we may form some idea of how great the annual consumption must be in all the different parts of the world, either in similar manufactures or in laces, embroideries, gold and silver fabrics, the gilding of books, furniture, etc. A considerable quantity, too, must be annually lost in transporting these metals from one place to another, both by sea and by land. Besides this, in most governments of Asia, the almost universal custom of hiding treasures in the earth (of which the knowledge frequently dies with the person who makes the concealment) must cause the loss of a still greater quantity.

The quantity of gold and silver imported at both Cadiz (Spain) and Lisbon (Portugal) – including not only what is officially registered but also what may be supposed to be smuggled – amounts, according to the best accounts, to about six million pounds sterling a year.

According to Mr. Meggens (a contemporary merchant and writer):

• The annual importation of precious metals into Spain (average of 1748-1753) and into Portugal (average of 1747-1753) amounted to 1,101,107 pounds weight of silver and 49,940 pounds weight of gold.
• The silver, at sixty-two shillings per Troy pound, amounts to £3,413,431 10s. sterling.
• The gold, at forty-four and a half guineas per Troy pound, amounts to £2,333,446 14s. sterling.
• Both together amount to £5,746,878 4s. sterling. Mr. Meggens assures us that the account of what was imported under register is exact. He provides details of the particular places from which the gold and silver were brought and the specific quantity of each metal registered from each place. He also makes an allowance for the quantity of each metal he supposes may have been smuggled. The great experience of this wise merchant makes his opinion considerably trustworthy.

According to the eloquent, and sometimes well-informed, author of the Philosophical and Political History of the Establishment of the Europeans in the two Indies:

• The annual importation of registered gold and silver into Spain (average of 1754-1764) amounted to 13,984,185¾ piastres of ten reals.
• However, accounting for what may have been smuggled, he supposes the whole annual importation may have amounted to seventeen million piastres. At 4 shillings and 6 pence per piastre, this is equal to £3,825,000 sterling. He also gives details of the particular places from which the gold and silver were brought and the registered quantities. He informs us, too, that if we were to judge the quantity of gold annually imported from Brazil into Lisbon by the amount of the tax paid to the King of Portugal (which seems to be one-fifth of the standard metal), we might value it at eighteen million cruzadoes, or forty-five million French livres, equal to about two million pounds sterling. On account of what may have been smuggled, however, we may safely, he says, add an eighth more to this sum (£250,000 sterling), so that the whole will amount to £2,250,000 sterling. According to this account, therefore, the whole annual importation of precious metals into both Spain and Portugal amounts to about £6,075,000 sterling.

Several other very well authenticated, though unpublished (manuscript), accounts, I have been assured, agree in making this whole annual importation amount, on average, to about six million pounds sterling – sometimes a little more, sometimes a little less.

The annual importation of precious metals into Cadiz and Lisbon, indeed, is not equal to the whole annual produce of the mines of America. Some part is sent annually by the Acapulco ships to Manilla (Philippines). Some part is employed in the contraband trade (smuggling) which the Spanish colonies carry on with those of other European nations. And some part, no doubt, remains in America. Besides, the mines of America are by no means the only gold and silver mines in the world. They are, however, by far the most abundant. The produce of all the other known mines is insignificant, it is acknowledged, in comparison with theirs. And most of their produce, it is also acknowledged, is annually imported into Cadiz and Lisbon. But the consumption of Birmingham alone, at the rate of fifty thousand pounds a year, is equal to one-hundred-and-twentieth part of this annual importation (if the importation is six million a year). The whole annual consumption of gold and silver, therefore, in all the different countries of the world where those metals are used, may perhaps be nearly equal to the whole annual produce from mines. The remainder may be no more than sufficient to supply the increasing demand of all thriving countries. It may even have fallen so far short of this demand as to somewhat raise the price of those metals in the European market.

Price Stability of Metals

The quantity of brass and iron annually brought from the mine to the market is out of all proportion greater than that of gold and silver. We do not, however, on this account, imagine that those coarse metals are likely to multiply beyond the demand, or to become gradually cheaper and cheaper. Why should we imagine that precious metals are likely to do so? The coarse metals, indeed, though harder, are put to much harder uses, and, as they are of less value, less care is employed in their preservation. The precious metals, however, are not necessarily immortal any more than coarse metals; they too are liable to be lost, wasted, and consumed in a great variety of ways.

The price of all metals, though liable to slow and gradual variations, varies less from year to year than that of almost any other raw product of the land. The price of precious metals is even less liable to sudden variations than that of coarse ones. The durableness of metals is the foundation of this extraordinary steadiness of price.

• The corn which was brought to market last year will be all or almost all consumed long before the end of this year.
• But some part of the iron which was brought from the mine two or three hundred years ago may still be in use.
• And perhaps some part of the gold which was brought from it two or three thousand years ago is still in use. The different masses of corn which in different years must supply the consumption of the world will always be nearly in proportion to the respective produce of those different years. But the proportion between the different masses of iron which may be in use in two different years will be very little affected by any accidental difference in the produce of the iron mines of those two years. The proportion between the masses of gold will be still less affected by any such difference in the produce of the gold mines. Therefore, though the produce of most metallic mines varies, perhaps, still more from year to year than that of most cornfields, those variations do not have the same effect upon the price of metals as they do upon the price of corn.

VARIATIONS IN THE PROPORTION BETWEEN THE RESPECTIVE VALUES OF GOLD AND SILVER

Before the discovery of the mines of America, the value of fine gold to fine silver was regulated in the different mints of Europe between the proportions of one to ten (1:10) and one to twelve (1:12). That is, an ounce of fine gold was supposed to be worth from ten to twelve ounces of fine silver. About the middle of the last century (mid-1600s), it came to be regulated between the proportions of one to fourteen (1:14) and one to fifteen (1:15). That is, an ounce of fine gold came to be considered worth between fourteen and fifteen ounces of fine silver. Gold rose in its nominal value (the quantity of silver given for it). Both metals sunk in their real value (the quantity of labor they could purchase), but silver sunk more than gold. Though both the gold and silver mines of America exceeded in fertility all those which had ever been known before, the fertility of the silver mines had, it seems, been proportionately still greater than that of the gold ones.

The great quantities of silver carried annually from Europe to India have, in some of the English settlements, gradually reduced the value of silver in proportion to gold.

• In the mint of Calcutta, an ounce of fine gold is supposed to be worth fifteen ounces of fine silver, the same as in Europe. It is perhaps rated too high in the mint for the value it actually has in the market of Bengal.
• In China, the proportion of gold to silver still continues as one to ten, or one to twelve.
• In Japan, it is said to be as one to eight.

The proportion between the quantities of gold and silver annually imported into Europe, according to Mr. Meggens’s account, is nearly one to twenty-two (1:22). That is, for one ounce of gold, a little more than twenty-two ounces of silver are imported. He supposes that the great quantity of silver sent annually to the East Indies reduces the quantities of those metals which remain in Europe to the proportion of their values, which is one to fourteen or fifteen. He seems to think that the proportion between their values must necessarily be the same as that between their quantities, and would therefore be as one to twenty-two if it were not for this greater exportation of silver.

But the ordinary proportion between the respective values of two commodities is not necessarily the same as that between the quantities of them commonly in the market. The price of an ox, say at ten guineas, is about sixty times the price of a lamb, say at 3 shillings and 6 pence. It would be absurd, however, to infer from this that there are commonly sixty lambs in the market for every one ox. And it would be just as absurd to infer, because an ounce of gold will commonly purchase from fourteen to fifteen ounces of silver, that there are commonly in the market only fourteen or fifteen ounces of silver for every one ounce of gold.

The quantity of silver commonly in the market, it is probable, is much greater in proportion to that of gold than the value of a certain quantity of gold is to that of an equal quantity of silver. The whole quantity of a cheap commodity brought to market is commonly not only greater in physical amount but also of greater total value than the whole quantity of an expensive one.

• The whole quantity of bread annually brought to market is not only greater but of greater value than the whole quantity of butcher’s meat.
• The whole quantity of butcher’s meat is greater in quantity and value than the whole quantity of poultry.
• And the whole quantity of poultry is greater than that of wild fowl. There are so many more purchasers for the cheap commodity than for the dear one that not only a greater quantity of it, but also a greater total value, can commonly be sold. Therefore, the whole quantity of the cheap commodity must commonly be greater in proportion to the whole quantity of the dear one than the value of a certain quantity of the dear one is to the value of an equal quantity of the cheap one. When we compare precious metals with one another, silver is a cheap commodity and gold is an expensive one. We ought naturally to expect, therefore, that there should always be in the market not only a greater quantity but also a greater total value of silver than of gold. Let any man who has a little of both compare his own silver items with his gold items (plate), and he will probably find that not only the quantity but also the value of the silver greatly exceeds that of the gold. Many people, besides, have a good deal of silver who have no gold items, which, even for those who have them, are generally confined to things like watch-cases, snuff-boxes, and similar trinkets, whose whole value is seldom great. In British coins, indeed, the value of the gold greatly outweighs (preponderates) the silver. But it is not so in the coinage of all countries. In the coins of some countries, the value of the two metals is nearly equal. In Scotch coins, before the union with England, the gold value was only slightly greater than silver, as accounts from the mint show. In the coins of many countries, silver outweighs gold in total value. In France, the largest sums are commonly paid in silver, and it is difficult there to get more gold than what is necessary to carry about in your pocket. The superior value, however, of silver items (plate) above gold items, which occurs in all countries, will much more than compensate for the greater value of gold coin over silver coin, which occurs only in some countries.

Though, in one sense of the word, silver always has been, and probably always will be, much cheaper than gold, yet in another sense, gold may, perhaps, in the present state of the Spanish market, be said to be somewhat cheaper than silver. A commodity may be said to be dear or cheap not only according to the absolute greatness or smallness of its usual price but according as that price is more or less above the lowest price for which it is possible to bring it to market for any considerable time. This lowest price is that which barely replaces, with a moderate profit, the capital which must be employed in bringing the commodity there. It is the price which provides nothing to the landlord (of which rent makes no component part), but which resolves itself entirely into wages and profit. But, in the present state of the Spanish market, gold is certainly somewhat nearer to this lowest price than silver.

• The tax of the King of Spain upon gold is only one-twentieth part of the standard metal, or five percent.
• His tax upon silver amounts to one-tenth part of it, or ten percent. These taxes, as has already been observed, make up the whole rent of most gold and silver mines in Spanish America. The tax upon gold is still worse paid than that upon silver. The profits of the operators of gold mines, too, as they more rarely make a fortune, must, in general, be still more moderate than those of the operators of silver mines. The price of Spanish gold, therefore, as it provides both less rent and less profit, must, in the Spanish market, be somewhat nearer to the lowest price for which it is possible to bring it there than the price of Spanish silver. When all expenses are calculated, the whole quantity of gold, it would seem, cannot, in the Spanish market, be sold as advantageously as the whole quantity of silver.

The tax of the King of Portugal upon the gold of Brazil is the same as the ancient tax of the King of Spain upon the silver of Mexico and Peru: one-fifth part of the standard metal. It may, therefore, be uncertain whether, for the general market of Europe, the whole mass of American gold comes at a price nearer to the lowest for which it is possible to bring it there than the whole mass of American silver does.

The price of diamonds and other precious stones may, perhaps, be still nearer to the lowest price at which it is possible to bring them to market than even the price of gold.

Future of Silver Value and Taxes

Though it is not very probable that any part of a tax which is not only imposed upon one of the most proper subjects of taxation (a mere luxury and non-essential item) but which also provides such very important revenue as the tax upon silver, will ever be given up as long as it is possible to pay it. Yet, the same impossibility of paying it, which in 1736 made it necessary to reduce the tax from one-fifth to one-tenth, may in time make it necessary to reduce it still further. This is similar to how it was necessary to reduce the tax upon gold to one-twentieth. That the silver mines of Spanish America, like all other mines, become gradually more expensive to work (on account of the greater depths at which it is necessary to carry on the works, and of the greater expense of drawing out water and supplying them with fresh air at those depths) is acknowledged by everybody who has inquired into the state of those mines.

These causes, which are equivalent to a growing scarcity of silver (for a commodity may be said to grow scarcer when it becomes more difficult and expensive to collect a certain quantity of it), must, in time, produce one or other of the three following events:

1. The increase of expense must either be compensated entirely by a proportional increase in the price of the metal.
2. Or, it must be compensated entirely by a proportional decrease in the tax upon silver.
3. Or, it must be compensated partly by the one, and partly by the other of those two solutions. This third event is very possible. Just as gold rose in its price in proportion to silver, despite a great decrease in the tax upon gold, so silver might rise in its price in proportion to labor and commodities, despite an equal decrease in the tax upon silver.

Such successive reductions of the tax, however, though they may not altogether prevent the rise in the value of silver in the European market, must certainly slow it down, more or less. As a consequence of such reductions, many mines may be worked which could not be worked before because they could not afford to pay the old tax. The quantity of silver annually brought to market must always be somewhat greater, and therefore, the value of any given quantity somewhat less, than it otherwise would have been. As a consequence of the reduction in 1736, the value of silver in the European market, though it may not today be lower than before that reduction, is probably at least ten percent lower than it would have been had the Court of Spain continued to demand the old tax.

That, despite this reduction, the value of silver has, during the course of the present century (the 1700s), begun to rise somewhat in the European market, is something the facts and arguments alleged above lead me to believe, or more properly to suspect and guess. For the best opinion I can form upon this subject hardly, perhaps, deserves the name of belief. The rise, indeed, supposing there has been any, has so far been so very small that after all that has been said, it may, perhaps, appear to many people uncertain not only whether this event has actually taken place, but whether the contrary may not have taken place, or whether the value of silver may not still continue to fall in the European market.

It must be observed, however, that whatever the supposed annual importation of gold and silver may be, there must be a certain point at which the annual consumption of those metals will be equal to that annual importation. Their consumption must increase as their total stock (mass) increases, or rather in a much greater proportion. As their total stock increases, their value diminishes. They are more used and less cared for, and their consumption consequently increases in a greater proportion than their total stock. After a certain period, therefore, the annual consumption of these metals must, in this manner, become equal to their annual importation, provided that importation is not continually increasing – which, in the present times, is not supposed to be the case.

If, when the annual consumption has become equal to the annual importation, the annual importation should gradually diminish, then the annual consumption may, for some time, exceed the annual importation. The total stock of these metals may gradually and unnoticeably (insensibly) diminish, and their value gradually and unnoticeably rise. This would continue until the annual importation, becoming stationary again, causes the annual consumption to gradually and unnoticeably adjust itself to what that annual importation can maintain.

GROUNDS FOR THE SUSPICION THAT THE VALUE OF SILVER STILL CONTINUES TO DECREASE

The increase of wealth in Europe, and the popular notion that as the quantity of precious metals naturally increases with the increase of wealth, their value diminishes as their quantity increases, may perhaps lead many people to believe that their value still continues to fall in the European market. The still gradually increasing price of many raw products from the land may confirm them still further in this opinion.

That the increase in the quantity of precious metals which arises in any country from the increase of wealth has no tendency to diminish their value, I have tried to show already. Gold and silver naturally go to a rich country for the same reason that all sorts of luxuries and curiosities go to it: not because they are cheaper there than in poorer countries, but because they are dearer, or because a better price is given for them. It is the superiority of price which attracts them, and as soon as that superiority ceases, they necessarily cease to go there.

If you exclude corn and such other vegetables as are grown entirely by human industry, all other sorts of raw produce – cattle, poultry, game of all kinds, useful minerals from the earth, etc. – naturally grow more expensive as society advances in wealth and improvement, as I have also tried to show already. Therefore, even though such commodities come to exchange for a greater quantity of silver than before, it will not follow from this that silver has become really cheaper (or will purchase less labor than before). Instead, it means that such commodities have become really dearer (or will purchase more labor than before). It is not their money price only, but their real price which rises in the progress of improvement. The rise of their money price is the effect, not of any decrease in the value of silver, but of the rise in their real price.

DIFFERENT EFFECTS OF THE PROGRESS OF IMPROVEMENT UPON THREE DIFFERENT SORTS OF RAW PRODUCE

These different sorts of raw produce (products from the land) may be divided into three classes:

1. First Sort: Supply Cannot Be Easily Increased by Human Industry The first sort of raw produce whose price rises in the progress of improvement is that which human industry can hardly multiply at all. It consists of those things which nature produces only in certain quantities, and which, being very perishable, make it impossible to accumulate the produce of many different seasons. Such are most rare and unique birds and fishes, many different sorts of game, almost all wild-fowl (especially birds of passage), as well as many other things. When wealth, and the luxury which accompanies it, increase, the demand for these is likely to increase with them. No effort of human industry may be able to increase the supply much beyond what it was before this increase of demand. The quantity of such commodities, therefore, remaining the same or nearly the same, while the competition to purchase them is continually increasing, their price may rise to any degree of extravagance and seems not to be limited by any certain boundary. If woodcocks should become so fashionable as to sell for twenty guineas apiece, no effort of human industry could increase the number of those brought to market much beyond what it is at present. The high prices paid by the Romans in the time of their greatest grandeur for rare birds and fishes may in this manner easily be accounted for. These prices were not the effects of a low value of silver in those times, but of the high value of such rarities and curiosities which human industry could not multiply at will. The real value of silver was higher at Rome for some time before and after the fall of the Republic than it is throughout most of Europe at present. Three sestertii (an ancient Roman coin), equal to about sixpence sterling in Smith’s time, was the price the Republic paid for a modius (about a peck, or a quarter of a bushel) of the tithe wheat (wheat paid as tax) of Sicily. This price, however, was probably below the average market price, as the obligation to deliver their wheat at this rate was considered a tax upon the Sicilian farmers. When the Romans, therefore, had occasion to order more corn than the tithe of wheat amounted to, they were bound by agreement (capitulation) to pay for the surplus at the rate of four sestertii, or eightpence sterling, per peck. This had probably been considered the moderate and reasonable, that is, the ordinary or average contract price of those times; it is equal to about twenty-one shillings per quarter. Twenty-eight shillings per quarter was, before the recent years of scarcity, the ordinary contract price of English wheat, which in quality is inferior to Sicilian wheat and generally sells for a lower price in the European market. The value of silver, therefore, in those ancient times must have been to its value in the present as three is to four inversely; that is, three ounces of silver would then have purchased the same quantity of labor and commodities which four ounces will purchase at present. When we read in Pliny (an ancient Roman writer), therefore, that Seius bought a white nightingale, as a present for the Empress Agrippina, at the price of six thousand sestertii (equal to about fifty pounds in Smith’s money), and that Asinius Celer purchased a surmullet (a type of fish) at the price of eight thousand sestertii (equal to about sixty-six pounds, thirteen shillings, and fourpence in Smith’s money), the extravagance of those prices, however much it may surprise us, is likely to appear to us about one-third less than it really was. Their real price – the quantity of labor and subsistence which was given away for them – was about one-third more than their money price is likely to suggest to us in the present times. Seius gave for the nightingale the command of a quantity of labor and subsistence equal to what £66 13s. 4d. would purchase in present times; and Asinius Celer gave for the surmullet the command of a quantity equal to what £88 17s. 9⅓d. would purchase. What caused the extravagance of those high prices was not so much the abundance of silver as the abundance of labor and subsistence of which those Romans had control, beyond what was necessary for their own use. The quantity of silver which they had at their disposal was a good deal less than what the command of the same quantity of labor and subsistence would have gotten for them in present times.

2. Second Sort: Supply Can Be Increased by Human Industry in Proportion to Demand The second sort of raw produce whose price rises in the progress of improvement is that which human industry can multiply in proportion to the demand. It consists of those useful plants and animals which, in uncultivated countries, nature produces with such lavish abundance that they are of little or no value. As cultivation advances, these are therefore forced to give way to some more profitable produce. During a long period in the progress of improvement, the quantity of these (like wild game or natural pasture) is continually diminishing, while at the same time the demand for them is continually increasing. Their real value, therefore – the real quantity of labor which they will purchase or command – gradually rises. Eventually, it gets so high as to make them as profitable a produce as anything else which human industry can raise upon the most fertile and best-cultivated land. When it has gotten that high, it cannot well go higher. If it did, more land and more industry would soon be employed to increase their quantity.

   When the price of cattle, for example, rises so high that it is as profitable to cultivate land in order to raise food for them as to raise food for humans, it cannot well go higher. If it did, more corn land would soon be turned into pasture. The extension of farming (tillage), by diminishing the quantity of wild pasture, diminishes the quantity of butcher’s meat which the country naturally produces without labor or cultivation. By increasing the number of those who have either corn, or (what comes to the same thing) the price of corn, to give in exchange for meat, it increases the demand. The price of butcher’s meat, therefore, and consequently of cattle, must gradually rise until it gets so high that it becomes as profitable to employ the most fertile and best-cultivated lands in raising food for them as in raising corn. But it must always be late in the progress of improvement before farming can be so far extended as to raise the price of cattle to this height. Until it has gotten to this height, if the country is advancing at all, their price must be continually rising. There are, perhaps, some parts of Europe in which the price of cattle has not yet gotten to this height. It had not gotten to this height in any part of Scotland before the union with England. Had Scotch cattle always been confined to the market of Scotland – in a country where the quantity of land which can be applied to no other purpose but the feeding of cattle is so great in proportion to what can be applied to other purposes – it is hardly possible, perhaps, that their price could ever have risen so high as to make it profitable to cultivate land for the sake of feeding them. In England, the price of cattle, as has already been observed, seems, in the neighborhood of London, to have gotten to this height about the beginning of the last century (the 1600s). But it was much later probably before it got to it throughout most of the more remote counties; in some of which, perhaps, it may hardly yet have gotten to it. Of all the different substances which make up this second sort of raw produce, cattle are perhaps those whose price, in the progress of improvement, first rises to this height.

   Until the price of cattle, indeed, has gotten to this height, it seems hardly possible that most, even of those lands which are capable of the highest cultivation, can be completely cultivated. In all farms too distant from any town to carry manure from it (that is, in most farms of every extensive country), the quantity of well-cultivated land must be in proportion to the quantity of manure which the farm itself produces. This, in turn, must be in proportion to the stock of cattle maintained upon it. The land is manured either by pasturing the cattle upon it, or by feeding them in the stable and from there carrying out their dung to it. But unless the price of the cattle is sufficient to pay both the rent and profit of cultivated land, the farmer cannot afford to pasture them upon it; and he can still less afford to feed them in the stable. It is with the produce of improved and cultivated land only that cattle can be fed in the stable because collecting the scanty and scattered produce of waste and unimproved lands would require too much labor and be too expensive. If the price of the cattle, therefore, is not sufficient to pay for the produce of improved and cultivated land when they are allowed to pasture on it, that price will be still less sufficient to pay for that produce when it must be collected with a good deal of additional labor and brought into the stable for them. In these circumstances, therefore, no more cattle can, with profit, be fed in the stable than what are necessary for tilling the land.

But the cattle on these farms can never provide enough manure to keep all the lands they are capable of cultivating in constantly good condition. Since the manure they do produce is insufficient for the whole farm, it will naturally be reserved for the lands where it can be most advantageously or conveniently applied. These are usually the most fertile lands, or perhaps those near the farmyard. These parts, therefore, will be kept constantly in good condition and fit for growing crops (tillage). Most of the rest of the land will be allowed to lie waste, producing hardly anything but some miserable pasture, just enough to keep alive a few straggling, half-starved cattle. The farm, though much under-stocked with animals in proportion to what would be necessary for its complete cultivation, is very frequently over-stocked in proportion to its actual produce from these poor pastures. A portion of this wasteland, however, after being pastured in this wretched manner for six or seven years, may be plowed up. It will then yield, perhaps, a poor crop or two of bad oats, or some other coarse grain. Then, being entirely exhausted, it must be rested and pastured again as before, and another portion plowed up to be exhausted and rested again in its turn. This, accordingly, was the general system of farm management all over the low country of Scotland before the union with England. The lands which were kept constantly well manured and in good condition seldom exceeded a third or a fourth part of the whole farm, and sometimes did not amount to a fifth or a sixth part of it. The rest were never manured, but a certain portion of them was, in its turn, nonetheless, regularly cultivated and exhausted. Under this system of management, it is evident that even the part of the land of Scotland which is capable of good cultivation could produce but little in comparison to what it might be capable of producing. But however disadvantageous this system may appear, yet before the union, the low price of cattle seems to have made it almost unavoidable. If, despite a great rise in their price, it still continues to prevail through a considerable part of the country, it is owing, in many places, no doubt, to ignorance and attachment to old customs. But in most places, it is due to the unavoidable obstructions which the natural course of things opposes to the immediate or speedy establishment of a better system:

1. First, to the poverty of the tenants. They have not yet had time to acquire a stock of cattle sufficient to cultivate their lands more completely. The same rise in price which would make it advantageous for them to maintain a greater stock also makes it more difficult for them to acquire it.
2. Secondly, to their not having yet had time to put their lands in condition to maintain this greater stock properly, supposing they were capable of acquiring it. The increase of capital (stock) and the improvement of land are two events which must go hand in hand. One can nowhere much outrun the other. Without some increase of capital, there can be hardly any improvement of land. But there can be no considerable increase of capital except as a consequence of a considerable improvement of land, because otherwise, the land could not maintain it. These natural obstructions to establishing a better system cannot be removed except by a long course of thriftiness (frugality) and industry. Half a century or a century more, perhaps, must pass away before the old system, which is gradually wearing out, can be completely abolished throughout all the different parts of the country. Of all the commercial advantages, however, which Scotland has derived from the union with England, this rise in the price of cattle is perhaps the greatest. It has not only raised the value of all Highland estates, but it has, perhaps, been the principal cause of the improvement of the low country.

Cattle and Land Use in New Colonies

In all new colonies, the great quantity of wasteland, which can for many years be applied to no other purpose but the feeding of cattle, soon makes them extremely abundant. And in everything, great cheapness is the necessary consequence of great abundance. Though all the cattle of the European colonies in America were originally brought from Europe, they soon multiplied so much there and became of so little value that even horses were allowed to run wild in the woods without any owner thinking it worthwhile to claim them. It must be a long time after the first establishment of such colonies before it can become profitable to feed cattle on the produce of cultivated land. The same causes, therefore – the want of manure, and the disproportion between the capital employed in cultivation and the land which it is destined to cultivate – are likely to introduce there a system of farming not unlike that which still continues to take place in so many parts of Scotland. Mr. Kalm, the Swedish traveler, when he gives an account of the farming practices of some of the English colonies in North America, as he found them in 1749, observes accordingly that he can with difficulty discover there the character of the English nation, so well skilled in all the different branches of agriculture. They make hardly any manure for their cornfields, he says. Instead, when one piece of ground has been exhausted by continual cropping, they clear and cultivate another piece of fresh land; and when that is exhausted, they proceed to a third. Their cattle are allowed to wander through the woods and other uncultivated grounds, where they are half-starved. They have long ago eliminated (extirpated) almost all the annual grasses by cropping them too early in the spring before they had time to form their flowers or to shed their seeds. The annual grasses were, it seems, the best natural grasses in that part of North America. When the Europeans first settled there, these grasses used to grow very thick and to rise three or four feet high. A piece of ground which, when he wrote, could not maintain one cow, would in former times, he was assured, have maintained four. Each of those four would have given four times the quantity of milk which that one was capable of giving. The poorness of the pasture had, in his opinion, caused the degradation of their cattle, which degenerated noticeably from one generation to another. They were probably not unlike that stunted breed which was common all over Scotland thirty or forty years ago, and which is now so much improved throughout most of the low country – not so much by a change of the breed (though that method has been employed in some places) as by a more plentiful method of feeding them.

Though it is late, therefore, in the progress of improvement before cattle can bring such a price as to make it profitable to cultivate land for the sake of feeding them, yet of all the different parts which made up this second sort of raw produce (those that industry can multiply), they are perhaps the first which bring this price. This is because until they bring it, it seems impossible that improvement can be brought near even to that degree of perfection to which it has arrived in many parts of Europe.

Venison: A Latecomer to High Prices

As cattle are among the first, so perhaps venison (deer meat) is among the last parts of this sort of raw produce to bring such a high price as to make cultivating land for it profitable. The price of venison in Great Britain, however expensive it may appear, is not nearly sufficient to compensate for the expense of a deer park, as is well known to all those who have had any experience in feeding deer. If it were otherwise, the feeding of deer would soon become an article of common farming, in the same manner as the feeding of those small birds called Turdi (thrushes) was among the ancient Romans. Varro and Columella (Roman writers on agriculture) assure us that it was a most profitable article. The fattening of ortolans (small birds considered a delicacy), which arrive lean in the country, is said to be so in some parts of France. If venison continues in fashion, and the wealth and luxury of Great Britain increase as they have done for some time past, its price may very probably rise still higher than it is at present.

Between that period in the progress of improvement which brings to its height the price of so necessary an article as cattle, and that which brings to it the price of such a non-essential luxury (superfluity) as venison, there is a very long interval. In the course of this interval, many other sorts of raw produce gradually arrived at their highest price, some sooner and some later, according to different circumstances.

Poultry: From “Save-All” to Profitable Farming

Thus, in every farm, the leftovers (offals) of the barn and stables will maintain a certain number of poultry. These, as they are fed with what would otherwise be lost, are a mere “save-all” (a way to use up waste). As they cost the farmer hardly anything, he can afford to sell them for very little. Almost all that he gets is pure gain, and their price can hardly be so low as to discourage him from feeding this number. But in countries that are poorly cultivated, and therefore only thinly inhabited, the poultry which are thus raised without expense are often fully sufficient to supply the whole demand. In this state of things, therefore, they are often as cheap as butcher’s meat or any other sort of animal food. But the whole quantity of poultry which the farm in this manner produces without expense must always be much smaller than the whole quantity of butcher’s meat which is reared upon it. In times of wealth and luxury, what is rare, even with only nearly equal merit, is always preferred to what is common. As wealth and luxury increase, therefore, as a consequence of improvement and cultivation, the price of poultry gradually rises above that of butcher’s meat. Eventually, it gets so high that it becomes profitable to cultivate land for the sake of feeding them. When it has gotten to this height, it cannot well go higher. If it did, more land would soon be turned to this purpose. In several provinces of France, the feeding of poultry is considered a very important article in rural economy and sufficiently profitable to encourage the farmer to raise a considerable quantity of Indian corn (maize) and buckwheat for this purpose. A middling farmer there will sometimes have four hundred fowls in his yard. The feeding of poultry seems hardly yet to be generally considered as a matter of so much importance in England. They are certainly, however, more expensive in England than in France, as England receives considerable supplies from France. In the progress of improvement, the period at which every particular sort of animal food is dearest must naturally be that which immediately precedes the general practice of cultivating land for the sake of raising it. For some time before this practice becomes general, the scarcity must necessarily raise the price. After it has become general, new methods of feeding are commonly found, which enable the farmer to raise upon the same quantity of ground a much greater quantity of that particular sort of animal food. The plenty not only obliges him to sell cheaper, but because of these improvements, he can afford to sell cheaper; for if he could not afford it, the plenty would not last long. It has probably been in this manner that the introduction of clover, turnips, carrots, cabbages, etc., has contributed to sink the common price of butcher’s meat in the London market somewhat below what it was about the beginning of the last century.

Hogs: A Similar Story

The hog, that finds its food among animal waste (ordure) and greedily devours many things rejected by every other useful animal, is, like poultry, originally kept as a “save-all.” As long as the number of such animals which can thus be reared at little or no expense is fully sufficient to supply the demand, this sort of butcher’s meat comes to market at a much lower price than any other. But when the demand rises beyond what this quantity can supply, when it becomes necessary to raise food on purpose for feeding and fattening hogs (in the same manner as for feeding and fattening other cattle), the price necessarily rises. It becomes proportionally either higher or lower than that of other butcher’s meat, according as the nature of the country and the state of its agriculture happen to make the feeding of hogs more or less expensive than that of other cattle. In France, according to Mr. Buffon (a famous naturalist), the price of pork is nearly equal to that of beef. In most parts of Great Britain, it is at present somewhat higher.

The great rise in the price of both hogs and poultry in Great Britain has frequently been attributed to the decrease in the number of cottagers (people living in small cottages with little land) and other small occupiers of land. This decrease has, in every part of Europe, been the immediate forerunner of improvement and better cultivation. But at the same time, it may have contributed to raising the price of those articles both somewhat sooner and somewhat faster than it would otherwise have risen. Just as the poorest family can often maintain a cat or a dog without any expense, the poorest occupiers of land can commonly maintain a few poultry, or a sow and a few pigs, at very little cost. The little leftovers from their own table, their whey, skimmed milk, and buttermilk, supply these animals with a part of their food, and they find the rest in the neighboring fields without doing any noticeable damage to anybody. By diminishing the number of these small occupiers, therefore, the quantity of this sort of provisions, which is thus produced at little or no expense, must certainly have been a good deal diminished. Their price must consequently have been raised both sooner and faster than it would otherwise have risen. Sooner or later, however, in the progress of improvement, it must in any case have risen to the utmost height to which it is capable of rising: that is, to the price which pays the labor and expense of cultivating the land which furnishes them with food, just as well as these are paid upon most other cultivated land.

The Dairy Business: From “Save-All” to Specialized Farming

The business of the dairy, like the feeding of hogs and poultry, is originally carried on as a “save-all.” The cattle necessarily kept upon the farm produce more milk than either the rearing of their own young or the consumption of the farmer’s family requires. They produce most milk at one particular season. But of all the productions of land, milk is perhaps the most perishable. In the warm season, when it is most abundant, it will hardly keep for twenty-four hours. The farmer, by making it into fresh butter, stores a small part of it for a week; by making it into salt butter, for a year; and by making it into cheese, he stores a much greater part of it for several years. Part of all these products is reserved for the use of his own family. The rest goes to market to find the best price available, which can hardly be so low as to discourage him from sending whatever is over and above the use of his own family. If the price is very low, indeed, he will likely manage his dairy in a very careless (slovenly) and dirty manner. He will hardly perhaps think it worthwhile to have a particular room or building just for it but will allow the business to be carried on amidst the smoke, filth, and nastiness of his own kitchen – as was the case with almost all farmers’ dairies in Scotland thirty or forty years ago, and as is still the case with many of them. The same causes which gradually raise the price of butcher’s meat – the increase of demand and, as a consequence of the country’s improvement, the decrease in the quantity of cattle that can be fed at little or no expense – also raise, in the same manner, the price of dairy produce. The price of dairy naturally connects with that of butcher’s meat, or with the expense of feeding cattle. The increase in price pays for more labor, care, and cleanliness. The dairy becomes more worthy of the farmer’s attention, and the quality of its produce gradually improves. The price at last gets so high that it becomes worthwhile to employ some of the most fertile and best-cultivated lands in feeding cattle merely for the purpose of the dairy. When it has gotten to this height, it cannot well go higher. If it did, more land would soon be turned to this purpose. It seems to have gotten to this height throughout most of England, where much good land is commonly employed in this manner. If you exclude the neighborhood of a few considerable towns, it seems not yet to have gotten to this height anywhere in Scotland, where common farmers seldom employ much good land in raising food for cattle merely for the purpose of the dairy. The price of the produce, though it has risen very considerably within these few years, is probably still too low to allow for it. The inferiority of the quality, indeed, compared with that of the produce of English dairies, is fully equal to the difference in price. But this inferiority of quality is, perhaps, rather the effect of this lowness of price than the cause of it. Though the quality was much better, most of what is brought to market could not, I believe, in the present circumstances of the country, be sold at a much better price. And the present price, it is probable, would not pay the expense of the land and labor necessary for producing a much better quality. Throughout most of England, notwithstanding the superiority of price, the dairy is not considered a more profitable employment of land than the raising of corn or the fattening of cattle (the two great objects of agriculture). Throughout most of Scotland, therefore, it cannot yet be even so profitable.

It is clear that the lands of no country can ever be completely cultivated and improved until the price of every product that human industry must raise upon them has gotten high enough to pay for the expense of complete improvement and cultivation. To do this, the price of each particular product must be sufficient:

1. First, to pay the rent equivalent to that of good corn land, as the rent of corn land regulates the rent of most other cultivated land.
2. Secondly, to pay the labor and expense of the farmer as well as they are commonly paid on good corn land; or, in other words, to replace the capital he employs with the ordinary profits. This rise in the price of each particular product must clearly happen before the improvement and cultivation of the land destined for raising it. Gain is the purpose of all improvement, and nothing could deserve that name if loss were to be the necessary consequence. But loss must be the necessary consequence of improving land for a product whose price could never bring back the expense. If the complete improvement and cultivation of the country is, as it most certainly is, the greatest of all public advantages, this rise in the price of all these different sorts of raw produce, instead of being considered a public calamity, ought to be regarded as the necessary forerunner and companion of the greatest of all public advantages.

This rise, too, in the money price (nominal price) of all these different sorts of raw produce has been the effect, not of any decrease in the value of silver, but of a rise in their real price. They have become worth not only a greater quantity of silver but also a greater quantity of labor and subsistence than before. As it costs a greater quantity of labor and subsistence to bring them to market, so when they are brought there, they represent or are equivalent to a greater quantity of labor and subsistence.

Third Sort: Produce Where Industry’s Effect is Limited or Uncertain

The third and last sort of raw produce, whose price naturally rises in the progress of improvement, is that for which the effectiveness of human industry in increasing the quantity is either limited or uncertain. Therefore, though the real price of this sort of raw produce naturally tends to rise in the progress of improvement, it may sometimes even fall, sometimes continue the same in very different periods of improvement, and sometimes rise more or less in the same period, depending on how different accidents make the efforts of human industry more or less successful in increasing the quantity.

There are some sorts of raw produce which nature has made like secondary products (appendages) to other sorts, so that the quantity of one which any country can provide is necessarily limited by the quantity of the other. The quantity of wool or of raw hides, for example, which any country can provide is necessarily limited by the number of large and small cattle kept in it. The state of its improvement and the nature of its agriculture, in turn, necessarily determine this number.

It might be thought that the same causes which, in the progress of improvement, gradually raise the price of butcher’s meat should have the same effect on the prices of wool and raw hides, raising them too, in nearly the same proportion. It probably would be so if, in the early stages of improvement, the market for wool and hides was confined within as narrow a boundary as the market for meat. But the extent of their respective markets is commonly extremely different.

• The market for butcher’s meat is almost everywhere confined to the country which produces it. Ireland and some parts of British America, indeed, carry on a considerable trade in salted provisions; but they are, I believe, the only countries in the commercial world which do so, or which export to other countries any considerable part of their butcher’s meat.
• The market for wool and raw hides, on the contrary, is very seldom confined to the country which produces them in the early stages of improvement. They can easily be transported to distant countries – wool without any preparation, and raw hides with very little. Since they are the materials for many manufactures, the industry of other countries may create a demand for them, even if the industry of the country which produces them might not create any.

In countries that are poorly cultivated, and therefore only thinly inhabited, the price of wool and hide always bears a much greater proportion to the price of the whole animal than in countries where improvement and population are further advanced, and there is more demand for butcher’s meat. Mr. Hume observes that in Saxon times, the fleece was estimated at two-fifths of the value of the whole sheep, which was much above the proportion of its present estimation. In some provinces of Spain, I have been assured, sheep are frequently killed merely for the sake of the fleece and the tallow (animal fat). The carcass is often left to rot on the ground or to be devoured by beasts and birds of prey. If this sometimes happens even in Spain, it happens almost constantly in Chile, at Buenos Aires, and in many other parts of Spanish America, where horned cattle are almost constantly killed merely for the sake of the hide and the tallow. This also used to happen almost constantly in Hispaniola (modern Haiti and Dominican Republic) while it was infested by buccaneers, and before the settlement, improvement, and population growth of the French plantations (which now extend round the coast of almost the whole western half of the island) had given some value to the cattle of the Spaniards, who still continue to possess not only the eastern part of the coast but the whole inland and mountainous part of the country.

Though in the progress of improvement and population the price of the whole animal necessarily rises, the price of the carcass is likely to be much more affected by this rise than that of the wool and the hide.

• The market for the carcass, being confined in undeveloped societies to the country which produces it, must necessarily expand in proportion to the improvement and population of that country.
• But the market for the wool and hides, even of an undeveloped country, often extends to the whole commercial world. It can very seldom be enlarged in the same proportion. The state of the whole commercial world can seldom be much affected by the improvement of any particular country. The market for such commodities may remain the same, or very nearly the same, after such improvements as before. It should, however, in the natural course of things, rather be somewhat extended on the whole as a consequence of them. If the manufactures, especially, for which these commodities are the materials, should ever come to flourish in the country, the market, though it might not be much enlarged, would at least be brought much nearer to the place of growth than before. The price of these materials might at least be increased by what had usually been the expense of transporting them to distant countries. Though it might not rise, therefore, in the same proportion as that of butcher’s meat, it ought naturally to rise somewhat, and it ought certainly not to fall.

The Case of English Wool

In England, however, despite the flourishing state of its woolen manufacture, the price of English wool has fallen very considerably since the time of Edward III (mid-14th century). There are many authentic records which show that during the reign of that prince (around 1339), what was considered the moderate and reasonable price of a tod (or twenty-eight pounds) of English wool was not less than ten shillings in the money of those times. At the rate of twentypence per ounce of silver, this contained six ounces of silver (Tower weight), equal to about thirty shillings in Adam Smith’s money. In Smith’s present times, twenty-one shillings per tod might be reckoned a good price for very good English wool. The money price of wool, therefore, in the time of Edward III was to its money price in present times as ten is to seven. The superiority of its real price (its purchasing power) was still greater. At the rate of six shillings and eightpence per quarter of wheat, ten shillings was in those ancient times the price of twelve bushels of wheat. At the rate of twenty-eight shillings per quarter, twenty-one shillings is in present times the price of only six bushels. The proportion between the real prices of ancient and modern times, therefore, is as twelve to six, or as two to one. In those ancient times, a tod of wool would have purchased twice the quantity of subsistence which it will purchase at present, and consequently twice the quantity of labor, if the real payment for labor had been the same in both periods.

This decrease (degradation) in both the real and money value of wool could never have happened as a consequence of the natural course of things. It has accordingly been the effect of force (violence) and clever schemes (artifice):

1. First, of the absolute prohibition of exporting wool from England.
2. Secondly, of the permission to import it from Spain duty-free.
3. Thirdly, of the prohibition of exporting it from Ireland to any other country but England. As a consequence of these regulations, the market for English wool, instead of being somewhat extended due to the improvement of England, has been confined to the home market. There, the wool of several other countries is allowed to come into competition with it, and wool from Ireland is forced into competition with it. As the woolen manufactures of Ireland are also as much discouraged as is consistent with just and fair dealing, the Irish can process only a small part of their own wool at home. They are, therefore, obliged to send a greater proportion of it to Great Britain, the only market they are allowed.

Raw Hide Prices

I have not been able to find such authentic records concerning the price of raw hides in ancient times. Wool was commonly paid as a subsidy to the king, and its valuation in that subsidy determines, at least to some degree, what its ordinary price was. But this seems not to have been the case with raw hides. Bishop Fleetwood, however, from an account in 1425 between the prior of Burcester Oxford and one of his canons, gives us their price, at least as it was stated on that particular occasion:

• Five ox hides at twelve shillings.
• Five cow hides at seven shillings and threepence.
• Thirty-six sheep skins of two years old at nine shillings.
• Sixteen calf skins at two shillings. In 1425, twelve shillings contained about the same quantity of silver as twenty-four shillings in Smith’s money. An ox hide, therefore, was in this account valued at the same quantity of silver as 4 shillings and about 9 or 10 pence (four-fifths of a shilling) in Smith’s money. Its nominal (money) price was a good deal lower than at present. But at the rate of six shillings and eightpence per quarter of wheat, twelve shillings would in those times have purchased fourteen and four-fifths bushels of wheat. At three shillings and sixpence per bushel, this wheat would in present times cost 51 shillings and 4 pence. An ox hide, therefore, would in those times have purchased as much corn as ten shillings and threepence would purchase at present. Its real value was equal to ten shillings and threepence in Smith’s money. In those ancient times, when cattle were half-starved during most of the winter, we cannot suppose that they were of a very large size. An ox hide which weighs four stone (sixty-four pounds avoirdupois) is not reckoned a bad one in present times, and in those ancient times would probably have been reckoned a very good one. But at half-a-crown (two shillings and sixpence) per stone, which at this moment (February 1773) I understand to be the common price, such a hide would at present cost only ten shillings. Though its money price, therefore, is higher in the present than it was in those ancient times, its real price (the real quantity of subsistence which it will purchase or command) is rather somewhat lower. The price of cow hides, as stated in the above account, is nearly in the common proportion to that of ox hides. That of sheep skins is a good deal above it; they had probably been sold with the wool on. That of calf skins, on the contrary, is greatly below it. In countries where the price of cattle is very low, calves not intended to be reared to keep up the stock are generally killed very young, as was the case in Scotland twenty or thirty years ago. It saves the milk, which their price would not pay for. Their skins, therefore, are commonly good for little.

The price of raw hides is a good deal lower at present than it was a few years ago. This is probably owing to the removal of the duty upon seal skins, and to allowing, for a limited time, the importation of raw hides from Ireland and from the plantations duty-free, which was done in 1769. Taking the whole of the present century as an average, their real price has probably been somewhat higher than it was in those ancient times. The nature of the commodity makes it not quite as proper for being transported to distant markets as wool. It suffers more by keeping. A salted hide is considered inferior to a fresh one and sells for a lower price. This circumstance must necessarily have some tendency to lower the price of raw hides produced in a country which does not manufacture them but is obliged to export them. Comparatively, it would raise the price of those produced in a country which does manufacture them. It must have some tendency to lower their price in an undeveloped country and to raise it in an improved and manufacturing country. It must have had some tendency, therefore, to lower it in ancient times and to raise it in modern times. Our tanners, besides, have not been quite as successful as our clothiers in convincing the wisdom of the nation that the safety of the commonwealth depends upon the prosperity of their particular manufacture. They have accordingly been much less favored. The exportation of raw hides has, indeed, been prohibited and declared a nuisance. But their importation from foreign countries has been subjected to a duty. And though this duty has been taken off from those of Ireland and the plantations (for the limited time of five years only), Ireland has not been confined to the market of Great Britain for the sale of its surplus hides or of those which are not manufactured at home. The hides of common cattle have only within these few years been put among the “enumerated commodities” which the plantations can send nowhere but to the mother country. Neither has the commerce of Ireland been oppressed in this case so far in order to support the manufactures of Great Britain.

Impact of Wool and Hide Price Regulations on Meat Prices

Whatever regulations tend to lower the price of either wool or raw hides below what it naturally would be must, in an improved and cultivated country, have some tendency to raise the price of butcher’s meat. The price of both large and small cattle which are fed on improved and cultivated land must be sufficient to pay the rent which the landlord, and the profit which the farmer, has reason to expect from improved and cultivated land. If it is not, they will soon cease to feed them. Whatever part of this price, therefore, is not paid by the wool and the hide must be paid by the carcass (the meat). The less there is paid for the one, the more must be paid for the other. In what manner this price is to be divided upon the different parts of the animal is indifferent to the landlords and farmers, provided the whole price is paid to them. In an improved and cultivated country, therefore, their interest as landlords and farmers cannot be much affected by such regulations, though their interest as consumers may be, by the rise in the price of provisions. It would be quite otherwise, however, in an unimproved and uncultivated country, where most of the lands could be applied to no other purpose but the feeding of cattle, and where the wool and the hide made up the principal part of the value of those cattle. Their interest as landlords and farmers would in this case be very deeply affected by such regulations, and their interest as consumers very little. The fall in the price of the wool and the hide would not in this case raise the price of the carcass, because most of the lands of the country being applicable to no other purpose but the feeding of cattle, the same number would still continue to be fed. The same quantity of butcher’s meat would still come to market. The demand for it would be no greater than before. Its price, therefore, would be the same as before. The whole price of cattle would fall, and along with it both the rent and the profit of all those lands of which cattle was the principal produce – that is, of most of the lands of the country. The perpetual prohibition of the exportation of wool, which is commonly, but very falsely, attributed to Edward III, would, in the circumstances of the country at that time, have been the most destructive regulation which could well have been thought of. It would not only have reduced the actual value of most of the lands of the kingdom, but by reducing the price of the most important type of small cattle (sheep), it would have greatly retarded its subsequent improvement.

The wool of Scotland fell very considerably in its price as a consequence of the union with England. This union excluded Scottish wool from the great market of Europe and confined it to the narrow one of Great Britain.

However, the manure from these animals can never be enough to keep all the lands they are capable of cultivating in constantly good condition. Since what they produce is insufficient for the whole farm, it will naturally be used on the lands where it can be most advantageously or conveniently applied. These are usually the most fertile lands, or perhaps those near the farmyard. These parts, therefore, will be kept constantly in good condition and fit for growing crops. Most of the rest of the land will be allowed to lie waste. It will produce hardly anything but some poor pasture, just enough to keep alive a few straggling, half-starved cattle. The farm, though having too few animals for its complete cultivation, is very frequently overstocked with animals relative to the actual produce of its poor pastures. A portion of this wasteland, however, after being pastured in this wretched manner for six or seven years, may be plowed up. It will then yield, perhaps, a poor crop or two of bad oats, or some other coarse grain. Then, being entirely exhausted, it must be rested and pastured again as before, and another portion plowed up to be exhausted and rested again in its turn. This, accordingly, was the general system of farm management all over the low country of Scotland before the union with England. The lands kept constantly well manured and in good condition seldom made up more than a third or a fourth of the whole farm, and sometimes not even a fifth or a sixth. The rest were never manured, but a certain portion was nonetheless regularly cultivated and exhausted in its turn. Under this system of management, it is clear that even the part of Scottish land capable of good cultivation could produce very little compared to its potential. But however disadvantageous this system may appear, before the union, the low price of cattle seems to have made it almost unavoidable. If, despite a great rise in their price, it still continues in a considerable part of the country, it is owing, in many places, no doubt, to ignorance and attachment to old customs. But in most places, it is due to the unavoidable obstacles that the natural course of things puts in the way of immediately or quickly establishing a better system:

1. First, the poverty of the tenants. They have not yet had time to acquire enough cattle to cultivate their lands more completely. The same rise in cattle prices that would make it beneficial for them to keep more cattle also makes it harder for them to buy more.
2. Secondly, they have not yet had time to get their lands in condition to properly support this larger number of cattle, even if they could buy them. The increase of livestock and the improvement of land are two events that must go hand in hand. One cannot get far ahead of the other anywhere. Without some increase in livestock, there can be hardly any improvement of land. But there can be no considerable increase in livestock without a considerable improvement of land, because otherwise, the land could not support them. These natural obstacles to a better system can only be removed by a long course of thriftiness and industry. Half a century or a century more, perhaps, must pass before the old system, which is gradually disappearing, can be completely abolished throughout all parts of the country. Of all the commercial advantages Scotland has gained from the union with England, this rise in the price of cattle is perhaps the greatest. It has not only raised the value of all Highland estates but has perhaps also been the main cause of improvement in the low country.

In all new colonies, the great quantity of wasteland, which can for many years be used only for feeding cattle, soon makes cattle extremely abundant. Great cheapness is always the necessary consequence of great abundance. Though all the cattle in the European colonies in America were originally brought from Europe, they soon multiplied so much there and became so cheap that even horses were allowed to run wild in the woods, with no owner thinking it worthwhile to claim them. It must be a long time after such colonies are first established before it can become profitable to feed cattle on the produce of cultivated land. The same causes, therefore – the lack of manure and the imbalance between the capital used in cultivation and the land it is meant to cultivate – are likely to introduce there a system of farming not unlike that which still exists in many parts of Scotland. Mr. Kalm, the Swedish traveler, when describing the farming in some English colonies in North America as he found it in 1749, observes accordingly that he can with difficulty see there the character of the English nation, so skilled in all branches of agriculture. He says they make hardly any manure for their cornfields. Instead, when one piece of ground has been exhausted by continuous cropping, they clear and cultivate another piece of fresh land; and when that is exhausted, they move to a third. Their cattle are allowed to wander through the woods and other uncultivated grounds, where they are half-starved. They have long ago destroyed almost all the annual grasses by grazing them too early in the spring, before the grasses had time to flower or produce seeds. The annual grasses, it seems, were the best natural grasses in that part of North America. When Europeans first settled there, these grasses used to grow very thick and to reach three or four feet high. Mr. Kalm was assured that a piece of ground which, when he wrote, could not maintain one cow, would in former times have maintained four. Each of those four would have given four times the quantity of milk that the one cow was capable of giving. The poorness of the pasture had, in his opinion, caused the degradation of their cattle, which noticeably degenerated from one generation to another. They were probably not unlike that stunted breed common all over Scotland thirty or forty years ago. This breed is now much improved throughout most of the low country, not so much by changing the breed (though that has been tried in some places) as by feeding them more plentifully.

Therefore, though it is late in the progress of improvement before cattle can bring such a price as to make it profitable to cultivate land just for feeding them, they are perhaps the first among this second sort of raw produce (those that industry can multiply) to reach this price. This is because until they do, it seems impossible that overall agricultural improvement can reach even close to the degree of perfection it has achieved in many parts of Europe.

Venison and Other Animal Products

Just as cattle are among the first, perhaps venison (deer meat) is among the last of this sort of raw produce to reach a price that makes cultivating land for it profitable. The price of venison in Great Britain, however expensive it may seem, is not nearly enough to cover the expense of a deer park, as is well known to anyone with experience in raising deer. If it were otherwise, feeding deer would soon become a common farming practice, just like feeding small birds called Turdi (thrushes) was among the ancient Romans. Varro and Columella (Roman writers) assure us it was a most profitable business. The fattening of ortolans (small migratory birds that arrive lean) is said to be profitable in some parts of France. If venison remains fashionable, and the wealth and luxury of Great Britain continue to increase as they have for some time, its price may very probably rise still higher than it is at present.

Between the period when a necessary item like cattle reaches its highest price relative to land use, and the period when a non-essential luxury like venison does, there is a very long interval. During this time, many other sorts of raw produce gradually reach their highest price, some sooner and some later, according to different circumstances.

For example, on every farm, the leftovers from the barn and stables will feed a certain number of poultry. Since they are fed with what would otherwise be lost, they are a way to use up waste (“save-all”). As they cost the farmer almost nothing, he can afford to sell them for very little. Almost all he gets is pure gain, and their price can hardly be so low as to discourage him from keeping this number. But in poorly cultivated and therefore thinly inhabited countries, the poultry raised this way without expense are often enough to supply the whole demand. In this situation, they are often as cheap as butcher’s meat or any other animal food. However, the total quantity of poultry a farm produces this way without expense must always be much smaller than the total quantity of butcher’s meat reared on it. In times of wealth and luxury, what is rare, even if only of nearly equal quality, is always preferred to what is common. As wealth and luxury increase with improvement and cultivation, the price of poultry gradually rises above that of butcher’s meat. Eventually, it gets so high that it becomes profitable to cultivate land just for feeding them. Once it reaches this height, it cannot go much higher. If it did, more land would soon be used for this purpose. In several provinces of France, feeding poultry is considered a very important part of the rural economy, profitable enough to encourage farmers to grow considerable amounts of Indian corn (maize) and buckwheat for this purpose. A medium-sized farmer there might sometimes have four hundred fowls in his yard. Feeding poultry seems hardly yet to be generally considered as important in England. Poultry are certainly more expensive in England than in France, as England receives considerable supplies from France. In the progress of improvement, the period when any particular sort of animal food is most expensive must naturally be just before the general practice of cultivating land specifically to raise it begins. For some time before this practice becomes general, scarcity must necessarily raise the price. After it becomes general, new methods of feeding are commonly found, which enable the farmer to raise a much greater quantity of that particular animal food on the same amount of ground. The abundance not only forces him to sell cheaper but, because of these improvements, he can afford to sell cheaper. If he could not afford it, the abundance would not last long. It has probably been in this way that the introduction of clover, turnips, carrots, cabbages, etc., has helped to lower the common price of butcher’s meat in the London market somewhat below what it was around the beginning of the last century.

The hog finds its food in waste (ordure) and greedily eats many things rejected by every other useful animal. Like poultry, it is originally kept as a “save-all.” As long as the number of such animals that can be raised at little or no expense is enough to supply the demand, this sort of butcher’s meat comes to market at a much lower price than any other. But when demand rises beyond what this quantity can supply, and it becomes necessary to grow food specifically for feeding and fattening hogs (just like for other cattle), the price necessarily rises. It then becomes proportionally either higher or lower than that of other butcher’s meat, depending on whether the nature of the country and its agriculture make feeding hogs more or less expensive than feeding other cattle. In France, according to Mr. Buffon, the price of pork is nearly equal to that of beef. In most parts of Great Britain, it is currently somewhat higher.

The great rise in the price of both hogs and poultry in Great Britain has frequently been blamed on the decrease in the number of cottagers (people living in cottages with small plots of land) and other small land occupiers. This decrease has, in every part of Europe, been the immediate forerunner of improvement and better cultivation. However, it may also have contributed to raising the price of these items both somewhat sooner and somewhat faster than it would otherwise have risen. Just as the poorest family can often keep a cat or a dog without any expense, the poorest occupiers of land can commonly keep a few poultry, or a sow and a few pigs, at very little cost. The little leftovers from their own table, their whey, skimmed milk, and buttermilk, supply these animals with part of their food. They find the rest in neighboring fields without doing any noticeable damage to anybody. By diminishing the number of these small occupiers, therefore, the quantity of this sort of food produced at little or no expense must certainly have been considerably reduced. Their price must consequently have risen both sooner and faster than it would otherwise have. Sooner or later, however, in the progress of improvement, the price must in any case have risen to the highest point it is capable of reaching – that is, to the price which pays for the labor and expense of cultivating the land that provides them with food, just as well as these costs are paid on most other cultivated land.

The dairy business, like feeding hogs and poultry, is originally carried on as a “save-all.” The cattle necessarily kept on the farm produce more milk than is needed for either rearing their own young or for the farmer’s family’s consumption. They produce most milk at one particular season. But of all land products, milk is perhaps the most perishable. In the warm season, when it is most abundant, it will hardly keep for twenty-four hours. The farmer, by making it into fresh butter, stores a small part of it for a week; by making it into salt butter, for a year; and by making it into cheese, he stores a much greater part of it for several years. Part of all these products is reserved for his own family’s use. The rest goes to market to get the best price available, which can hardly be so low as to discourage him from sending whatever is surplus to his family’s needs. If the price is very low, indeed, he will likely manage his dairy in a very careless and dirty manner. He will perhaps hardly think it worthwhile to have a particular room or building just for it but will allow the business to be carried on amidst the smoke, filth, and nastiness of his own kitchen – as was the case with almost all farmers’ dairies in Scotland thirty or forty years ago, and as is still the case with many of them. The same causes which gradually raise the price of butcher’s meat – the increase in demand and, due to the country’s improvement, the decrease in the quantity of cattle that can be fed at little or no expense – also raise, in the same manner, the price of dairy produce. The price of dairy naturally connects with that of butcher’s meat, or with the expense of feeding cattle. The increase in price pays for more labor, care, and cleanliness. The dairy becomes more worthy of the farmer’s attention, and the quality of its produce gradually improves. The price at last gets so high that it becomes worthwhile to employ some of the most fertile and best-cultivated lands in feeding cattle merely for the purpose of the dairy. When it has reached this height, it cannot well go higher. If it did, more land would soon be turned to this purpose. It seems to have reached this height throughout most of England, where much good land is commonly employed in this manner. If you exclude the neighborhood of a few considerable towns, it seems not yet to have reached this height anywhere in Scotland, where common farmers seldom employ much good land in raising food for cattle merely for the purpose of the dairy. The price of the produce, though it has risen very considerably within these few years, is probably still too low to allow for it. The inferiority of the quality, indeed, compared with that of English dairy produce, is fully equal to the difference in price. But this inferiority of quality is, perhaps, rather the effect of this lowness of price than the cause of it. Though the quality were much better, most of what is brought to market could not, I believe, in the present circumstances of the country, be sold at a much better price. And the present price, it is probable, would not pay the expense of the land and labor necessary for producing a much better quality. Throughout most of England, despite the higher price, dairy farming is not considered a more profitable use of land than raising corn or fattening cattle (the two main objects of agriculture). Throughout most of Scotland, therefore, it cannot yet be even as profitable.

BOOK TWO

Of the Nature, Accumulation, and Employment of Capital (Stock)

INTRODUCTION

In early, undeveloped societies where there is no division of labor, where exchanges are seldom made, and where every person provides everything for himself, it is not necessary for any capital (or stock of goods) to be accumulated or stored up beforehand to carry on the business of society. Every person tries to supply their own occasional wants as they occur through their own industry.

• When a person is hungry, they go to the forest to hunt.
• When their coat is worn out, they clothe themselves with the skin of the first large animal they kill.
• When their hut begins to fall into ruin, they repair it as well as they can with the trees and turf that are nearest to it.

But once the division of labor has been thoroughly introduced, the produce of a person’s own labor can supply only a very small part of their occasional wants. The far greater part of their wants is supplied by the produce of other people’s labor. A person purchases this with the produce of their own labor, or (what is the same thing) with the price of the produce of their own labor. But this purchase cannot be made until the produce of their own labor has not only been completed but also sold. Therefore, a stock of goods of different kinds must be stored up somewhere. This stock must be sufficient to maintain the person and to supply them with the materials and tools for their work until, at least, both these events (completing and selling their product) can happen. A weaver, for example, cannot apply himself entirely to his specialized business unless there is already stored up somewhere – either in his own possession or in that of some other person – enough stock to maintain him. This stock must also supply him with the materials and tools for his work until he has not only completed but also sold his woven cloth. This accumulation of stock must, clearly, happen before he applies his industry for so long to such a specialized business.

Just as the accumulation of stock must, in the nature of things, come before the division of labor, so labor can be more and more subdivided only in proportion as stock is previously more and more accumulated.

• The quantity of materials that the same number of people can work up increases greatly as labor becomes more and more subdivided.
• As the operations of each workman are gradually reduced to a greater degree of simplicity, a variety of new machines come to be invented for making those operations easier and quicker. Therefore, as the division of labor advances, an equal stock of provisions (food and necessities), and a greater stock of materials and tools than what would have been necessary in less developed conditions, must be accumulated beforehand to give constant employment to an equal number of workmen. But the number of workmen in every branch of business generally increases with the division of labor in that branch. Or rather, it is the increase of their number which enables them to classify and subdivide themselves in this manner.

Just as the accumulation of stock is necessary before carrying on this great improvement in the productive powers of labor, so that accumulation naturally leads to this improvement. The person who employs his stock in maintaining labor necessarily wishes to employ it in such a manner as to produce the greatest possible quantity of work. He tries, therefore, both to make the most proper distribution of employment among his workmen and to furnish them with the best machines which he can either invent or afford to purchase. His abilities in both these respects are generally in proportion to the extent of his stock, or to the number of people it can employ. The quantity of industry, therefore, not only increases in every country with the increase of the stock which employs it, but, as a consequence of that increase, the same quantity of industry produces a much greater quantity of work.

Such are, in general, the effects of the increase of stock upon industry and its productive powers.

In the following book, I have tried to explain:

• The nature of stock.
• The effects of its accumulation into different kinds of capital.
• The effects of the different ways those capitals are employed.

This book is divided into five chapters:

1. In the first chapter, I have tried to show the different parts or branches into which the stock, either of an individual or of a great society, naturally divides itself.
2. In the second, I have tried to explain the nature and operation of money, considered as a particular branch of the general stock of the society.
3. The stock which is accumulated into capital may either be employed by the person to whom it belongs, or it may be lent to some other person. In the third and fourth chapters, I have tried to examine the manner in which it operates in both these situations.
4. The fifth and last chapter discusses the different effects which the different employments of capital immediately produce upon the quantity both of national industry and of the annual produce of land and labor.

CHAPTER I: THE DIVISION OF STOCK

When the stock (possessions or resources) which a person has is no more than enough to maintain him for a few days or a few weeks, he seldom thinks of getting any income (revenue) from it. He consumes it as sparingly as he can and tries by his labor to acquire something to replace it before it is all used up. His income, in this case, comes from his labor only. This is the situation of most laboring poor in all countries.

But when he possesses enough stock to maintain him for months or years, he naturally tries to get an income from the greater part of it. He reserves only enough for his immediate consumption to maintain him until this income begins to come in. His whole stock, therefore, is distinguished into two parts:

1. That part which he expects to provide him this income is called his capital.
2. The other part is that which supplies his immediate consumption. This consists of:
   • The portion of his whole stock originally reserved for this purpose.
   • Or, his income (from whatever source) as it gradually comes in.
   • Or, things purchased by either of these in former years which are not yet entirely consumed, such as a stock of clothes, household furniture, and the like. The stock which people commonly reserve for their own immediate consumption consists of one, or some, or all these three articles.

Two Ways to Employ Capital for Profit

There are two different ways in which capital may be employed so as to yield an income or profit to its employer:

1. Circulating Capital: It may be employed in raising, manufacturing, or purchasing goods, and then selling them again with a profit. The capital employed in this manner yields no income or profit to its employer while it either remains in his possession or continues in the same form.

   • The merchant’s goods yield him no income or profit until he sells them for money.
   • The money yields him just as little until it is again exchanged for goods. His capital is continually going from him in one form and returning to him in another. It is only by means of such circulation, or successive exchanges, that it can yield him any profit. Such capitals, therefore, may very properly be called circulating capitals.

2. Fixed Capital: It may be employed in the improvement of land, in the purchase of useful machines and instruments of trade, or in similar things that yield an income or profit without changing masters or circulating any further. Such capitals, therefore, may very properly be called fixed capitals.

Different occupations require very different proportions between the fixed and circulating capitals employed in them.

• The capital of a merchant, for example, is entirely a circulating capital. He needs no machines or instruments of trade, unless his shop or warehouse is considered as such.

• Some part of the capital of every master craftsman or manufacturer must be fixed in the instruments of his trade. This part, however, is very small in some businesses and very large in others.

  • A master tailor requires no other instruments of trade but a parcel of needles.
  • Those of the master shoemaker are a little, though only a very little, more expensive.
  • Those of the weaver rise a good deal above those of the shoemaker. The far greater part of the capital of all such master craftsmen, however, is circulated, either in the wages of their workmen or in the price of their materials, and is repaid with a profit by the price of the work.

• In other works, a much greater fixed capital is required.

  • In a great iron-works, for example, the furnace for melting the ore, the forge, and the slitting-mill (for cutting metal) are instruments of trade that cannot be built without very great expense.
  • In coal-works and mines of every kind, the machinery necessary both for pumping out water and for other purposes is frequently still more expensive.

• That part of the capital of a farmer which is employed in the instruments of agriculture (tools, plows) is a fixed capital. That which is employed in the wages and maintenance of his laboring servants is a circulating capital. He makes a profit from the one by keeping it in his own possession, and from the other by parting with it (paying it out and getting it back in sales).

  • The price or value of his laboring cattle (like oxen for plowing) is a fixed capital, in the same manner as that of farming tools. Their maintenance is a circulating capital, in the same manner as that of the laboring servants. The farmer makes his profit by keeping the laboring cattle and by parting with (spending on) their maintenance.
  • Both the price and the maintenance of cattle which are bought in and fattened, not for labor, but for sale, are a circulating capital. The farmer makes his profit by parting with them.
  • A flock of sheep or a herd of cattle that, in a breeding country, is bought not for labor or for immediate sale, but to make a profit by their wool, by their milk, and by their increase (offspring), is a fixed capital. The profit is made by keeping them. Their maintenance is a circulating capital. The profit is made by parting with (selling) the produce (wool, milk, offspring), and it comes back with its own profit and the profit upon the whole price of the cattle.
  • The whole value of seed, too, is properly a fixed capital. Though it goes back and forth between the ground and the granary, it never changes masters and therefore does not properly circulate. The farmer makes his profit not by its sale, but by its increase.

The General Stock of Society

The general stock of any country or society is the same as the total stock of all its inhabitants or members. It therefore naturally divides itself into the same three portions, each of which has a distinct function or office:

1. Reserved for Immediate Consumption: The first portion is that which is reserved for immediate consumption. Its characteristic is that it provides no income or profit. It consists of the stock of food, clothes, household furniture, etc., which have been purchased by their proper consumers but which are not yet entirely consumed. The whole stock of mere dwelling-houses existing at any one time in the country also makes up a part of this first portion. The stock that is invested in a house, if it is to be the dwelling-house of the owner, ceases from that moment to serve as capital or to provide any income to its owner. A dwelling-house, as such, contributes nothing to the income of its inhabitant. Though it is, no doubt, extremely useful to him, it is useful in the same way his clothes and household furniture are – they are part of his expense, not his income. If a house is to be let to a tenant for rent, since the house itself can produce nothing, the tenant must always pay the rent out of some other income he derives either from labor, capital, or land. Therefore, though a house may yield an income to its owner (and thereby serve as capital for him), it cannot yield any to the public, nor serve as capital for the public. The income of the whole body of people can never be increased in the smallest degree by it. Clothes and household furniture, in the same manner, sometimes yield an income and thereby serve as capital to particular persons. In countries where masquerades are common, it is a trade to let out masquerade dresses for a night. Upholsterers frequently let furniture by the month or by the year. Undertakers let out the furniture for funerals by the day and by the week. Many people let furnished houses and get rent not only for the use of the house but also for that of the furniture. The income, however, which is derived from such things must always be ultimately drawn from some other source of income. Of all parts of the stock reserved for immediate consumption (either of an individual or of a society), what is invested in houses is most slowly consumed. A stock of clothes may last several years; a stock of furniture, half a century or a century. But a stock of houses, well built and properly taken care of, may last many centuries. Though the period of their total consumption is more distant, they are still as truly a stock reserved for immediate consumption as either clothes or household furniture.

2. Fixed Capital: The second of the three portions into which the general stock of society divides itself is the fixed capital. Its characteristic is that it provides an income or profit without circulating or changing masters. It consists chiefly of the four following articles:

   • First, of all useful machines and instruments of trade which make labor easier and shorter.
   • Secondly, of all those profitable buildings which are the means of procuring an income, not only to their owner who lets them for rent but also to the person who possesses them and pays that rent for them. Examples include shops, warehouses, workshops, farmhouses with all their necessary buildings, stables, granaries, etc. These are very different from mere dwelling-houses. They are a sort of instrument of trade and may be considered in the same light.
   • Thirdly, of the improvements of land – what has been profitably invested in clearing, draining, enclosing, manuring, and preparing land into the condition most proper for farming and cultivation. An improved farm may very justly be regarded in the same light as those useful machines which make labor easier and shorter, and by means of which an equal circulating capital can provide a much greater income to its employer. An improved farm is equally advantageous and more durable than any of those machines, frequently requiring no other repairs than the most profitable application of the farmer’s capital employed in cultivating it.
   • Fourthly, of the acquired and useful abilities of all the inhabitants or members of the society (often called human capital today). The acquisition of such talents – by maintaining the acquirer during his education, study, or apprenticeship – always costs a real expense. This expense is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, also make a part of the fortune of the society to which he belongs. The improved skill of a workman may be considered in the same light as a machine or instrument of trade which makes labor easier and shorter, and which, though it costs a certain expense, repays that expense with a profit.

3. Circulating Capital: The third and last of the three portions into which the general stock of society naturally divides itself is the circulating capital. Its characteristic is that it provides an income only by circulating or changing masters. It is likewise composed of four parts:

   • First, of the money by means of which all the other three parts are circulated and distributed to their proper consumers.
   • Secondly, of the stock of provisions (food) which are in the possession of the butcher, the grazier (cattle farmer), the farmer, the corn-merchant, the brewer, etc., and from the sale of which they expect to derive a profit.
   • Thirdly, of the materials (whether completely raw or more or less manufactured) for clothes, furniture, and building. These are not yet made up into any of those three shapes but remain in the hands of the growers, the manufacturers, the sellers of fine fabrics (mercers) and cloth sellers (drapers), the timber merchants, the carpenters and joiners, the brickmakers, etc.
   • Fourthly, and lastly, of the work which is made up and completed but which is still in the hands of the merchant or manufacturer and not yet sold or distributed to the proper consumers. Examples include the finished work which we frequently find ready-made in the shops of the smith, the cabinet-maker, the goldsmith, the jeweler, the china-merchant, etc. The circulating capital consists, in this manner, of the provisions, materials, and finished work of all kinds that are in the hands of their respective dealers, and of the money that is necessary for circulating and distributing them to those who are finally to use or consume them.

Of these four parts of circulating capital, three – provisions, materials, and finished work – are regularly withdrawn from it, either annually or in a longer or shorter period. They are then placed either in the fixed capital or in the stock reserved for immediate consumption.

Every fixed capital is both originally derived from, and requires to be continually supported by, a circulating capital. All useful machines and instruments of trade are originally derived from a circulating capital, which furnishes the materials of which they are made and the maintenance of the workmen who make them. They also require a capital of the same kind to keep them in constant repair.

No fixed capital can yield any income except by means of a circulating capital.

The most useful machines and instruments of trade will produce nothing without the circulating capital that provides the materials they work on and the living expenses (maintenance) of the workmen who use them. Land, however improved, will yield no income without a circulating capital that maintains the laborers who cultivate it and collect its produce.

The sole end and purpose of both fixed and circulating capitals is to maintain and increase the stock of goods that is reserved for immediate consumption. It is this stock which feeds, clothes, and lodges the people. Their riches or poverty depend upon the abundant or sparse supplies which those two types of capital can provide to the stock reserved for immediate consumption.

Since a large part of the circulating capital is continually withdrawn from it to be placed in the other two branches of the general stock of society (fixed capital and consumption stock), it must, in turn, require continual supplies. Without these supplies, circulating capital would soon cease to exist. These supplies are principally drawn from three sources:

1. The produce of land.
2. The produce of mines.
3. The produce of fisheries. These sources provide continual supplies of provisions (food) and materials. Part of these are afterwards processed into finished work. These supplies replace the provisions, materials, and finished work continually withdrawn from the circulating capital. From mines, too, is drawn what is necessary for maintaining and increasing that part of circulating capital which consists of money. For though, in the ordinary course of business, this money part is not, like the other three, necessarily withdrawn from circulating capital to be placed in the other two branches of the general stock of society, it must, however, like all other things, be wasted and worn out at last. Sometimes, too, it may be either lost or sent abroad. It must, therefore, require continual, though no doubt much smaller, supplies.

Land, mines, and fisheries all require both a fixed and a circulating capital to cultivate them. Their produce replaces with a profit not only those capitals but also all the other capitals in the society.

• Thus, the farmer annually replaces for the manufacturer the provisions the manufacturer had consumed and the materials he had processed the year before.
• The manufacturer, in turn, replaces for the farmer the finished work (like tools or clothes) which the farmer had used up or worn out in the same time. This is the real exchange that is annually made between these two groups of people. However, it seldom happens that the raw produce of the one and the manufactured produce of the other are directly bartered for one another. This is because it seldom happens that the farmer sells his corn and his cattle, his flax and his wool, to the very same person from whom he chooses to purchase the clothes, furniture, and instruments of trade which he wants. He therefore sells his raw produce for money, with which he can purchase, wherever it is available, the manufactured produce he needs. Land even replaces, in part at least, the capitals with which fisheries and mines are cultivated. It is the produce of land (food for fishermen and miners, materials for their tools) which draws the fish from the waters. It is the produce of the surface of the earth which extracts the minerals from its depths.

The produce of land, mines, and fisheries, when their natural fertility is equal, is in proportion to the extent and proper application of the capitals employed in them. When the capitals are equal and equally well applied, their produce is in proportion to their natural fertility.

Use of Capital in Secure vs. Insecure Countries

In all countries where there is reasonable security, every person of common understanding will try to employ whatever capital (stock) he can command in obtaining either present enjoyment or future profit.

• If it is employed in obtaining present enjoyment, it is a stock reserved for immediate consumption.
• If it is employed in obtaining future profit, it must produce this profit either by staying with him (as fixed capital) or by going from him and returning (as circulating capital). A person must be perfectly crazy who, where there is reasonable security, does not employ all the capital he commands (whether his own or borrowed) in one or other of these three ways.

In those unfortunate countries, indeed, where people are continually afraid of the violence of their superiors, they frequently bury and hide a great part of their capital. They do this to have it always at hand to carry with them to some place of safety, in case they are threatened with any of those disasters to which they consider themselves always exposed. This is said to be a common practice in Turkey, in India (Indostan), and, I believe, in most other governments of Asia. It seems to have been a common practice among our ancestors during the violence of the feudal government. Treasure-trove (hidden treasure found in the earth, to which no particular person could prove any right) was in those times considered a significant part of the revenue of the greatest sovereigns in Europe. It was regarded in those times as so important an object that it was always considered as belonging to the sovereign – neither to the finder nor to the owner of the land, unless the right to it had been granted to the landowner by an express clause in his charter. It was put on the same footing as gold and silver mines. Without a special clause in the charter, these mines were never supposed to be included in the general grant of lands, though mines of lead, copper, tin, and coal were, as they were considered things of small consequence.

CHAPTER II: MONEY CONSIDERED AS A PARTICULAR BRANCH OF THE GENERAL STOCK OF SOCIETY, OR THE EXPENSE OF MAINTAINING THE NATIONAL CAPITAL

It has been shown in the first Book that the price of most commodities is made up of three parts:

1. One pays the wages of labor.
2. Another pays the profits of capital (stock).
3. A third pays the rent of the land which had been employed in producing and bringing them to market.

There are, indeed, some commodities whose price is made up of only two of those parts (the wages of labor and the profits of capital), and a very few in which it consists entirely of one (the wages of labor). But the price of every commodity necessarily resolves itself into one, or some, or all of these three parts. Every part of its price which goes neither to rent nor to wages is necessarily profit to somebody.

Since this is the case for every particular commodity taken separately, it must also be so for all the commodities which make up the whole annual produce of the land and labor of every country, taken together. The whole price or exchangeable value of that annual produce must resolve itself into the same three parts. It must be divided up among the different inhabitants of the country, either as the wages of their labor, the profits of their capital, or the rent of their land.

Gross vs. Net Revenue

But though the whole value of the annual produce of the land and labor of every country is thus divided among and provides an income (revenue) to its different inhabitants, we can distinguish between gross revenue and net revenue, just as we do with the rent of a private estate.

• The gross rent of a private estate includes whatever is paid by the farmer.
• The net rent is what remains free to the landlord after deducting the expense of management, repairs, and all other necessary charges. It is what he can, without harming his estate, place in his stock reserved for immediate consumption, or spend on his table, carriages and horses (equipage), the ornaments of his house and furniture, his private enjoyments, and amusements. His real wealth is in proportion not to his gross rent, but to his net rent.

Similarly, for a whole country:

• The gross revenue of all its inhabitants includes the whole annual produce of their land and labor.
• The net revenue is what remains free to them after deducting the expense of maintaining – first, their fixed capital, and, secondly, their circulating capital. It is what they can, without using up (encroaching upon) their capital, place in their stock reserved for immediate consumption, or spend on their subsistence, conveniences, and amusements. Their real wealth, too, is in proportion not to their gross revenue, but to their net revenue.

Maintaining Fixed Capital Reduces Net Revenue

The whole expense of maintaining fixed capital must clearly be excluded from the net revenue of society. Neither the materials necessary for supporting their useful machines and instruments of trade, their profitable buildings, etc., nor the produce of the labor necessary for shaping those materials into the proper form, can ever make any part of it. The price of that labor (wages) may indeed make a part of net revenue, as the workmen so employed may place the whole value of their wages in their stock reserved for immediate consumption. But in other sorts of labor, both the price (wages) and the produce go to this consumption stock – the price to that of the workmen, the produce to that of other people, whose subsistence, conveniences, and amusements are increased by the labor of those workmen.

The purpose of fixed capital is to increase the productive powers of labor, or to enable the same number of laborers to perform a much greater quantity of work.

• In a farm where all the necessary buildings, fences, drains, communications, etc., are in the most perfect good order, the same number of laborers and working animals will raise a much greater produce than in one of equal size and equally good ground but not furnished with equal conveniences.
• In manufactures, the same number of workers, assisted with the best machinery, will process a much greater quantity of goods than with more imperfect instruments of trade. The expense which is properly laid out upon a fixed capital of any kind is always repaid with great profit and increases the annual produce by a much greater value than the cost of supporting such improvements. This support, however, still requires a certain portion of that produce. A certain quantity of materials, and the labor of a certain number of workmen – both of which might have been immediately employed to increase the food, clothing, lodging, and the general subsistence and conveniences of society – are thus diverted to another employment. This other employment is highly advantageous indeed, but still different from directly producing consumer goods. It is for this reason that all such improvements in mechanics that enable the same number of workmen to perform an equal quantity of work with cheaper and simpler machinery than had been usual before are always regarded as advantageous to every society. A certain quantity of materials, and the labor of a certain number of workmen, which had before been employed in supporting more complex and expensive machinery, can afterwards be applied to increasing the quantity of work which that or any other machinery is useful only for performing. The owner of a large factory (undertaker of some great manufactory) who employed a thousand pounds a year in maintaining his machinery, if he can reduce this expense to five hundred, will naturally employ the other five hundred in purchasing an additional quantity of materials to be processed by an additional number of workmen. The quantity of that work, therefore, which his machinery was useful only for performing, will naturally be increased, and with it all the advantage and convenience which the society can derive from that work.

The expense of maintaining fixed capital in a great country may very properly be compared to that of repairs on a private estate. The expense of repairs may frequently be necessary for supporting the produce of the estate, and consequently both the gross and the net rent of the landlord. When, by more proper management, however, this expense can be reduced without causing any reduction in produce, the gross rent remains at least the same as before, and the net rent is necessarily increased.

Maintaining Circulating Capital (Except Money) Does Not Reduce Net Revenue

But though the whole expense of maintaining fixed capital is thus necessarily excluded from the net revenue of society, it is not the same case with the expense of maintaining circulating capital. Of the four parts of which this latter capital is composed – money, provisions, materials, and finished work – the three last, as has already been observed, are regularly withdrawn from it and placed either in the fixed capital of the society or in their stock reserved for immediate consumption. Whatever portion of those consumable goods is not employed in maintaining fixed capital goes entirely to the consumption stock and makes a part of the net revenue of society. The maintenance of those three parts of the circulating capital, therefore, withdraws no portion of the annual produce from the net revenue of society, besides what is necessary for maintaining the fixed capital.

The circulating capital of a society is in this respect different from that of an individual. An individual’s circulating capital is totally excluded from making any part of his net revenue, which must consist entirely of his profits. But though the circulating capital of every individual makes a part of the circulating capital of the society to which he belongs, it is not for that reason totally excluded from making a part also of their net revenue. Though all the goods in a merchant’s shop must by no means be placed in his own stock reserved for immediate consumption, they may be placed in that of other people. These other people, from an income derived from other funds, may regularly replace their value to him, together with his profits, without causing any decrease either of his capital or of theirs.

Therefore, money is the only part of the circulating capital of a society whose maintenance can cause any decrease in their net revenue.

Fixed Capital and Money: Similar Effects on Net Revenue

Fixed capital, and that part of circulating capital which consists in money, bear a very great resemblance to one another in how they affect the revenue of society.

1. First, just as machines and instruments of trade, etc., require a certain expense first to build them and afterwards to support them (both of which expenses, though they make a part of the gross revenue, are deductions from the net revenue of society), so the stock of money which circulates in any country must require a certain expense first to collect it and afterwards to support it. Both these expenses, though they make a part of the gross revenue, are, in the same manner, deductions from the net revenue of society. A certain quantity of very valuable materials (gold and silver) and of very skilled labor, instead of increasing the stock reserved for immediate consumption (the subsistence, conveniences, and amusements of individuals), is employed in supporting that great but expensive instrument of commerce (money). By means of money, every individual in society has his subsistence, conveniences, and amusements regularly distributed to him in their proper proportion.

2. Secondly, just as the machines and instruments of trade, etc., which make up the fixed capital of either an individual or of a society, make no part of either the gross or the net revenue of either, so money, by means of which the whole revenue of society is regularly distributed among all its different members, itself makes no part of that revenue. The great wheel of circulation is altogether different from the goods which are circulated by means of it. The revenue of society consists entirely of those goods, and not in the wheel which circulates them. In calculating either the gross or the net revenue of any society, we must always, from their whole annual circulation of money and goods, deduct the whole value of the money. Not a single penny (farthing) of that money can ever make any part of either gross or net revenue.

It is only the ambiguity of language which can make this proposition appear either doubtful or paradoxical. When properly explained and understood, it is almost self-evident.

When we talk of any particular sum of money, we sometimes mean nothing but the metal pieces of which it is composed. Sometimes, however, we include in our meaning some unclear reference to the goods which can be had in exchange for it, or to the purchasing power which possessing it conveys.

• Thus, when we say that the circulating money of England has been calculated at eighteen million pounds, we mean only to express the amount of the metal pieces which some writers have calculated, or rather have supposed, to circulate in that country.
• But when we say that a man is “worth” fifty or a hundred pounds a year, we commonly mean to express not only the amount of the metal pieces which are annually paid to him but also the value of the goods which he can annually purchase or consume. We commonly mean to determine what his way of living is or ought to be, or the quantity and quality of the necessities and conveniences of life in which he can properly indulge himself.

When, by any particular sum of money, we mean not only to express the amount of the metal pieces but also to include in its meaning some unclear reference to the goods which can be had in exchange for them, the wealth or revenue which it denotes in this case is equal only to one of the two values thus hinted at somewhat ambiguously by the same word. It refers more properly to the latter value (the goods) than to the former (the metal) – to the money’s worth more properly than to the money itself.

Thus, if a guinea is the weekly pension of a particular person, he can, in the course of the week, purchase with it a certain quantity of subsistence, conveniences, and amusements. His real riches, his real weekly revenue, are in proportion to whether this quantity is great or small.

A person’s weekly income is certainly not equal to both the gold coin (guinea) he receives and what can be purchased with it. It is equal to only one or the other of those two equal values – and more properly to what the guinea can buy (the guinea’s worth) rather than to the guinea itself.

If such a person’s pension was paid to him not in gold, but in a weekly bill (like a check or bank note) for a guinea, his income surely would not properly consist in the piece of paper, but in what he could get for it. A guinea coin may be considered as a bill for a certain quantity of necessities and conveniences upon all the tradesmen in the neighborhood. The income of the person to whom it is paid does not so properly consist in the piece of gold, as in what he can get for it, or in what he can exchange it for. If it could be exchanged for nothing, it would, like a bill from a bankrupt, be of no more value than the most useless piece of paper.

In the same manner, though the weekly or yearly income of all the different inhabitants of any country may be, and in reality frequently is, paid to them in money, their real riches – the real weekly or yearly income of all of them taken together – must always be great or small in proportion to the quantity of consumable goods which all of them can purchase with this money. The whole income of all of them taken together is clearly not equal to both the money and the consumable goods, but only to one or other of those two values – and more properly to the latter (the goods) than to the former (the money).

Therefore, though we frequently express a person’s income by the metal pieces which are annually paid to him, it is because the amount of those pieces regulates the extent of his power of purchasing, or the value of the goods which he can annually afford to consume. We still consider his income as consisting in this power of purchasing or consuming, and not in the pieces which convey that power.

But if this is clear enough even for an individual, it is still more so for a society. The amount of metal pieces annually paid to an individual is often precisely equal to his income and is, for that reason, the shortest and best expression of its value. But the amount of metal pieces which circulate in a society can never be equal to the income of all its members. The same guinea which pays the weekly pension of one man today may pay that of another tomorrow, and that of a third the day after. Therefore, the amount of metal pieces which annually circulate in any country must always be of much less value than the whole of the money pensions annually paid with them. But the power of purchasing, or the goods which can successively be bought with the whole of those money pensions as they are successively paid, must always be precisely of the same value as those pensions. So must likewise be the income of the different persons to whom they are paid. That income, therefore, cannot consist in those metal pieces (whose amount is so much inferior to the income’s value), but in the power of purchasing – in the goods which can successively be bought with them as they circulate from hand to hand.

Money: A Tool, Not Revenue

Money, therefore – the great wheel of circulation, the great instrument of commerce – like all other instruments of trade, though it makes up a part (and a very valuable part) of a country’s capital, makes up no part of the revenue of the society to which it belongs. And though the metal pieces of which it is composed, in the course of their annual circulation, distribute to every person the income which properly belongs to him, they themselves make up no part of that income.

Saving on the “Wheel” of Circulation

Thirdly, and lastly, the machines and instruments of trade, etc., which make up fixed capital, bear this further resemblance to that part of circulating capital which consists in money:

• Just as every saving in the expense of erecting and supporting those machines (which does not diminish the productive powers of labor) is an improvement of the net revenue of the society;
• So every saving in the expense of collecting and supporting that part of the circulating capital which consists in money is an improvement of exactly the same kind.

It is clear enough (and has partly been explained already) how every saving in the expense of supporting fixed capital is an improvement of the net revenue of society. The whole capital of the owner (undertaker) of every work is necessarily divided between his fixed and his circulating capital. While his whole capital remains the same, the smaller one part is, the greater the other must necessarily be. It is the circulating capital which furnishes the materials and wages of labor and puts industry into motion. Every saving, therefore, in the expense of maintaining fixed capital (which does not diminish the productive powers of labor) must increase the fund which puts industry into motion, and consequently the annual produce of land and labor – the real revenue of every society.

Paper Money: A Cheaper Wheel

The substitution of paper money in place of gold and silver money replaces a very expensive instrument of commerce with one much less costly, and sometimes equally convenient. Circulation comes to be carried on by a new wheel, which costs less both to set up and to maintain than the old one. But how this operation is performed, and how it tends to increase either the gross or the net revenue of society, is not altogether so obvious and may therefore require some further explanation.

There are several different sorts of paper money, but the circulating notes of banks and bankers are the type which is best known and which seems best adapted for this purpose.

When the people of any particular country have such confidence in the fortune, honesty (probity), and prudence of a particular banker as to believe that he is always ready to pay upon demand such of his promissory notes (bank notes) as are likely to be at any time presented to him, those notes come to have the same currency as gold and silver money. This is because of the confidence that such money can at any time be had for them.

A particular banker lends his own bank notes to his customers, let’s suppose, to the amount of one hundred thousand pounds. Since these notes serve all the purposes of money, his debtors pay him the same interest as if he had lent them that much actual money. This interest is the source of his gain. Though some of those notes are continually coming back to him for payment, part of them continue to circulate for months and years. Therefore, though he generally has notes in circulation to the amount of one hundred thousand pounds, twenty thousand pounds in gold and silver may frequently be enough in his vaults (coffers) to meet occasional demands for payment. By this operation, therefore, twenty thousand pounds in gold and silver perform all the functions which one hundred thousand in gold and silver could otherwise have performed. The same exchanges can be made, the same quantity of consumable goods can be circulated and distributed to their proper consumers, by means of his bank notes (to the value of one hundred thousand pounds), as by an equal value of gold and silver money. Eighty thousand pounds of gold and silver, therefore, can in this manner be spared from the circulation of the country. If different operations of the same kind should, at the same time, be carried on by many different banks and bankers, the whole circulation may thus be conducted with only a fifth part of the gold and silver which would otherwise have been required.

Let us suppose, for example, that the whole circulating money of some particular country amounted, at a particular time, to one million pounds sterling, that sum being then sufficient for circulating the whole annual produce of their land and labor. Let us also suppose that some time thereafter, different banks and bankers issued bank notes payable to the bearer, to the amount of one million pounds, reserving in their different vaults two hundred thousand pounds for meeting occasional demands. There would then remain in circulation eight hundred thousand pounds in gold and silver, and a million pounds of bank notes, totaling one million eight hundred thousand pounds of paper and money together. But the annual produce of the land and labor of the country had before required only one million pounds to circulate and distribute it to its proper consumers, and that annual produce cannot be immediately increased by these banking operations. One million pounds, therefore, will still be sufficient to circulate it after them. The goods to be bought and sold being precisely the same as before, the same quantity of currency will be sufficient for buying and selling them. The “channel of circulation,” if I may be allowed such an expression, will remain precisely the same as before. We have supposed one million pounds is sufficient to fill that channel. Whatever, therefore, is poured into it beyond this sum cannot run in it but must overflow. One million eight hundred thousand pounds are poured into it. Therefore, eight hundred thousand pounds must overflow, as that sum is over and above what can be employed in the circulation of the country. But though this sum cannot be employed at home, it is too valuable to be allowed to lie idle. It will, therefore, be sent abroad to seek the profitable employment which it cannot find at home. But the paper money cannot go abroad, because at a distance from the banks which issue it and from the country in which payment of it can be enforced by law, it will not be received in common payments. Gold and silver, therefore, to the amount of eight hundred thousand pounds will be sent abroad. The channel of home circulation will then remain filled with one million pounds of paper, instead of the one million pounds of those metals which filled it before.

But though such a great quantity of gold and silver is thus sent abroad, we must not imagine that it is sent abroad for nothing, or that its owners make a present of it to foreign nations. They will exchange it for foreign goods of some kind or another, to supply the consumption either of some other foreign country or of their own.

• If they employ it in purchasing goods in one foreign country to supply the consumption of another (in what is called the carrying trade), whatever profit they make will be an addition to the net revenue of their own country. It is like a new fund created for carrying on a new trade, since domestic business is now transacted by paper, and the gold and silver have been converted into a fund for this new trade.

• If they employ it in purchasing foreign goods for home consumption, they may either:

  1. First, purchase goods likely to be consumed by idle people who produce nothing, such as foreign wines, foreign silks, etc.
  2. Secondly, they may purchase an additional stock of materials, tools, and provisions to maintain and employ an additional number of industrious people, who reproduce, with a profit, the value of their annual consumption.

So far as it is employed in the first way (for idle consumption), it promotes wasteful spending (prodigality). It increases expense and consumption without increasing production or establishing any permanent fund for supporting that expense, and is in every respect hurtful to society.

So far as it is employed in the second way (for productive use), it promotes industry. Though it increases the consumption of society, it provides a permanent fund for supporting that consumption. The people who consume these goods reproduce, with a profit, the whole value of their annual consumption. The gross revenue of society (the annual produce of their land and labor) is increased by the whole value which the labor of those workmen adds to the materials upon which they are employed. Their net revenue is increased by what remains of this value after deducting what is necessary for supporting the tools and instruments of their trade.

That most of the gold and silver forced abroad by these banking operations and employed in purchasing foreign goods for home consumption is, and must be, employed in purchasing goods of this second kind (for industry) seems not only probable but almost unavoidable. Though some particular individuals may sometimes increase their expense very considerably even if their income does not increase at all, we may be assured that no class or order of people ever does so. This is because, though the principles of common prudence do not always govern the conduct of every individual, they always influence that of the majority of every class or order. But the income of idle people, considered as a class, cannot be increased in the smallest degree by these banking operations. Their expense in general, therefore, cannot be much increased by them, though that of a few individuals among them may, and in reality sometimes is. The demand of idle people, therefore, for foreign goods being the same, or very nearly the same, as before, a very small part of the money forced abroad by banking and used for purchasing foreign goods for home consumption is likely to be used for purchasing goods for their use. Most of it will naturally be destined for the employment of industry, and not for the maintenance of idleness.

Calculating the Impact of Circulating Capital

When we calculate the quantity of industry which the circulating capital of any society can employ, we must always consider only those parts of it which consist of provisions, materials, and finished work. The other part, which consists of money and which serves only to circulate those three, must always be deducted. To put industry into motion, three things are required:

1. Materials to work upon.
2. Tools to work with.
3. Wages or payment for the sake of which the work is done. Money is neither a material to work upon nor a tool to work with. Though the wages of the workman are commonly paid to him in money, his real income, like that of all other people, consists not in the money, but in the money’s worth – not in the metal pieces, but in what can be gotten for them.

The quantity of industry which any capital can employ must, clearly, be equal to the number of workmen whom it can supply with materials, tools, and a maintenance suitable to the nature of the work. Money may be required for purchasing the materials and tools, as well as the maintenance of the workmen. But the quantity of industry which the whole capital can employ is certainly not equal to both the money which purchases and the materials, tools, and maintenance which are purchased with it. It is equal only to one or other of those two values – and more properly to the latter (the goods and support) than to the former (the money).

When paper is substituted for gold and silver money, the quantity of materials, tools, and maintenance which the whole circulating capital can supply may be increased by the whole value of the gold and silver which used to be employed in purchasing them. The whole value of the “great wheel of circulation and distribution” (money) is, in effect, added to the goods which are circulated and distributed by means of it. The operation, in some measure, resembles that of the owner of some great work who, due to some improvement in mechanics, takes down his old machinery and adds the difference between its price and that of the new machinery to his circulating capital – to the fund from which he furnishes materials and wages to his workmen.

What proportion the circulating money of any country bears to the whole value of the annual produce circulated by means of it is perhaps impossible to determine. It has been calculated by different authors at a fifth, at a tenth, at a twentieth, and at a thirtieth part of that value. But however small the proportion which circulating money may bear to the whole value of the annual produce, it must always bear a very considerable proportion to that part of the produce which is destined for the maintenance of industry (since only a part, and frequently only a small part, of total produce is so destined). When, therefore, by the substitution of paper, the gold and silver necessary for circulation is reduced to, perhaps, a fifth part of the former quantity, if the value of only most of the other four-fifths is added to the funds which are destined for the maintenance of industry, it must make a very considerable addition to the quantity of that industry, and consequently, to the value of the annual produce of land and labor.

The Example of Banking in Scotland

An operation of this kind has, within these last twenty-five or thirty years, been performed in Scotland by the establishment of new banking companies in almost every considerable town, and even in some country villages. The effects of it have been precisely those described above. The business of the country is almost entirely carried on by means of the paper money of these different banking companies, with which purchases and payments of all kinds are commonly made. Silver very seldom appears except in the change for a twenty-shilling bank note, and gold still less often. But though the conduct of all these different companies has not been without fault (unexceptionable), and has accordingly required an act of parliament to regulate it, the country, notwithstanding, has clearly derived great benefit from their trade. I have heard it asserted that the trade of the city of Glasgow doubled in about fifteen years after the first establishment of the banks there. It is also said that the trade of Scotland has more than quadrupled since the first establishment of the two public banks at Edinburgh. One, called the Bank of Scotland, was established by act of parliament in 1695; the other, called the Royal Bank, was established by royal charter in 1727.

Whether the trade of Scotland in general, or of the city of Glasgow in particular, has really increased in such a great proportion during such a short period, I do not claim to know. If either of them has increased this much, it seems to be too great an effect to be accounted for solely by the operation of banking. However, that the trade and industry of Scotland have increased very considerably during this period, and that the banks have contributed a good deal to this increase, cannot be doubted.

Changes in Scottish Currency and Wealth

The value of the silver money which circulated in Scotland before the union with England in 1707, and which, immediately after it, was brought into the Bank of Scotland to be re-coined, amounted to £411,117 10s. 9d. sterling. No account has been found of the gold coin at that time. However, it appears from the ancient accounts of the mint of Scotland that the value of gold annually coined was somewhat greater than that of silver. There were also many people on this occasion who, lacking trust in being repaid, did not bring their silver into the Bank of Scotland. Besides this, there was some English coin in circulation which was not called in. The whole value of the gold and silver, therefore, which circulated in Scotland before the union cannot be estimated at less than one million pounds sterling. It seems to have made up almost the whole circulation of that country. Though the circulation of the Bank of Scotland, which then had no rival, was considerable, it seems to have made up only a very small part of the whole. In the present times (Smith’s era), the whole circulation of Scotland cannot be estimated at less than two million pounds. Of this, the part which consists of gold and silver most probably does not amount to half a million. But though the circulating gold and silver of Scotland have decreased so much during this period, its real riches and prosperity do not appear to have suffered any. On the contrary, its agriculture, manufactures, and trade – the annual produce of its land and labor – have clearly increased.

How Banks Issue Paper Money

It is chiefly by discounting bills of exchange (that is, by advancing money on them before they are due) that most banks and bankers issue their bank notes (promissory notes). They always deduct, from whatever sum they advance, the legal interest until the bill becomes due. The payment of the bill, when it becomes due, replaces to the bank the value of what had been advanced, together with a clear profit of the interest. The banker who advances to the merchant whose bill he discounts not gold and silver but his own bank notes has the advantage of being able to discount a greater total amount – by the whole value of his bank notes which he finds by experience are commonly in circulation. He is thereby enabled to make his clear gain of interest on a much larger sum.

The commerce of Scotland, which at present is not very great, was still smaller when the first two banking companies were established. Those companies would have had little trade if they had confined their business to discounting bills of exchange. They, therefore, invented another method of issuing their bank notes: by granting what they called cash accounts. This meant giving credit up to a certain sum (two or three thousand pounds, for example) to any individual who could find two persons of undoubted credit and good landed estate to become guarantors (surety) for him. These guarantors ensured that whatever money should be advanced to him, within the sum for which the credit had been given, would be repaid upon demand, together with the legal interest. Credits of this kind are, I believe, commonly granted by banks and bankers in all different parts of the world. But the easy terms upon which the Scotch banking companies accept repayment are, as far as I know, peculiar to them. These terms have, perhaps, been the principal cause both of the great trade of those companies and of the benefit which the country has received from it.

Whoever has a credit of this kind with one of those companies and borrows a thousand pounds upon it, for example, may repay this sum in small amounts (piecemeal) – by twenty or thirty pounds at a time. The company discounts a proportionate part of the interest on the large sum from the day on which each of those small sums is paid in, until the whole is repaid in this manner. All merchants, therefore, and almost all business people, find it convenient to keep such cash accounts with them. They are thereby interested in promoting the trade of those companies by readily accepting their notes in all payments and by encouraging all those with whom they have any influence to do the same. The banks, when their customers apply to them for money, generally advance it to them in their own bank notes.

• Merchants pay these notes to manufacturers for goods.
• Manufacturers pay them to farmers for materials and provisions.
• Farmers pay them to their landlords for rent.
• Landlords repay them to merchants for the conveniences and luxuries with which they supply them.
• And merchants again return them to the banks to balance their cash accounts or to replace what they may have borrowed. Thus, almost the whole money business of the country is transacted by means of these notes. Hence, the great trade of those companies.

By means of these cash accounts, every merchant can, without being reckless (imprudent), carry on a greater trade than he otherwise could. If there are two merchants, one in London and the other in Edinburgh, who employ equal amounts of capital in the same branch of trade, the Edinburgh merchant can, without recklessness, carry on a greater trade and give employment to a greater number of people than the London merchant.

• The London merchant must always keep by him a considerable sum of money, either in his own vaults or in those of his banker (who gives him no interest for it), to meet the demands continually coming upon him for payment of goods he purchases on credit. Let the ordinary amount of this sum be supposed five hundred pounds. The value of the goods in his warehouse must always be less by five hundred pounds than it would have been if he had not been obliged to keep such a sum unemployed. Let us suppose that he generally sells his whole stock on hand once a year. By being obliged to keep so great a sum unemployed, he must sell five hundred pounds’ worth less goods in a year than he might otherwise have done. His annual profits must be less by all that he could have made from the sale of five hundred pounds’ worth more goods. The number of people employed in preparing his goods for the market must be less by all those that five hundred pounds more capital could have employed.
• The merchant in Edinburgh, on the other hand, keeps no money unemployed for meeting such occasional demands. When they actually come upon him, he satisfies them from his cash account with the bank and gradually replaces the sum borrowed with the money or paper which comes in from the occasional sales of his goods. With the same capital, therefore, he can, without recklessness, have at all times in his warehouse a larger quantity of goods than the London merchant. He can thereby both make a greater profit himself and give constant employment to a greater number of industrious people who prepare those goods for the market. Hence, the great benefit which the country has derived from this trade.

The ease of discounting bills of exchange, it may be thought indeed, gives English merchants a convenience equivalent to the cash accounts of Scotch merchants. But the Scotch merchants, it must be remembered, can discount their bills of exchange as easily as English merchants, and also have the additional convenience of their cash accounts.

Limits to Paper Money Circulation

The whole paper money of every kind which can easily circulate in any country can never exceed the value of the gold and silver which it replaces, or which would circulate there if there were no paper money (assuming commerce remains the same). If twenty-shilling notes, for example, are the lowest paper money current in Scotland, the whole of that currency which can easily circulate there cannot exceed the sum of gold and silver which would be necessary for handling the annual exchanges of twenty shillings’ value and upwards usually transacted within that country. Should the circulating paper at any time exceed that sum, this excess could neither be sent abroad nor be employed in the circulation of the country. It must therefore immediately return to the banks to be exchanged for gold and silver. Many people would immediately perceive that they had more of this paper than was necessary for transacting their business at home. Since they could not send it abroad, they would immediately demand payment of it from the banks. When this superfluous paper was converted into gold and silver, they could easily find a use for it by sending it abroad; but they could find none while it remained in the shape of paper. There would immediately, therefore, be a run upon the banks to the whole extent of this superfluous paper – and, if the banks showed any difficulty or hesitation in payment, to a much greater extent, as the alarm this would cause would necessarily increase the run.

Expenses Peculiar to Banking

Over and above the expenses common to every branch of trade (such as house rent, wages of servants, clerks, accountants, etc.), the expenses peculiar to a bank consist chiefly in two articles:

1. First, in the expense of keeping at all times in its vaults a large sum of money to meet the occasional demands of the holders of its notes. The bank loses the interest it could have earned on this money.
2. Secondly, in the expense of replenishing those vaults as fast as they are emptied by meeting such occasional demands.

A banking company which issues more paper than can be employed in the circulation of the country, and whose excess notes are continually returning to them for payment, ought to increase the quantity of gold and silver they keep in their vaults. This increase should be not only in proportion to this excessive increase of their circulation but in a much greater proportion, because their notes return to them much faster relative to the excess quantity. Such a company, therefore, ought to increase the first item of their expense (reserves) not only in proportion to this forced increase of their business but in a much greater proportion.

The vaults of such a company, too, though they ought to be filled much fuller, must empty themselves much faster than if their business were confined within more reasonable bounds. They must require not only a more intense but a more constant and uninterrupted expense to replenish them. The coin, too, which is thus continually drawn in such large quantities from their vaults, cannot be employed in the circulation of the country. It comes in place of paper which is over and above what can be employed in that circulation and is therefore also over and above what can be employed in it. But as that coin will not be allowed to lie idle, it must, in one shape or another, be sent abroad to find that profitable employment which it cannot find at home. This continual exportation of gold and silver, by increasing the difficulty, must necessarily further increase the expense of the bank in finding new gold and silver to replenish those vaults, which empty themselves so very rapidly. Such a company, therefore, must, in proportion to this forced increase of their business, increase the second item of their expense (replenishing reserves) still more than the first.

Let us suppose that all the paper from a particular bank, which the circulation of the country can easily absorb and employ, amounts exactly to forty thousand pounds. And let’s suppose that for meeting occasional demands, this bank is obliged to keep ten thousand pounds in gold and silver in its vaults at all times. Should this bank attempt to circulate forty-four thousand pounds in notes, the four thousand pounds which are over and above what the circulation can easily absorb will return to it almost as fast as they are issued. For meeting occasional demands, therefore, this bank ought to keep not just eleven thousand pounds, but fourteen thousand pounds in its vaults. It will thus gain nothing by the interest on the four thousand pounds of excessive circulation. It will also lose the whole expense of continually collecting four thousand pounds in gold and silver, which will be continually going out of its vaults as fast as they are brought into them.

If every particular banking company had always understood and attended to its own particular interest, the circulation never could have been overstocked with paper money. But every particular banking company has not always understood or attended to its own particular interest, and the circulation has frequently been overstocked with paper money.

By issuing too great a quantity of paper, the excess of which was continually returning to be exchanged for gold and silver, the Bank of England was for many years obliged to coin gold to the extent of between eight hundred thousand pounds and a million pounds a year, or, on average, about eight hundred and fifty thousand pounds. For this great coinage, the bank (because of the worn and degraded state into which the gold coin had fallen a few years ago) was frequently obliged to purchase gold bullion at the high price of four pounds an ounce. It soon after issued this in coin at £3 17s. 10½d. an ounce, losing in this manner between two and a half and three percent upon the coinage of such a very large sum. Though the bank, therefore, paid no seigniorage (fee for coining), and though the government was properly at the expense of the coinage, this generosity of the government did not altogether prevent the expense for the bank.

The Scotch banks, as a consequence of an excess of the same kind, were all obliged to constantly employ agents in London to collect money for them, at an expense which was seldom below one and a half or two percent. This money was sent down by wagon and insured by the carriers at an additional expense of three-quarters of a percent, or fifteen shillings per hundred pounds. Those agents were not always able to replenish the vaults of their employers as fast as they were emptied. In this case, the banks’ solution was to draw bills of exchange upon their correspondents in London for the amount they needed. When those correspondents afterwards drew upon them for the payment of this sum, together with interest and a commission, some of those banks, due to the distress into which their excessive circulation had thrown them, sometimes had no other means of satisfying this draft but by drawing a second set of bills either upon the same or upon some other correspondents in London. The same sum, or rather bills for the same sum, would in this manner sometimes make more than two or three journeys, with the debtor bank always paying the interest and commission upon the whole accumulated sum. Even those Scotch banks which never distinguished themselves by extreme recklessness were sometimes obliged to use this ruinous method.

The gold coin which was paid out either by the Bank of England or by the Scotch banks, in exchange for that part of their paper which was over and above what could be employed in the circulation of the country, was also over and above what could be employed in that circulation. It was therefore sometimes sent abroad in the shape of coin, sometimes melted down and sent abroad in the shape of bullion, and sometimes melted down and sold to the Bank of England at the high price of four pounds an ounce. It was only the newest, heaviest, and best pieces which were carefully picked out of the whole coin and either sent abroad or melted down. At home, and while they remained in the shape of coin, these heavy pieces were of no more value than the light ones. But they were of more value abroad, or when melted down into bullion at home. The Bank of England, despite their great annual coinage, found to their astonishment that there was every year the same scarcity of coin as there had been the year before. Despite the great quantity of good and new coin issued from the bank every year, the state of the coin, instead of growing better and better, became every year worse and worse. Every year they found themselves under the necessity of coining nearly the same quantity of gold as they had coined the year before. Due to the continual rise in the price of gold bullion (as a consequence of the continual wearing and clipping of the coin), the expense of this great annual coinage became every year greater and greater. The Bank of England, it is to be observed, by supplying its own vaults with coin, is indirectly obliged to supply the whole kingdom, into which coin is continually flowing from those vaults in many ways. Therefore, whatever coin was needed to support this excessive circulation of both Scotch and English paper money, whatever shortages (vacuities) this excessive circulation caused in the necessary coin of the kingdom, the Bank of England was obliged to supply them. The Scotch banks, no doubt, all paid very dearly for their own recklessness and inattention. But the Bank of England paid very dearly, not only for its own recklessness but for the much greater recklessness of almost all the Scotch banks.

The over-trading of some bold, perhaps reckless, entrepreneurs (projectors) in both parts of the united kingdom was the original cause of this excessive circulation of paper money.

What Banks Can Safely Lend

What a bank can properly advance to a merchant or any kind of business owner (undertaker) is not the whole capital with which he trades, nor even any considerable part of that capital. Instead, it is only that part of his capital which he would otherwise be obliged to keep by him unemployed, as ready money, to meet occasional demands for payment. If the paper money which the bank advances never exceeds this value, it can never exceed the value of the gold and silver which would necessarily circulate in the country if there were no paper money. It can never exceed the quantity which the circulation of the country can easily absorb and employ.

When a bank discounts for a merchant a real bill of exchange – one drawn by a real creditor upon a real debtor, and which, as soon as it becomes due, is actually paid by that debtor – it only advances to the merchant a part of the value which he would otherwise have to keep as idle cash. The payment of the bill, when it becomes due, replaces to the bank the value of what it had advanced, together with the interest. The bank’s vaults (coffers), as long as its dealings are confined to such customers, resemble a water pond: though a stream is continually running out, another is continually running in, fully equal to that which runs out. So, without any further care or attention, the pond always stays equally full, or very nearly so. Little or no expense should ever be necessary for refilling the vaults of such a bank.

A merchant, without over-trading, may frequently need a sum of ready money, even when he has no bills to discount. When a bank, besides discounting his bills, also advances him such sums on these occasions through his cash account (a line of credit), and accepts repayment in small amounts (piecemeal) as money comes in from the occasional sale of his goods (on the easy terms offered by Scottish banking companies), it entirely frees him from the necessity of keeping any part of his capital unemployed as ready cash. When such demands for payment actually come upon him, he can meet them sufficiently from his cash account. The bank, however, in dealing with such customers, ought to observe with great attention whether, in the course of some short period (four, five, six, or eight months, for example), the sum of the repayments it commonly receives from them is, or is not, fully equal to the sum of the advances it commonly makes to them.

• If, within such short periods, the sum of the repayments from certain customers is, on most occasions, fully equal to that of the advances, the bank may safely continue to deal with such customers. Though the stream of money continually running out from its vaults in this case may be very large, the stream continually running into them must be at least equally large. So, without any further care, those vaults are likely to always be equally full and hardly ever require any extraordinary expense to refill them.
• If, on the contrary, the sum of the repayments from certain other customers commonly falls very much short of the advances the bank makes to them, it cannot with any safety continue to deal with such customers, at least if they continue to deal with it in this manner. The stream continually running out from its vaults is necessarily much larger than that which is continually running in. So, unless they are refilled by some great and continual expense, those vaults must soon be completely exhausted.

The banking companies of Scotland, accordingly, were for a long time very careful to require frequent and regular repayments from all their customers. They did not care to deal with any person, whatever his fortune or credit might be, who did not make what they called “frequent and regular operations” with them. By this attention, besides saving almost entirely the extraordinary expense of refilling their vaults, they gained two other very considerable advantages:

1. First, this attention enabled them to make a reasonably good judgment about the thriving or declining circumstances of their debtors, without being obliged to look for any other evidence besides what their own books provided. People are generally either regular or irregular in their repayments according to whether their circumstances are either thriving or declining. A private individual who lends his money to perhaps half a dozen or a dozen debtors may, either by himself or his agents, observe and inquire both constantly and carefully into the conduct and situation of each of them. But a banking company, which lends money to perhaps five hundred different people, and whose attention is continually occupied by very different matters, can have no regular information concerning the conduct and circumstances of most of its debtors beyond what its own books provide. In requiring frequent and regular repayments from all their customers, the banking companies of Scotland probably had this advantage in view.

2. Secondly, by this attention, they secured themselves from the possibility of issuing more paper money than the circulation of the country could easily absorb and employ. When they observed that within moderate periods the repayments of a particular customer were on most occasions fully equal to the advances they had made to him, they could be assured that the paper money they had advanced to him had not at any time exceeded the quantity of gold and silver which he would otherwise have been obliged to keep by him for meeting occasional demands. Consequently, the paper money which they had circulated through him had not at any time exceeded the quantity of gold and silver which would have circulated in the country if there had been no paper money. The frequency, regularity, and amount of his repayments would sufficiently demonstrate that the amount of their advances had at no time exceeded that part of his capital which he would otherwise have been obliged to keep by him unemployed as ready cash – that is, for the purpose of keeping the rest of his capital in constant employment. It is this part of his capital only which, within moderate periods, is continually returning to every dealer in the shape of money (whether paper or coin) and continually going from him in the same shape. If the advances of the bank had commonly exceeded this part of his capital, the ordinary amount of his repayments could not, within moderate periods, have equaled the ordinary amount of its advances. The stream which, through his dealings, was continually running into the bank’s vaults could not have been equal to the stream which, through the same dealings, was continually running out. The advances of bank paper, by exceeding the quantity of gold and silver which he would have been obliged to keep by him for occasional demands (had there been no such advances), might soon come to exceed the whole quantity of gold and silver which would have circulated in the country if there had been no paper money (assuming commerce remained the same). Consequently, this would exceed the quantity which the circulation of the country could easily absorb and employ, and the excess of this paper money would immediately have returned upon the bank to be exchanged for gold and silver. This second advantage, though equally real, was perhaps not as well understood by all the different banking companies of Scotland as the first.

Limits of Bank Assistance and the Rise of “Drawing and Redrawing”

When, partly by the convenience of discounting bills and partly by that of cash accounts, the reputable traders of any country can be freed from the necessity of keeping any part of their capital by them unemployed as ready money, they can reasonably expect no further assistance from banks and bankers. Banks, when they have gone this far, cannot, consistently with their own interest and safety, go further. A bank cannot, in its own interest, advance to a trader the whole, or even most, of the circulating capital with which he trades. This is because, though that capital is continually returning to him as money and going from him in the same form, the whole of the returns is too distant from the whole of the outgoings. The sum of his repayments could not equal the sum of the bank’s advances within such moderate periods as suit the convenience of a bank. Still less could a bank afford to advance him any considerable part of his fixed capital – for example:

• The capital an iron forge owner employs in building his forge, smelting-house, workshops, and warehouses, and the dwelling-houses of his workmen.
• The capital a mine owner employs in sinking shafts, erecting engines for pumping out water, and making roads.
• The capital a person undertaking to improve land employs in clearing, draining, enclosing, manuring, and plowing uncultivated fields, and in building farmhouses with stables, granaries, etc. The returns from fixed capital are in almost all cases much slower than those from circulating capital. Such expenses, even when laid out with the greatest prudence and judgment, very seldom return to the business owner until after many years – a period far too distant to suit the convenience of a bank. Traders and other business owners may, no doubt, with great propriety, carry on a very considerable part of their projects with borrowed money. In justice to their creditors, however, their own capital ought, in this case, to be sufficient to ensure, so to speak, the capital of those creditors. It should make it extremely improbable that those creditors would incur any loss, even if the project’s success should fall very much short of the projectors’ expectations. Even with this precaution, money which is borrowed and meant not to be repaid for several years ought not to be borrowed from a bank. It ought to be borrowed upon bond or mortgage from private people who plan to live on the interest of their money without taking the trouble themselves to employ the capital, and who are therefore willing to lend that capital to people of good credit who are likely to keep it for several years. A bank, indeed, which lends its money without the expense of stamped paper or of attorneys’ fees for drawing bonds and mortgages, and which accepts repayment on the easy terms of the Scottish banking companies, would no doubt be a very convenient creditor to such traders and business owners. But such traders and business owners would surely be most inconvenient debtors to such a bank.

It is now more than twenty-five years since the paper money issued by the different banking companies of Scotland was fully equal to, or rather was somewhat more than fully equal to, what the circulation of the country could easily absorb and employ. Those companies, therefore, had long ago given all the assistance to the traders and other business owners of Scotland which it is possible for banks and bankers, consistently with their own interest, to give. They had even done somewhat more. They had over-traded a little and had brought upon themselves that loss, or at least that decrease in profit, which in this particular business never fails to accompany even the smallest degree of over-trading. Those traders and other business owners, having gotten so much assistance from banks and bankers, wished to get still more. The banks, they seem to have thought, could extend their credits to whatever sum might be wanted, without incurring any other expense besides that of a few reams of paper. They complained of the narrow-minded views and timid (dastardly) spirit of the directors of those banks, which did not, they said, extend their credits in proportion to the extension of the trade of the country – meaning, no doubt, by the extension of that trade, the extension of their own projects beyond what they could carry on either with their own capital or with what they had credit to borrow from private people in the usual way of bond or mortgage. The banks, they seem to have thought, were honor-bound to supply the deficiency and to provide them with all the capital they wanted to trade with. The banks, however, were of a different opinion. Upon their refusing to extend their credits, some of those traders resorted to a method which, for a time, served their purpose – though at a much greater expense, yet as effectively as the utmost extension of bank credits could have done. This method was no other than the well-known shift of drawing and redrawing bills of exchange – the trick to which unfortunate traders sometimes resort when they are on the brink of bankruptcy. The practice of raising money in this manner had been long known in England. During the course of the late war, when the high profits of trade offered a great temptation to over-trading, it is said to have been carried on to a very great extent. From England, it was brought into Scotland, where, in proportion to the very limited commerce and the very moderate capital of the country, it was soon carried on to a much greater extent than it ever had been in England.

The practice of drawing and redrawing is so well known to all business people that it may perhaps be thought unnecessary to give an account of it. But as this book may come into the hands of many people who are not business people, and as the effects of this practice upon the banking trade are not perhaps generally understood even by business people themselves, I shall try to explain it as clearly as I can.

The customs of merchants, which were established when the undeveloped laws of Europe did not enforce their contracts, and which during the last two centuries have been adopted into the laws of all European nations, have given such extraordinary privileges to bills of exchange that money is more readily advanced upon them than upon any other type of obligation. This is especially true when they are made payable within a short period, such as two or three months after their date. If, when the bill becomes due, the acceptor (the person who has agreed to pay it) does not pay it as soon as it is presented, he becomes bankrupt from that moment. The bill is protested (formally declared unpaid), and it returns upon the drawer (the person who originally issued the bill). If the drawer does not immediately pay it, he likewise becomes bankrupt. If, before it came to the person who presents it to the acceptor for payment, it had passed through the hands of several other persons who had successively advanced its contents to one another (either in money or goods), and who, to show that each had received those contents, had all endorsed it (written their names on the back), each endorser becomes in turn liable to the owner of the bill for its contents. If an endorser fails to pay, he too becomes bankrupt from that moment. Even if the drawer, acceptor, and endorsers of the bill should all be persons of doubtful credit, the shortness of the date still gives some security to the owner of the bill. Though all of them may be very likely to become bankrupts, it is a chance if they all become so in such a short time. A weary traveler might say to himself, “The house is shaky and will not stand very long; but it’s a chance if it falls tonight, and I will risk sleeping in it tonight.”

Suppose Trader A in Edinburgh draws a bill upon B in London, payable two months after date. In reality, B in London owes nothing to A in Edinburgh. But B agrees to accept A’s bill on the condition that before the payment term, A shall redraw upon B in London for the same sum, plus interest and a commission, another bill, also payable two months after date. Accordingly, before the end of the first two months, B redraws this bill upon A in Edinburgh. A, again, before the end of the second two months, draws a second bill upon B in London, also payable two months after date. Before the end of the third two months, B in London redraws upon A in Edinburgh another bill, also payable two months after date. This practice has sometimes gone on not only for several months but for several years, with the bill always returning upon A in Edinburgh, carrying the accumulated interest and commission of all the former bills. The interest was five percent per year, and the commission was never less than half a percent on each draft. Since this commission was repeated more than six times a year, whatever money A might raise by this method must necessarily have cost him something more than eight percent per year, and sometimes a great deal more, especially when the price of the commission happened to rise, or when he was obliged to pay compound interest upon the interest and commission of former bills. This practice was called raising money by circulation.

In a country where the ordinary profits of capital in most business projects are supposed to be between six and ten percent, it must have been a very fortunate speculation whose returns could not only repay the enormous expense at which the money was borrowed to carry it on, but also provide a good surplus profit to the entrepreneur (projector). Many vast and extensive projects, however, were undertaken and for several years carried on with no other funds to support them besides what was raised at this enormous expense. The entrepreneurs, no doubt, had in their golden dreams the most distinct vision of this great profit. Upon their awakening, however, either at the end of their projects or when they were no longer able to carry them on, they very seldom, I believe, had the good fortune to find it.

The bills which Trader A in Edinburgh drew upon B in London, he regularly discounted (cashed in early, for a fee) two months before they were due with some bank or banker in Edinburgh. The bills which B in London re-drew upon A in Edinburgh, he just as regularly discounted either with the Bank of England or with some other bankers in London. Whatever was advanced upon such circulating bills was, in Edinburgh, advanced in the paper money of the Scotch banks. In London, when they were discounted at the Bank of England, it was advanced in the paper of that bank. Though the bills upon which this paper had been advanced were all repaid in their turn as soon as they became due, the value which had been really advanced upon the first bill was never truly returned to the banks which advanced it. This was because, before each bill became due, another bill was always drawn for a somewhat greater amount than the bill which was soon to be paid. Discounting this other bill was essential for the payment of the one that was soon to be due. This payment, therefore, was altogether fictitious. The stream of money which, by means of these circulating bills of exchange, had once been made to run out from the vaults of the banks was never replaced by any stream which really ran into them.

The paper money which was issued upon these circulating bills of exchange amounted, on many occasions, to the whole fund intended for carrying on some vast and extensive project of agriculture, commerce, or manufactures. It was not merely for that part of the fund which, had there been no paper money, the entrepreneur would have been obliged to keep by him, unemployed and as ready cash, for meeting occasional demands. Most of this paper was, consequently, over and above the value of the gold and silver which would have circulated in the country had there been no paper money. It was therefore over and above what the circulation of the country could easily absorb and employ. On that account, it immediately returned to the banks to be exchanged for gold and silver, which the banks then had to find as best they could. It was a capital which these entrepreneurs had very artfully managed to draw from those banks – not only without their knowledge or deliberate consent, but for some time, perhaps, without their having the most distant suspicion that they had actually advanced it.

When two people who are continually drawing and redrawing upon one another discount their bills always with the same banker, he must immediately discover what they are about. He will see clearly that they are trading not with any capital of their own, but with the capital which he advances to them. But this discovery is not altogether so easy when they discount their bills sometimes with one banker and sometimes with another. It is also harder to detect when the same two persons do not constantly draw and redraw upon one another but occasionally involve a large circle of entrepreneurs who find it in their interest to assist one another in this method of raising money. They try to make it as difficult as possible to distinguish between a real and a fictitious bill of exchange – between a bill drawn by a real creditor upon a real debtor, and a bill for which there was properly no real creditor but the bank which discounted it, nor any real debtor but the entrepreneur who used the money. When a banker had even made this discovery, he might sometimes make it too late. He might find that he had already discounted the bills of those entrepreneurs to such a great extent that, by refusing to discount any more, he would necessarily make them all bankrupts. Thus, by ruining them, he might perhaps ruin himself. For his own interest and safety, therefore, he might find it necessary, in this very dangerous situation, to go on for some time. He would, however, try to withdraw gradually, and for that reason, make it increasingly difficult each day to get discounts. This was to force those entrepreneurs by degrees to turn to other bankers or to other methods of raising money, so that he himself might, as soon as possible, get out of the circle. The difficulties, accordingly, which the Bank of England, the principal bankers in London, and even the more prudent Scotch banks began to make about discounting (after a certain time, and when all of them had already gone too far) not only alarmed but enraged these entrepreneurs to the highest degree. Their own distress, of which this prudent and necessary reserve of the banks was, no doubt, the immediate cause, they called the distress of the country. This distress of the country, they said, was entirely owing to the ignorance, cowardice (pusillanimity), and bad conduct of the banks, which did not give sufficiently generous aid to the spirited undertakings of those who exerted themselves to beautify, improve, and enrich the country. It was the duty of the banks, they seemed to think, to lend for as long a time, and to as great an extent, as they might wish to borrow. The banks, however, by refusing in this manner to give more credit to those to whom they had already given a great deal too much, took the only method by which it was now possible to save either their own credit or the public credit of the country.

The Ayr Bank: A Case Study in Imprudent Banking

In the midst of this outcry and distress, a new bank was established in Scotland for the express purpose of relieving the distress of the country. The design was generous, but the execution was imprudent. The nature and causes of the distress which it meant to relieve were not, perhaps, well understood. This bank was more liberal than any other had ever been, both in granting cash accounts (lines of credit) and in discounting bills of exchange. With regard to bills of exchange, it seems to have made hardly any distinction between real bills (based on actual trade) and circulating bills (used for raising money), but to have discounted all equally. It was the stated principle of this bank to advance, upon any reasonable security, the whole capital which was to be employed in those improvements whose returns are the slowest and most distant, such as the improvements of land. To promote such improvements was even said to be the chief of the public-spirited purposes for which it was instituted. By its generosity in granting cash accounts and in discounting bills of exchange, it undoubtedly issued great quantities of its bank notes. But these bank notes, being mostly over and above what the circulation of the country could easily absorb and employ, returned upon it to be exchanged for gold and silver as fast as they were issued. Its vaults were never well filled. The capital which had been subscribed to this bank at two different subscriptions amounted to one hundred and sixty thousand pounds, of which only eighty percent was paid up. This sum ought to have been paid in several different installments. A great part of the proprietors (shareholders), when they paid in their first installment, opened a cash account with the bank. The directors, thinking themselves obliged to treat their own proprietors with the same generosity with which they treated all other men, allowed many of them to borrow upon this cash account what they paid in upon all their subsequent installments. Such payments, therefore, only put into one vault what had the moment before been taken out of another. But even if the vaults of this bank had been ever so well filled, its excessive circulation must have emptied them faster than they could have been refilled by any other method except the ruinous one of drawing bills upon London, and when the bill became due, paying it (together with interest and commission) by another draft upon the same place. Its vaults having been filled so very poorly, it is said to have been driven to this resource within a very few months after it began to do business. The estates of the proprietors of this bank were worth several millions, and by their subscription to the original bond or contract of the bank, were really pledged for answering all its engagements. By means of the great credit which so great a pledge necessarily gave it, it was, despite its too liberal conduct, enabled to carry on business for more than two years. When it was obliged to stop, it had about two hundred thousand pounds in bank notes in circulation. To support the circulation of these notes, which were continually returning upon it as fast as they were issued, it had been constantly in the practice of drawing bills of exchange upon London. The number and value of these bills were continually increasing, and when it stopped, amounted to upwards of six hundred thousand pounds. This bank, therefore, had, in little more than two years, advanced to different people upwards of eight hundred thousand pounds at five percent interest. Upon the two hundred thousand pounds which it circulated in bank notes, this five percent might perhaps be considered as clear gain, without any other deduction besides the expense of management. But upon upwards of six hundred thousand pounds, for which it was continually drawing bills of exchange upon London, it was paying, in interest and commission, upwards of eight percent. It was consequently losing more than three percent upon more than three-fourths of all its dealings.

The operations of this bank seem to have produced effects quite opposite to those which were intended by the particular persons who planned and directed it. They seem to have intended to support the “spirited undertakings” (as they considered them) which were at that time being carried on in different parts of the country. At the same time, by drawing all the banking business to themselves, they meant to supplant all the other Scotch banks, particularly those established in Edinburgh, whose hesitation in discounting bills of exchange had given some offense. This new bank, no doubt, gave some temporary relief to those entrepreneurs and enabled them to carry on their projects for about two years longer than they could otherwise have done. But it thereby only enabled them to get so much deeper into debt, so that when ruin came, it fell so much heavier both upon them and upon their creditors. The operations of this bank, therefore, instead of relieving, actually aggravated in the long run the distress which those entrepreneurs had brought both upon themselves and upon their country. It would have been much better for themselves, their creditors, and their country if most of them had been obliged to stop two years sooner than they actually did. The temporary relief, however, which this bank provided to those entrepreneurs proved a real and permanent relief to the other Scotch banks. All the dealers in circulating bills of exchange, which those other banks had become so hesitant to discount, turned to this new bank, where they were received with open arms. Those other banks, therefore, were enabled to get very easily out of that fatal circle, from which they could not otherwise have freed themselves without incurring a considerable loss, and perhaps too even some degree of discredit.

In the long run, therefore, the operations of this bank increased the real distress of the country which it meant to relieve, and effectively relieved from a very great distress those rivals whom it meant to supplant.

At the first setting up of this bank, some people thought that however fast its vaults might be emptied, it might easily refill them by raising money upon the securities of those to whom it had advanced its paper. Experience, I believe, soon convinced them that this method of raising money was by far too slow to answer their purpose. Coffers which originally were so poorly filled, and which emptied themselves so very fast, could be refilled by no other method but the ruinous one of drawing bills upon London, and when they became due, paying them by other drafts upon the same place with accumulated interest and commission. But even if they had been able by this method to raise money as fast as they wanted it, they still would have suffered a loss by every such operation, instead of making a profit. So, in the long run, they must have ruined themselves as a business company, though perhaps not as soon as by the more expensive practice of drawing and redrawing. They could still have made nothing by the interest on the paper money, which, being over and above what the circulation of the country could absorb and employ, returned upon them to be exchanged for gold and silver as fast as they issued it. For the payment of this, they themselves were continually obliged to borrow money. On the contrary, the whole expense of this borrowing – of employing agents to look out for people who had money to lend, of negotiating with those people, and of drawing the proper bond or assignment – must have fallen upon them and have been so much clear loss on the balance of their accounts. The project of refilling their vaults in this manner may be compared to that of a man who had a water pond from which a stream was continually running out, and into which no stream was continually running. He proposed to keep it always equally full by employing a number of people to go continually with buckets to a well some miles distant in order to bring water to refill it.

But even if this operation had proved not only practicable but profitable to the bank as a business company, the country could have derived no benefit from it. On the contrary, it must have suffered a very considerable loss by it. This operation could not increase in the smallest degree the quantity of money to be lent. It could only have turned this bank into a sort of general loan office for the whole country. Those who wanted to borrow would have had to apply to this bank instead of applying to the private persons who had lent the bank their money. But a bank which lends money perhaps to five hundred different people, most of whom its directors can know very little about, is not likely to be more judicious in the choice of its debtors than a private person who lends out his money among a few people whom he knows, and in whose sober and frugal conduct he thinks he has good reason to trust. The debtors of such a bank as that whose conduct I have been describing were likely, most of them, to be unrealistic (chimerical) entrepreneurs, the drawers and redrawers of circulating bills of exchange. They would employ the money in extravagant undertakings which, with all the assistance that could be given them, they would probably never be able to complete. And if these projects should be completed, they would never repay the expense they had really cost; they would never provide a fund capable of maintaining a quantity of labor equal to that which had been employed on them. The sober and frugal debtors of private persons, on the contrary, would be more likely to employ the borrowed money in sober undertakings which were proportioned to their capitals. These undertakings, though they might have less of the grand and the marvelous, would have more of the solid and the profitable. They would repay with a large profit whatever had been laid out upon them and would thus provide a fund capable of maintaining a much greater quantity of labor than that which had been employed on them. The success of this banking operation, therefore, without increasing in the smallest degree the capital of the country, would only have transferred a great part of it from prudent and profitable to imprudent and unprofitable undertakings.

Mr. Law’s Scheme

That the industry of Scotland languished for want of money to employ it was the opinion of the famous Mr. Law. By establishing a bank of a particular kind, which he seems to have imagined might issue paper to the amount of the whole value of all the lands in the country, he proposed to remedy this want of money. The Parliament of Scotland, when he first proposed his project, did not think proper to adopt it. It was afterwards adopted, with some variations, by the Duke of Orleans, at that time Regent of France. The idea of the possibility of multiplying paper money to almost any extent was the real foundation of what is called the Mississippi scheme, the most extravagant project both of banking and stock-jobbing (speculative trading in stocks) that perhaps the world ever saw. The different operations of this scheme are explained so fully, so clearly, and with so much order and distinctness by Mr. Du Verney, in his examination of the Political Reflections upon Commerce and Finances of Mr. Du Tot, that I shall not give any account of them. The principles upon which it was founded are explained by Mr. Law himself, in a discourse concerning money and trade, which he published in Scotland when he first proposed his project.

The impressive but unrealistic (visionary) ideas set forth in Mr. Law’s work and some other writings based on similar principles still continue to make an impression on many people. They have, perhaps, partly contributed to the excessive banking activity that has recently been complained of both in Scotland and in other places.

The Bank of England

The Bank of England is the largest bank that issues circulating paper money (bank of circulation) in Europe. It was officially established (incorporated) by an act of parliament, through a charter under the great seal, dated July 27, 1694. At that time, it advanced to the government the sum of £1,200,000 in exchange for an annuity (annual payment) of one hundred thousand pounds. This consisted of £96,000 a year in interest (at a rate of eight percent) and £4,000 a year for management expenses. The credit of the new government, established by the Revolution of 1688, must have been very low, we may believe, when it was obliged to borrow at such a high interest rate.

In 1697, the bank was allowed to enlarge its capital stock by an addition (“engraftment”) of £1,001,171 10s. Its whole capital stock, therefore, amounted at this time to £2,201,171 10s. This addition is said to have been for the support of public credit. In 1696, government IOUs (“tallies”) had been discounted by 40, 50, and even 60 percent, and bank notes were at a 20 percent discount. During the great recoinage of silver, which was happening at this time, the bank had thought it proper to temporarily stop paying its notes in specie (gold or silver), which necessarily caused their discredit.

Following the 7th of Queen Anne, chapter vii, the bank advanced and paid into the treasury (exchequer) the sum of £400,000. This made a total of £1,600,000 which it had advanced based on its original annuity of £96,000 interest and £4,000 for management expenses. In 1708, therefore, the government’s credit was as good as that of private persons, since it could borrow at six percent interest – the common legal and market rate of those times. In accordance with the same act, the bank cancelled treasury bills (exchequer bills) to the amount of £1,775,027 17s. 10½d. (which were paying 6 percent interest) and was at the same time allowed to take in subscriptions for doubling its capital. In 1708, therefore, the capital of the bank amounted to £4,402,343, and it had advanced to the government the sum of £3,375,027 17s. 10½d.

By a call for 15 percent more capital from its shareholders in 1709, £656,204 1s. 9d. was paid in and added to the stock. By another call for 10 percent in 1710, £501,448 12s. 11d. was added. As a consequence of these two calls, therefore, the bank’s capital amounted to £5,559,995 14s. 8d.

Following the 3rd of George I, chapter 8, the bank delivered up two million pounds of treasury bills to be cancelled. It had at this time, therefore, advanced to the government £5,375,027 17s. 10d. Following the 8th of George I, chapter 21, the bank purchased South Sea Company stock to the amount of £4,000,000. In 1722, as a consequence of the subscriptions it had taken in to enable it to make this purchase, its capital stock was increased by £3,400,000. At this time, therefore, the bank had advanced to the public £9,375,027 17s. 10½d., while its capital stock (the sum on which it paid dividends to its proprietors) amounted only to £8,959,995 14s. 8d. It was on this occasion that the sum which the bank had advanced to the public (and for which it received interest) first began to exceed its capital stock. In other words, the bank began to have an “undivided capital” (retained earnings or reserves) over and above its “divided capital” (shareholder equity). It has continued to have an undivided capital of the same kind ever since. In 1746, the bank had, on different occasions, advanced to the public £11,686,800, and its divided capital had been raised by different calls and subscriptions to £10,780,000. The state of these two sums has continued to be the same ever since. Following the 4th of George III, chapter 25, the bank agreed to pay the government £110,000 for the renewal of its charter, without interest or repayment. This sum, therefore, did not increase either of those two other sums (its advances to the public or its divided capital).

The dividend (payment to shareholders) of the bank has varied according to the variations in the rate of interest it has received at different times for the money it had advanced to the public, as well as according to other circumstances. This rate of interest has gradually been reduced from 8 percent to 3 percent. For some years past, the bank dividend has been at 5½ percent.

The stability of the Bank of England is equal to that of the British government. All that it has advanced to the public must be lost before its creditors (those who hold its notes or deposits) can sustain any loss. No other banking company in England can be established by act of parliament, nor can it consist of more than six members (a restriction to protect the Bank of England’s monopoly). It acts not only as an ordinary bank but as a great engine of state.

• It receives and pays most of the annuities (annual payments) due to the creditors of the public.
• It circulates treasury bills (Exchequer bills).
• It advances to the government the annual amount of the land and malt taxes, which are frequently not paid up until some years later. In these different operations, its duty to the public may sometimes have obliged it, without any fault of its directors, to overstock the circulation with paper money. It also discounts merchants’ bills and has, on several different occasions, supported the credit of the principal business houses, not only of England but also of Hamburgh and Holland. On one occasion, in 1763, it is said to have advanced for this purpose, in one week, about £1,600,000, a great part of it in bullion (gold or silver bars). I do not, however, claim to guarantee either the greatness of the sum or the shortness of the time. On other occasions, this great company has been reduced to the necessity of paying in sixpences (small silver coins, a sign of difficulty).

How Banking Increases a Country’s Industry

It is not by increasing the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country. That part of his capital which a dealer is obliged to keep by him unemployed, as ready money, for meeting occasional demands, is so much dead stock. As long as it remains in this situation, it produces nothing either to him or to his country. The judicious operations of banking enable him to convert this dead stock into active and productive stock:

• Into materials to work upon.
• Into tools to work with.
• Into provisions and subsistence to work for. In short, into stock which produces something both to himself and to his country. The gold and silver money which circulates in any country, and by means of which the produce of its land and labor is annually circulated and distributed to the proper consumers, is, in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country, which produces nothing for the country. The judicious operations of banking, by substituting paper in the place of a great part of this gold and silver, enable the country to convert a great part of this dead stock into active and productive stock – into stock which produces something for the country. The gold and silver money which circulates in any country may very properly be compared to a highway. While it circulates and carries to market all the grass and corn of the country, the highway itself produces not a single blade of grass or stalk of corn. The judicious operations of banking, by providing (if I may be allowed so bold a metaphor) a sort of “wagon-way through the air,” enable the country to convert, as it were, a great part of its highways into good pastures and cornfields, and thereby to increase very considerably the annual produce of its land and labor. The commerce and industry of the country, however, it must be acknowledged, though they may be somewhat increased, cannot be altogether so secure when they are thus, as it were, suspended upon the “Daedalian wings” of paper money (referring to the mythical Daedalus, whose wax wings were unreliable) as when they travel about upon the solid ground of gold and silver. Over and above the accidents to which they are exposed from the unskillfulness of the conductors of this paper money, they are liable to several others from which no prudence or skill of those conductors can guard them.

An unsuccessful war, for example, in which the enemy got possession of the capital, and consequently of the treasure which supported the credit of the paper money, would cause much greater confusion in a country where the whole circulation was carried on by paper than in one where most of it was carried on by gold and silver. The usual instrument of commerce having lost its value, no exchanges could be made except either by barter or upon credit. All taxes having been usually paid in paper money, the ruler (prince) would not have the means either to pay his troops or to furnish his storehouses (magazines). The state of the country would be much more difficult to recover (irretrievable) than if most of its circulation had consisted of gold and silver. A ruler, anxious to maintain his territories at all times in the state in which he can most easily defend them, ought, on this account, to guard not only against that excessive multiplication of paper money which ruins the very banks that issue it, but even against that multiplication of it which enables banks to fill most of the circulation of the country with it.

Two Branches of Circulation

The circulation of every country may be considered as divided into two different branches:

1. The circulation of the dealers with one another.
2. The circulation between the dealers and the consumers. Though the same pieces of money, whether paper or metal, may be employed sometimes in one circulation and sometimes in the other, yet as both are constantly going on at the same time, each requires a certain stock of money of one kind or another to carry it on. The value of the goods circulated between the different dealers can never exceed the value of those circulated between the dealers and the consumers, because whatever is bought by the dealers is ultimately destined to be sold to the consumers.

• The circulation between dealers, as it is carried on by wholesale, generally requires a pretty large sum for every particular transaction.
• That between dealers and consumers, on the contrary, as it is generally carried on by retail, frequently requires but very small sums; a shilling, or even a halfpenny, is often sufficient. But small sums circulate much faster than large ones. A shilling changes masters more frequently than a guinea, and a halfpenny more frequently than a shilling. Therefore, though the annual purchases of all consumers are at least equal in value to those of all dealers, they can generally be transacted with a much smaller quantity of money. The same pieces, by a more rapid circulation, serve as the instrument of many more purchases of the retail kind than of the wholesale kind.

Paper money may be so regulated as either to confine itself very much to the circulation between different dealers, or to extend itself also to a great part of that between dealers and consumers.

• Where no bank notes are circulated under ten pounds’ value, as in London, paper money confines itself very much to the circulation between dealers. When a ten-pound bank note comes into the hands of a consumer, he is generally obliged to change it at the first shop where he needs to purchase five shillings’ worth of goods, so that it often returns into the hands of a dealer before the consumer has spent even a fortieth part of the money.
• Where bank notes are issued for sums as small as twenty shillings, as in Scotland, paper money extends itself to a considerable part of the circulation between dealers and consumers. Before the act of parliament which put a stop to the circulation of ten-shilling and five-shilling notes, it filled an even greater part of that circulation.
• In the currencies of North America, paper was commonly issued for as small a sum as a shilling and filled almost the whole of that circulation. In some paper currencies of Yorkshire, it was issued even for as small a sum as sixpence.

Where the issuing of bank notes for very small sums is allowed and commonly practiced, many people of humble means (mean people) are both enabled and encouraged to become bankers. A person whose promissory note for five pounds, or even for twenty shillings, would be rejected by everybody, will get it to be received without question when it is issued for so small a sum as sixpence. But the frequent bankruptcies to which such poor (beggarly) bankers must be liable may cause very considerable inconvenience, and sometimes even a very great calamity, to many poor people who had received their notes in payment.

It would be better, perhaps, if no bank notes were issued in any part of the kingdom for a smaller sum than five pounds. Paper money would then probably confine itself, in every part of the kingdom, to the circulation between different dealers, much as it does at present in London (where no bank notes are issued under ten pounds’ value). Five pounds is, in most parts of the kingdom, a sum which, though it will purchase perhaps little more than half the quantity of goods as ten pounds in London, is considered just as significant and is as seldom spent all at once as ten pounds are amidst the lavish expense of London.

Where paper money, it is to be observed, is pretty much confined to the circulation between dealers and dealers (as at London), there is always plenty of gold and silver. Where it extends itself to a considerable part of the circulation between dealers and consumers (as in Scotland, and still more in North America), it banishes gold and silver almost entirely from the country. Almost all the ordinary transactions of its internal commerce are thus carried on by paper. The suppression of ten-shilling and five-shilling bank notes somewhat relieved the scarcity of gold and silver in Scotland; and the suppression of twenty-shilling notes would probably relieve it still more. Those metals are said to have become more abundant in America since the suppression of some of their paper currencies. They are said, likewise, to have been more abundant before the institution of those currencies.

Though paper money should be pretty much confined to the circulation between dealers and dealers, banks and bankers might still be able to give nearly the same assistance to the industry and commerce of the country as they had done when paper money filled almost the whole circulation. The ready money which a dealer is obliged to keep by him for meeting occasional demands is destined entirely for the circulation between himself and other dealers from whom he buys goods. He has no occasion to keep any by him for the circulation between himself and the consumers, who are his customers and who bring ready money to him, instead of taking any from him. Therefore, even if no paper money were allowed to be issued except for such sums as would confine it pretty much to the circulation between dealers and dealers, banks and bankers might still be able to relieve most of those dealers from the necessity of keeping any considerable part of their capital by them, unemployed and as ready money, for meeting occasional demands. They might still be able to give the utmost assistance which banks and bankers can, with propriety, give to traders of every kind.

Regulation of Banking and Natural Liberty

To restrain private people, it may be said, from receiving in payment the bank notes of a banker for any sum, whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes when all his neighbors are willing to accept them, is a clear violation of that natural liberty which it is the proper business of law not to infringe but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those uses of the natural liberty of a few individuals which might endanger the security of the whole society are, and ought to be, restrained by the laws of all governments – of the most free as well as of the most tyrannical (despotical). The obligation of building party walls between houses, to prevent the spread of fire, is a violation of natural liberty exactly of the same kind as the regulations of the banking trade which are here proposed.

A paper money consisting of bank notes, issued by people of undoubted credit, payable upon demand without any condition, and in fact always readily paid as soon as presented, is, in every respect, equal in value to gold and silver money, since gold and silver money can at any time be had for it. Whatever is either bought or sold for such paper must necessarily be bought or sold as cheaply as it could have been for gold and silver.

It has been said that the increase of paper money, by increasing the quantity and consequently diminishing the value of the whole currency, necessarily increases the money price of commodities. But as the quantity of gold and silver which is taken from the currency is always equal to the quantity of paper which is added to it, paper money does not necessarily increase the quantity of the whole currency. From the beginning of the last century to the present time, food provisions were never cheaper in Scotland than in 1759, though, due to the circulation of ten-shilling and five-shilling bank notes, there was then more paper money in the country than at present. The proportion between the price of provisions in Scotland and that in England is the same now as before the great multiplication of banking companies in Scotland. Corn is, on most occasions, fully as cheap in England as in France, though there is a great deal of paper money in England and hardly any in France.

In 1751 and 1752, Mr. Hume published his Political Discourses. This was around the time that paper money greatly increased in Scotland. Prices for food and other essentials rose noticeably. However, this price increase was likely due to bad weather and poor harvests, not because there was more paper money.

When Paper Money Loses Value

Paper money would indeed be less valuable than gold and silver if certain conditions applied. For example, its value would fall if:

• You could only cash it in based on the goodwill of the people who issued it.
• Getting paid depended on a condition that you, the holder of the note, couldn’t always meet.
• You couldn’t cash it in for several years, and it didn’t pay any interest during that waiting time.

In such cases, paper money would definitely be worth less than gold and silver. How much less would depend on:

• How difficult or uncertain it seemed to get immediate payment.
• How long you had to wait to get paid.

The “Optional Clause” in Scottish Banking

A few years ago, banks in Scotland used to include something called an Optional Clause in their banknotes. This clause meant the bank promised to pay the bearer of the note in one of two ways:

1. As soon as the note was presented for payment.
2. Or, if the bank directors chose, six months after the note was presented. If payment was delayed for six months, the bank would also pay the legal interest for that period.

Sometimes, the directors of these banks would use this optional clause. If people came asking for gold and silver in exchange for many banknotes, the banks might threaten to delay payment for six months. They did this unless the people agreed to take only part of what they were asking for.

At that time, these banknotes with uncertain payment made up most of Scotland’s currency. This uncertainty naturally made the paper money less valuable than gold and silver coins. This problem was most common between 1762 and 1764.

Here’s an example:

• The exchange rate between London and Carlisle (a town in England) was normal, meaning money traded at its proper value.
• But the exchange rate between London and Dumfries (a town in Scotland, not far from Carlisle) could be 4% lower for Dumfries.
• Why the difference? In Carlisle, bills were paid in gold and silver. In Dumfries, they were paid in Scottish banknotes.
• The uncertainty of exchanging these Scottish notes for actual gold and silver made them worth 4% less than coin.

Eventually, the same law that banned small banknotes (for ten and five shillings) also got rid of this optional clause. This action helped restore the exchange rate between England and Scotland to its natural level, determined by trade and money transfers.

Paper Money Issues in Yorkshire

In Yorkshire, England, there were also problems with paper money. For very small sums, like sixpence, there was sometimes a condition for payment. The person holding the note might have to provide change for a guinea (a much larger gold coin) to the person who issued the small note.

This was often a very difficult condition for people to meet. As a result, this type of paper money became less valuable than gold and silver. Parliament passed an act declaring such clauses illegal. Just like in Scotland, this act also banned all paper notes payable to the bearer that were worth less than twenty shillings.

North American Colonial Paper Money

The paper money in North America was different. It wasn’t like bank notes that could be cashed on demand. Instead, it was government-issued paper.

• Payment was not due until several years after the paper was issued.
• Colonial governments did not pay any interest to the people holding this paper.
• However, they declared this paper to be legal tender, meaning it had to be accepted as payment for its full face value.

Let’s think about this. Even if we assume the colonial government’s promise to pay was perfectly reliable, the system was unfair. For example, imagine a country where the usual interest rate is 6%. In that situation, £100 that you’ll receive 15 years from now is only worth a little more than £40 in cash today.

So, forcing a creditor (someone owed money) to accept this delayed paper money as full payment for a £100 debt that was originally made in cash was extremely unjust. Few governments in supposedly free countries have perhaps ever tried something so unfair.

It clearly seems to have been, as Dr. Douglas honestly stated, a plan by dishonest debtors to cheat the people they owed money to.

The government of Pennsylvania, when it first issued paper money in 1722, tried to make its paper as valuable as gold and silver. They did this by passing laws that penalized anyone who charged different prices for goods depending on whether they were paid in colonial paper or in gold and silver. This rule was just as oppressive as the system it was trying to support, but much less effective.

A law can force people to accept a shilling as payment for a guinea in a legal sense. For instance, courts might rule that a debtor who offers a shilling for a guinea debt has legally paid it. But no law can force a seller, who is free to set their own prices, to accept a shilling as being worth the same as a guinea when selling their goods.

Despite these kinds of regulations, the exchange rates with Great Britain showed the true value. In some colonies, £100 sterling (British money) was sometimes considered equal to £130 of their paper currency. In other colonies, it was as high as £1100 in paper currency. This difference in value happened because:

• Different colonies issued different amounts of paper money.
• The time until final payment and the likelihood of that payment also varied.

Therefore, the Act of Parliament that declared future paper money issued in the colonies could not be legal tender was a very fair law. The colonies complained about it unjustly.

Pennsylvania’s More Moderate Approach

Pennsylvania was always more careful about how much paper money it issued compared to other colonies. Because of this, its paper currency is said to have never dropped below the value of the gold and silver that was used as money in the colony before paper was introduced.

Before issuing paper money, Pennsylvania had already changed the official value of its coins. By an act of its assembly, 5 shillings sterling was ordered to be accepted as 6 shillings and 3 pence in the colony, and later as 6 shillings and 8 pence. So, a pound in Pennsylvania currency, even when it was made of gold and silver, was already worth over 30% less than a pound sterling. When this currency was converted to paper, it rarely fell much further below that 30% mark.

The stated reason for increasing the official value of coins was to prevent gold and silver from being exported. The idea was that if the same amount of metal was worth more in the colony than in Great Britain, people would keep it in the colony. However, this didn’t work. The price of all goods imported from Great Britain rose in exact proportion to the increase in the coin’s official value. So, gold and silver were exported just as quickly as before.

The Value from Tax Payments

The paper money of each colony gained some extra value because it could be used to pay provincial taxes at its full face value. This was true regardless of when the money was supposed to be finally paid off or how likely that payment was.

This added value was greater or smaller depending on a key factor:

• How much paper money was issued compared to the amount needed to pay the taxes in that specific colony.
• In all colonies, the amount of paper money issued was far greater than what could be used for paying taxes.

How a Ruler Can Create Value for Paper Money

Imagine a ruler who declared that a certain part of taxes had to be paid using a specific kind of paper money. This action alone could give that paper money some value. This would be true even if the final payment of that paper money depended entirely on the ruler’s whim.

If the bank (or entity) issuing this paper was careful to keep the amount in circulation slightly below what was easily needed for these tax payments, the demand for the paper could become very high. It might even trade at a premium, meaning it would sell for more in the market than the actual amount of gold or silver it was issued for.

Some people use this idea to explain what is called the Agio of the Bank of Amsterdam. The “Agio” refers to the higher value of bank money compared to regular currency in Amsterdam. They claim this happened because this bank money, which supposedly couldn’t be withdrawn from the bank whenever the owner wanted, was required for paying most foreign bills of exchange (international trade payments). These payments had to be made by transferring funds in the bank’s record books.

The argument is that the bank directors were careful to keep the total amount of this special bank money always below the amount needed for these transactions. This scarcity, they say, is why bank money sold at a premium, or had an “agio” of 4 or 5 percent above the same stated amount in regular gold and silver currency. However, as we will see later, this explanation about the Bank of Amsterdam is largely a myth.

Devalued Paper Does Not Devalue Gold and Silver

When paper money becomes less valuable than gold and silver coins, it does not mean that gold and silver themselves have become less valuable. It does not cause the same amount of gold or silver to buy fewer other goods.

The relationship between the value of gold and silver and the value of other goods always depends on two main things:

1. How rich or poor the mines are that supply gold and silver to the world market at any given time.
2. The amount of labor needed to bring a certain quantity of gold and silver to market, compared to the amount of labor needed to bring a certain quantity of other goods to market.

This relationship does not depend on the type or amount of any specific paper money used in a particular country.

Banking Freedom and Public Security

If certain rules are in place, the banking business can be perfectly free while remaining safe for the public. These rules are:

• Banks should be prevented from issuing very small banknotes (notes payable to the bearer for small sums).
• Banks must be required to immediately and unconditionally pay their banknotes in coin as soon as they are presented.

The recent increase in the number of banking companies in both parts of the United Kingdom has alarmed many people. However, instead of reducing public safety, this increase actually makes the public more secure. Here’s why:

• More Caution: It forces all banks to be more careful in how they operate. They must avoid issuing too many banknotes compared to the cash they have, to protect themselves from “runs.” A run happens when many people demand cash for their notes at once, which rival banks might encourage.
• Limited Circulation: It keeps the circulation of each bank’s notes within a smaller geographic area and reduces the total number of notes any single bank has out.
• Less Impact from Failures: By dividing the entire money circulation into more parts, the failure of one single bank becomes less damaging to the public. Bank failures are accidents that will inevitably happen sometimes.
• Better Customer Service: This free competition also forces all bankers to be more generous and fair in their dealings with customers. If they are not, their rivals might take their customers away.

In general, if any type of business or any specific job is good for the public, then the freer and more widespread the competition, the better it will be for everyone.

CHAPTER III: OF THE ACCUMULATION OF CAPITAL, OR OF PRODUCTIVE AND UNPRODUCTIVE LABOUR

There are two kinds of labor.

1. One kind adds to the value of the object it works on.
2. The other kind has no such effect.

We can call the first kind productive labor because it produces value. We can call the second kind unproductive labor.

For example, the work of a manufacturer (like a factory worker) generally adds value to the materials they work with. This added value covers the cost of their own living (wages) and their employer’s profit. Even though the employer pays the manufacturer’s wages upfront, it doesn’t actually cost the employer anything in the end. The value of those wages is usually recovered, along with a profit, in the higher value of the product the manufacturer made.

On the other hand, the labor of a domestic servant adds no value to anything. The money spent on maintaining a domestic servant is never recovered.

• A person becomes rich by employing many manufacturers.
• A person becomes poor by maintaining many domestic servants.

However, the labor of a domestic servant still has its own value and deserves to be paid, just like the labor of a manufacturer. But there’s a key difference:

• The manufacturer’s labor becomes fixed and real in a specific item or a sellable product. This product lasts for some time, even after the labor is finished. It’s like a certain amount of labor is saved and stored up, ready to be used if needed on another occasion. That product, or its price, can later set in motion an amount of labor equal to what originally created it.
• The domestic servant’s labor, however, does not become fixed or real in any specific item or sellable product. Their services usually disappear the moment they are performed. They seldom leave any trace or value behind for which an equal amount of service could be obtained later.

Many Respected Professions are “Unproductive” in This Sense

The labor of some of the most respected groups in society is like that of domestic servants: it doesn’t produce any lasting value. It doesn’t become fixed or real in any permanent object or sellable product that lasts after the work is done, and for which an equal amount of labor could later be obtained.

Consider these examples:

• The sovereign (the ruler of a country), along with all the officials of justice and war who serve under the sovereign.
• The entire army and navy.

These are all unproductive laborers in this specific economic sense. They are servants of the public. They are supported by a part of the yearly output created by the work of other people. Their service – no matter how honorable, useful, or necessary – produces nothing that can later be exchanged for an equal amount of service. The protection, security, and defense they provide for the country this year will not buy protection, security, and defense for the next year.

In the same category, we must include some of the most serious and important professions, as well as some of the most lighthearted ones:

• Clergy (churchmen)
• Lawyers
• Physicians (doctors)
• Writers and academics of all kinds
• Actors, comedians, musicians, opera singers, opera dancers, etc.

The work of even the least important of these people has a certain value. This value is determined by the same principles that determine the value of any other kind of labor. And the work of the noblest and most useful among them produces nothing that could later buy or get an equal amount of labor in return. Like an actor’s speech, an orator’s passionate address, or a musician’s melody, the work of all these people vanishes the very instant it is created.

How Unproductive Labor Affects Future Wealth

Everyone in a country – productive laborers, unproductive laborers, and even those who do not labor at all – is supported by the annual produce of the country’s land and labor. This annual produce, no matter how large, is never infinite; it has limits.

Therefore, the proportion of this annual produce used in any given year to support unproductive hands matters greatly:

• If a smaller proportion of the produce goes to unproductive hands, more will remain for productive hands. Consequently, the next year’s produce will likely be larger.
• If a larger proportion of the produce goes to unproductive hands, less will remain for productive hands. Consequently, the next year’s produce will likely be smaller.

This is because the entire annual produce (except for things that grow naturally without human effort, like wild berries) is the result of productive labor.

How the Annual Produce Is Divided

The entire annual output of a country’s land and labor is ultimately meant to supply what its inhabitants consume and to provide them with an income (revenue). However, when this output first comes from the ground or from the hands of productive workers, it naturally splits into two parts:

1. Replacing Capital: One part, often the largest, is first used to replace capital. This means renewing the food, materials, and finished goods that were used up from an existing stock of capital.
2. Constituting Revenue: The other part is used to form revenue. This revenue can be:
   • Profit for the owner of the capital.
   • Rent for someone else, like a landowner.

Let’s look at examples:

• Farming: Part of a farm’s produce replaces the farmer’s capital (seeds, tools, wages for farmhands). The other part pays the farmer’s profit and the landlord’s rent. Both profit and rent are forms of revenue.
• Manufacturing: Similarly, part of a large factory’s output replaces the capital of the business owner (materials, machinery upkeep, wages). The other part pays the owner’s profit, which is their revenue.

Capital Employs Only Productive Labor

The part of a country’s annual produce that replaces capital is never immediately used to support anyone but productive hands. It only pays the wages of productive labor.

However, the part that is immediately intended to be revenue (like profit or rent) can be used to support either productive or unproductive hands, as the receiver chooses.

How Individuals Use Their Wealth

When a person uses part of their wealth as capital, they always expect to get it back, along with a profit. Therefore, they use this capital to pay only productive workers. After this wealth has served as capital for the employer, it becomes revenue (wages) for those productive workers.

Whenever a person uses any part of their wealth to support unproductive hands (like hiring a domestic servant for personal convenience), that part is immediately taken away from their capital. It is moved into the fund of money they keep for their immediate personal spending and consumption, not for investment.

Unproductive workers, and people who do not work at all, are all supported by revenue. This revenue comes from two main places:

1. Dedicated Revenue: This is the part of the country’s annual output that is specifically intended to be income for certain people. This income could be rent from owning land or profits from owning capital (like a business or investments).
2. Surplus from Capital-Replacing Funds: This is the part of the output originally meant to replace capital and pay only productive workers. However, when productive workers receive their wages, any money they have left over after covering their basic needs can be used to support either productive or unproductive activities.

How Everyone Contributes to Supporting Unproductive Labor

It’s not just wealthy landlords or rich merchants who support unproductive labor. Even an ordinary worker, if their wages are decent, might:

• Hire a domestic servant (an unproductive laborer).
• Go to a play or a puppet show, thereby helping to support entertainers (another group of unproductive laborers).
• Pay taxes, which help to support government employees and officials. These roles are often honorable and useful but are still considered unproductive in this specific economic sense.

However, it’s important to remember this: no part of the annual produce that was originally meant to replace capital is used to support unproductive workers until after it has fully funded all the productive labor it was intended to support. A worker must first earn their wages by doing their job. Only then can they use any leftover portion of those wages for other purposes.

This leftover part is usually small for most productive workers. They typically don’t have a lot of spare income. However, because there are so many productive workers, their small individual contributions (like through taxes) can add up to a significant amount.

Despite this, the rent from land and the profits from capital are the main sources of income that support unproductive workers. The owners of land and capital generally have the most spare revenue. These owners could choose to use their spare revenue to support either productive or unproductive workers. However, they often seem to prefer supporting the latter. For example, the spending of a great lord usually feeds more people who are idle than people who are industrious. A rich merchant, even though their invested capital supports only industrious, productive workers, often uses their personal revenue (their profits) to support the same kinds of idle people that a great lord does.

National Wealth and the Mix of Labor

The balance between productive and unproductive workers in a country depends heavily on one key factor. This factor is the proportion between two parts of the annual national output:

1. The part that, as soon as it’s produced (from the land or by productive workers), is set aside to replace capital.
2. The part that is set aside to become revenue (either as rent or as profit).

This proportion is very different in rich countries compared to poor countries.

Capital and Revenue: Rich Countries vs. Ancient Times

In Modern, Wealthy European Countries:

• Land: A very large share, often the largest part, of what the land produces is used to replace the capital of the wealthy and independent farmer. The rest of the produce pays the farmer’s profits and the landlord’s rent.
• Trade and Manufacturing: Great amounts of capital are currently invested in trade and manufacturing.

In Ancient Times (Feudal Government):

• Land: Only a very small portion of the land’s produce was needed to replace the capital used in farming. This capital was usually just a few basic farm animals. These animals were often fed by whatever grew naturally on uncultivated land and could almost be considered part of that natural produce. This meager capital generally belonged to the landlord, who lent it to the people working the land.
• Essentially, all the rest of the produce also belonged to the landlord, either as rent for the land or as profit on this tiny amount of capital. The people working the land were often bondmen (like serfs), meaning their bodies and everything they owned were the landlord’s property.
• Those who weren’t bondmen were tenants who could be evicted at any time. Even though the rent they paid might have sounded small, it usually amounted to the entire produce of the land. Their lord could demand their labor during peacetime and their military service during wartime. Even if they lived away from his house, they were just as dependent on him as the servants who lived with him. The entire produce of the land effectively belongs to whoever can control the labor and service of everyone it supports.

The Shift Over Time:

• In modern Europe, a landlord’s share of the land’s produce is rarely more than a third, and sometimes not even a fourth. However, because farming has improved so much, the land produces far more than it did in ancient times. So, this smaller share (one-third or one-fourth) of today’s annual produce is actually three or four times greater than the entire produce was back then.

• As farming improves, rent increases if you consider the total area of land. However, rent decreases as a proportion of the total amount produced by the land.

• Trade and Manufacturing (Ancient): In ancient times, there was little trade. The few simple and rough goods that were manufactured required very small amounts of capital.

• However, these small investments must have generated very large profits. The interest rate on money was never less than ten percent, so profits had to be high enough to cover such high interest.

• Trade and Manufacturing (Present): Today, in the developed parts of Europe, the interest rate is no higher than six percent. In some of the most developed areas, it’s as low as four, three, or even two percent.

• Although the total income people get from the profits of capital is always much greater in rich countries than in poor ones, this is because the total amount of capital is much greater. In proportion to the amount of capital invested, profits are generally much lower now.

More Capital Means More Productive Labor

So, in rich countries, the part of the annual output that is set aside to replace capital is not only much larger in absolute terms than in poor countries. It also makes up a much greater share of the total output compared to the part that immediately becomes revenue (as rent or profit).

This means that the funds available to support productive labor are much greater in rich countries than in poor ones. These funds for productive labor also form a much larger proportion compared to those funds (revenue) that could support either productive or unproductive workers but tend to be used for the latter.

How This Shapes a Nation’s Character: Industry vs. Idleness

The proportion between these different funds – capital-replacing funds versus revenue funds – inevitably shapes the general character of a country’s people regarding industry or idleness.

• We are more industrious than our ancestors. This is because today, the funds available to support industry are much greater, relative to the funds likely to be used to support idleness, than they were two or three centuries ago.
• Our ancestors were often idle because there wasn’t enough encouragement (funding and opportunity) for industry. As the proverb says, “It is better to play for nothing than to work for nothing.”

Examples from Different Towns and Cities:

• Industrial Towns: In towns focused on trade and manufacturing, where the working class is mainly supported by the employment of capital, people are generally industrious, self-disciplined, and successful. This is seen in many English towns and most Dutch towns.
• Revenue-Supported Towns: In towns that are mainly supported by the spending of a royal court (either permanently or occasionally), the working class is chiefly supported by the spending of revenue. These people are often idle, undisciplined, and poor. Examples include Rome, Versailles, Compiegne, and Fontainebleau in France.
• French Parliament Towns: If you exclude Rouen and Bordeaux, there is little trade or industry in any of the French towns that host regional parliaments. The working people there are mainly supported by the spending of judges and those who come for legal cases. As a result, they are generally idle and poor.
  • Rouen and Bordeaux are exceptions because of their locations. Rouen is a natural entry point for goods going to Paris. Bordeaux is a major port for exporting wine from a rich wine-growing region. These advantageous locations attract large amounts of capital, which in turn creates jobs and industry.
  • In other French parliament towns, very little capital seems to be used beyond what’s needed to supply their own local needs. This means they use the smallest amount of capital possible.
• Major Capitals like Paris, Madrid, and Vienna: Much of the capital in these cities is also focused on supplying their own consumption. Paris is the most industrious of these three, but it mainly serves as its own biggest market for the goods manufactured there.
• Trading Court Cities: London, Lisbon, and Copenhagen are perhaps the only three cities in Europe that are both permanent homes to a royal court and major trading cities. They trade not only for their own needs but also for other cities and countries. All three have excellent locations that naturally make them centers for distributing goods to distant places.
• Challenges in Revenue-Heavy Cities: In a city where a lot of revenue is spent (like a court city), it’s probably harder to use capital profitably for anything other than supplying that city’s own consumption. This is more difficult than in a city where working people rely solely on jobs created by capital investment. The idleness of many people supported by revenue spending likely discourages the industry of those who should be supported by capital. This makes investing capital there less attractive than in other places.
• Edinburgh’s Transformation: Before the union with England, Edinburgh had little trade or industry. When the Scottish parliament was no longer based there, and it stopped being the necessary home for Scotland’s main nobility, it started to develop some trade and industry. However, it still hosts Scotland’s main courts and tax offices, so a considerable amount of revenue is still spent there. In terms of trade and industry, it is much less significant than Glasgow, where the inhabitants are mainly supported by the employment of capital.
• The Effect of a Rich Resident: It has sometimes been observed that a large village, after making good progress in manufacturing, can become idle and poor if a great lord takes up residence nearby. This is because the lord’s spending (revenue) can shift the local economy away from productive enterprise.

The Core Relationship: Capital, Revenue, Industry, and Idleness

Therefore, the balance between capital and revenue seems to determine the balance between industry and idleness everywhere.

• Wherever capital is dominant, industry thrives.
• Wherever revenue is dominant, idleness is more common.

Any increase in capital naturally tends to increase the real amount of industry, the number of productive workers, and consequently, the exchangeable value of the country’s annual output of land and labor – which is the real wealth and income of all its people. Any decrease in capital tends to do the opposite.

How Capital Grows or Shrinks

• Capitals are increased by parsimony (saving and being frugal).
• Capitals are diminished by prodigality (wasteful spending) and misconduct (bad management).

Whatever a person saves from their income, they add to their capital. They then either use this saved money themselves to hire more productive workers, or they lend it to someone else for interest (a share of the profits). That other person then uses it to hire productive workers.

Just as an individual’s capital can only grow by what they save from their annual income or gains, the capital of a society (which is simply the sum of all the capital of the individuals in it) can only grow in the same way – through saving.

Parsimony, not industry, is the direct cause of the increase of capital. Industry does provide the goods and services that parsimony accumulates. But no matter how much industry might produce, if parsimony did not save and store up some of that production, capital would never grow larger.

Parsimony increases the fund that is set aside to pay productive workers. This tends to increase the number of these workers – those whose labor adds value to the things they work on. Therefore, parsimony tends to increase the exchangeable value of the country’s annual output. It puts more industry into motion, which creates additional value in the annual output.

Saved Money is Still Consumed, but by Different People

What is saved each year is consumed just as regularly as what is spent each year, and in about the same amount of time. However, it is consumed by a different group of people.

• The portion of a rich person’s income that they spend annually is mostly consumed by idle guests and domestic servants. These people leave nothing behind in return for what they consume.
• The portion of their income that they save annually (which is immediately invested as capital to earn a profit) is also consumed in a similar way and timeframe. But it is consumed by a different group: laborers, manufacturers, and artisans. These productive workers reproduce with a profit the value of what they consume.

Let’s say a rich person’s income is paid in money.

• If they had spent all of it, the food, clothing, and housing that the money could buy would have been distributed among the idle guests and servants.
• By saving a part of it, that saved part is immediately used as capital (either by the owner or by someone they lend it to) for the sake of making a profit. The food, clothing, and housing that can be bought with this saved portion are then necessarily reserved for the productive workers.

The amount of consumption is the same, but the consumers are different, and so are the results.

The Lasting Impact of Frugality

When a frugal person saves money each year, they do more than just provide support for additional productive workers for that year or the next. Like someone who founds a public workhouse, they establish what amounts to a perpetual fund for supporting an equal number of productive workers for all time to come.

The permanent dedication of this fund is not usually guaranteed by any specific law or legal trust. However, it is always protected by a very powerful principle: the clear and obvious self-interest of every individual who will ever own any share of that capital. No part of that capital can ever be used later to support anyone but productive workers without an evident loss to the person who diverts it from its proper purpose.

The Wasteful Spender (The Prodigal)

The prodigal is someone who misuses capital in this way. By not keeping their expenses within their income, they dip into their capital. They are like someone who misuses funds from a religious charity for non-religious purposes. The prodigal pays the wages of idleness with funds that their frugal ancestors had, in a sense, dedicated to supporting industry.

By reducing the funds available for employing productive labor, the prodigal necessarily reduces (as far as their actions are concerned) the amount of that labor which adds value to things. Consequently, they reduce the value of the annual produce of the entire country’s land and labor – the real wealth and income of its people. If the wasteful spending of some was not offset by the frugality of others, the actions of every prodigal person—by feeding the idle with the resources that should have gone to the industrious—would tend not only to make themselves bankrupt but also to impoverish their country.

Even Domestic Wastefulness is Harmful

Even if the prodigal’s spending is entirely on home-made goods, and none of it on foreign commodities, its effect on the productive funds of the society would still be the same. Every year, a certain quantity of food and clothing, which should have supported productive workers, would instead be used to support unproductive ones. Therefore, every year, there would still be some reduction in what would otherwise have been the value of the country’s annual output.

One might argue that since this spending is not on foreign goods, it doesn’t cause any gold and silver to leave the country, so the amount of money in the country would remain the same. However, if the food and clothing that were consumed by unproductive people had instead been distributed among productive workers, those workers would have reproduced the full value of their consumption, along with a profit. In that scenario, the same amount of money would still have remained in the country, and there would also have been a reproduction of consumable goods of equal value. There would have been two values created instead of just one.

Money Supply Shrinks with Production

Besides, the same quantity of money cannot stay for long in any country where the value of the annual produce is diminishing. The sole purpose of money is to circulate consumable goods. Through money, food, materials, and finished products are bought and sold, and distributed to their proper consumers.

Therefore, the quantity of money that can be used productively each year in any country must be determined by the value of the consumable goods circulated within it annually. These goods consist either of the direct produce of the country’s own land and labor, or of something that was bought with a part of that produce. So, if the value of that annual produce diminishes, the value of the goods circulated must also diminish. Along with it, the quantity of money that can be employed in circulating those goods will also shrink.

But the money that is pushed out of domestic use each year because of this shrinking production won’t just sit idle. Whoever owns that money will want to use it. Since there’s no way to use it profitably at home, it will be sent to other countries. This will happen despite any laws trying to stop it. This exported money will be used to buy goods that can be useful back home.

For a while, sending money out of the country like this will allow the nation to consume more than it’s actually producing. The gold and silver that were saved during prosperous times will help support the country’s consumption when things get tough. In this situation, the export of gold and silver is not the cause of the country’s decline; it’s a result. For a short time, it might even make the hard times a little less miserable.

Money Supply Grows with Production

On the other hand, the amount of money in a country naturally increases as the value of its annual production grows. When the value of goods being bought and sold within the society is greater, more money is needed to make these transactions happen.

Therefore, a part of the increased production will naturally be used to buy the additional gold and silver needed to circulate the rest of the goods. This will happen wherever these metals can be found. In this case, the increase in gold and silver is the effect, not the cause, of the country’s prosperity.

Gold and silver are bought in the same way everywhere. The price paid for them, whether in Peru (where they might be mined) or in England, is the food, clothing, housing, and income needed to support all the people whose work or investment brings these metals from the mine to the market. A country that can afford to pay this price will never be without the amount of these metals it needs for long. And no country will keep a quantity of gold and silver that it doesn’t need for long.

The True Public Benefactors and Enemies

So, no matter what we believe a country’s real wealth and income consist of:

• Some believe it’s the value of the annual produce of its land and labor, which plain reason seems to suggest.
• Others, due to common misunderstanding, believe it’s the amount of precious metals circulating within the country.

Whichever way you look at it, every prodigal (wasteful spender) appears to be a public enemy. And every frugal man (saver) appears to be a public benefactor.

The Impact of Bad Business Decisions

The effects of misconduct (bad judgment in business) are often the same as those of prodigality.

• Every poorly planned or unsuccessful project in farming, mining, fishing, trade, or manufacturing tends to reduce the funds available to support productive labor.
• In every such failed project, even though the capital is consumed by productive workers, they don’t reproduce the full value of what they consumed. This happens because they were employed in an unwise way.
• As a result, there will always be some decrease in what would otherwise have been the society’s productive funds.

Nations Are Resilient to Individual Failings

However, it’s rare for the circumstances of a large nation to be seriously damaged by the wasteful spending or bad business decisions of individuals. The excessive spending or imprudence of some people is always more than balanced out by the frugality and good conduct of others.

Why People Save:

• When it comes to profusion (excessive spending), the driving force is the desire for immediate enjoyment. While this desire can sometimes be strong and hard to control, it’s usually just a temporary and occasional feeling.
• But the principle that encourages people to save is the desire to improve their situation in life. This desire, though generally calm and unemotional, is with us from birth and stays with us until we die.
• In the entire time between birth and death, there is hardly a moment when any person is so perfectly happy with their situation that they have no wish for any kind of change or improvement.
• Increasing one’s fortune is how most people plan and hope to better their condition. It’s the most common and obvious method. The most likely way to increase their fortune is to save and build up some part of what they earn, either regularly each year or on special occasions.
• So, although the urge to spend is present in almost everyone at times (and in some people almost all the time), for most people, on average throughout their lives, the principle of frugality seems to be much stronger.

Prudence in Business is Common:

• Regarding misconduct in business, the number of sensible and successful ventures is much greater everywhere than those that are poorly judged and unsuccessful.
• Despite all our complaints about how often bankruptcies happen, the unfortunate people who suffer this misfortune are only a very small part of everyone involved in trade and other businesses – perhaps not much more than one in a thousand.
• Bankruptcy is possibly the greatest and most humiliating disaster that can happen to an innocent person. Therefore, most people are careful enough to avoid it. Some, indeed, do not avoid it, just as some people do not avoid committing serious crimes.

Public Waste vs. Private Frugality

Great nations are never made poor by the private wasteful spending of their citizens. However, they sometimes are made poor by public prodigality and misconduct – that is, by the wasteful spending and bad decisions of the government.

In most countries, the whole, or almost the whole, of public revenue is used to support unproductive workers. These include:

• People who make up a large and splendid royal court.
• A large religious establishment.
• Large navies and armies. In peacetime, these groups produce nothing. In wartime, they gain nothing that can make up for the cost of maintaining them, even while the war is ongoing.

Such people, since they produce nothing themselves, are all supported by the output of other people’s labor. If the number of these unproductive public employees grows unnecessarily large, they might consume such a large share of the nation’s annual produce in a particular year that not enough is left to support the productive laborers. These productive laborers are the ones who should be creating the produce for the next year.

If this happens:

• The next year’s produce will be less than the current year’s.
• If the same wasteful situation continues, the third year’s produce will be even less than the second.

These unproductive public workers, who should ideally be supported by only a part of the people’s spare revenue, might end up consuming such a large share of the entire revenue. This could force so many people to use up their capital – the funds meant for supporting productive labor. When this happens, all the saving and good business practices of individuals may not be enough to make up for the waste and decline in production caused by this forceful and excessive government spending.

Individual Efforts Can Overcome Public Waste

However, experience shows that on most occasions, this individual frugality and good conduct is enough to compensate. It can make up not only for the private wasteful spending and bad decisions of individuals but also for the extravagant spending of the government.

The steady, constant, and unbroken effort of every person to improve their own condition is the fundamental source of public and national wealth, as well as private wealth. This individual drive is often powerful enough to maintain the natural progress of things toward improvement. It can do this despite government extravagance and even the biggest mistakes in administration. Like an unknown vital force in a living body, it often restores health and strength, overcoming not only disease but also the unhelpful treatments prescribed by doctors.

How to Increase a Nation’s Annual Output

The value of a nation’s annual produce from its land and labor can be increased in only two ways:

1. By increasing the number of its productive laborers.
2. By increasing the productive powers (efficiency) of the laborers already employed.

It’s clear that the number of productive laborers can never be significantly increased unless there is an increase in capital, or the funds set aside for supporting them.

The productive powers of the same number of laborers cannot be increased except through one of these:

• Some addition or improvement to the machines and tools that make labor easier and quicker.
• A more effective division and distribution of employment (specialization of tasks).

In either case, additional capital is almost always needed. Only by using additional capital can a business owner provide workers with better machinery or organize their jobs more effectively. When the work involves many different parts, keeping every worker constantly employed in just one specialized task requires much more capital than if every worker occasionally does every different part of the job.

Evidence of Growth: Increased Capital

Therefore, when we compare the state of a nation at two different times, and find that its annual output of land and labor is clearly greater at the later time, we can be sure of something. If its lands are better cultivated, its manufacturing businesses more numerous and successful, and its trade more extensive, then its capital must have increased during the time between those two periods. More must have been added to its capital by the good conduct of some individuals than had been taken away by the private misconduct of others or by the public extravagance of the government.

We will find this to be true for almost all nations in reasonably quiet and peaceful times. This even applies to nations that have not had the most sensible and frugal governments. To judge this correctly, we must compare the state of the country at periods that are somewhat distant from each other. Progress is often so gradual that if you look at closely spaced periods, the improvement might not be noticeable. Sometimes, the decline of certain industries or certain regions of the country can create a suspicion that the overall wealth and industry are decaying. This can happen even when the country in general is prospering.

England’s Economic Journey: A Case Study

For example, the annual produce of England’s land and labor is certainly much greater today than it was a little more than a century ago, at the time of the Restoration of King Charles II. Though few people today would doubt this, during this entire period, five years have rarely passed without some book or pamphlet being published claiming the opposite. These writings were often skillful enough to gain some public credibility, arguing that the nation’s wealth was rapidly declining, the country was losing population, agriculture was neglected, manufacturing was decaying, and trade was ruined.

These publications were not all just biased political pamphlets produced for dishonest reasons. Many were written by very honest and intelligent people. They wrote nothing but what they believed, and only because they believed it.

Looking further back, England’s annual produce at the Restoration was certainly much greater than we can imagine it was about a hundred years before that, when Queen Elizabeth I came to the throne. At Elizabeth’s time, too, we have every reason to believe the country was much more advanced than it had been about a century earlier, towards the end of the wars between the houses of York and Lancaster. Even then, England was probably in a better condition than it had been at the time of the Norman Conquest. And it was better at the Norman Conquest than during the chaos of the Saxon Heptarchy (when England was divided into several kingdoms). Even at that very early period, England was certainly a more developed country than when Julius Caesar invaded. At that time, its inhabitants were in a state similar to the indigenous peoples of North America.

Progress Despite Immense Challenges

In each of these historical periods, however, there was not only much private and public wasteful spending. There were many expensive and unnecessary wars. Much of the annual produce was diverted from supporting productive workers to supporting unproductive ones. But sometimes, in the chaos of civil conflict, there was such absolute waste and destruction of capital (stock) that we must assume it did more than just slow down the natural accumulation of wealth. It likely left the country poorer at the end of the period than at the beginning.

Consider the happiest and most fortunate of all these periods: the time that has passed since the Restoration of Charles II. How many disorders and misfortunes have occurred? If people could have foreseen them, they might have expected not just poverty, but the total ruin of the country. These include:

• The Great Plague and the Great Fire of London.
• Two wars against the Dutch.
• The disorders of the Glorious Revolution.
• The war in Ireland.
• Four expensive wars against France (starting in 1688, 1702, 1742, and 1756).
• Two major rebellions (in 1715 and 1745).

During the four French wars, the nation accumulated more than £145 million in debt. This was on top of all the other extraordinary annual expenses these wars caused. The total cost cannot be estimated at less than £200 million. Since the Glorious Revolution, a very large share of the country’s annual produce has been used on various occasions to support an extraordinary number of unproductive workers (like soldiers and sailors).

But if those wars had not diverted such a large amount of capital, most of it would naturally have been used to support productive workers. Their labor would have replaced the full value of what they consumed, plus a profit. The value of the country’s annual produce would have increased considerably because of it every year. And each year’s increase would have further boosted the increase of the following year.

• More houses would have been built.
• More lands would have been improved.
• Lands already improved would have been better cultivated.
• More manufacturing businesses would have been established.
• Those already established would have expanded.

It is perhaps not very easy even to imagine how high the real wealth and revenue of the country might have been raised by now without these burdens.

Government Waste Slows, But Cannot Stop, Progress

But even though the wasteful spending of the government has undoubtedly slowed down England’s natural progress towards wealth and improvement, it has not been able to stop it. The annual produce of its land and labor is undoubtedly much greater at present than it was either at the Restoration or at the Revolution. Therefore, the capital annually used in cultivating this land and in supporting this labor must also be much greater.

In the midst of all the demands of government, this capital has been silently and gradually accumulated. This has happened due to the private frugality and good conduct of individuals, driven by their universal, continual, and uninterrupted effort to better their own condition.

It is this effort, protected by law and allowed by liberty to express itself in the most advantageous way, that has maintained England’s progress towards wealth and improvement in almost all past times. It is to be hoped that this effort will continue to do so in all future times.

England, however, has never been blessed with a very frugal government. Similarly, frugality has at no time been the defining virtue of its inhabitants. It is, therefore, the highest arrogance and presumption for kings and ministers to pretend to watch over the financial affairs of private people and to restrict their expenses, either through laws limiting consumption (sumptuary laws) or by prohibiting the import of foreign luxuries. They themselves are always, without any exception, the biggest spendthrifts in the society. Let them look carefully after their own expenses, and they can safely trust private people with theirs. If their own extravagance does not ruin the state, the spending of their subjects never will.

Some Spending is Better Than Others

Just as frugality increases public capital and wasteful spending diminishes it, the conduct of those whose expense exactly equals their income neither increases nor diminishes public capital. However, some ways of spending seem to contribute more to the growth of public wealth than others.

An individual’s income can be spent in two main ways:

1. On things that are consumed immediately. With these, one day’s expense neither lessens nor supports the expense of another day.
2. On things that are more durable. These can therefore be accumulated. With durable goods, every day’s expense can, if the owner chooses, either lessen the need for future spending or support and enhance the effect of the next day’s spending.

For example, a wealthy person might:

• Spend their income on lavish and expensive meals, maintaining a large number of domestic servants, and keeping many dogs and horses.
• Or, by being content with simple meals and few servants, they might spend the greater part of their income on:
  • Improving their house or country home.
  • Useful or decorative buildings.
  • Useful or decorative furniture.
  • Collecting books, statues, or pictures.
  • Or on more frivolous but still durable things like jewels, trinkets, or, most trivial of all, amassing a large wardrobe of fine clothes (like a certain royal favorite who died a few years ago).

Imagine two people with equal fortunes. One spends their income chiefly in the first way (on immediate consumables), and the other chiefly in the second way (on durable goods).

• The magnificence of the person whose spending was mainly on durable commodities would continually increase. Every day’s expense would contribute something to support and enhance the effect of the following day’s spending.
• The magnificence of the other person, who spent on immediate consumables, would be no greater at the end of a period than at the beginning.
• The first person, who bought durables, would also be the richer of the two at the end of the period. They would have a stock of goods of some kind. Even if this stock might not be worth all that it cost, it would always be worth something.

No trace of the wasteful spending would remain. The effects of ten or twenty years of such extravagance would be completely gone, as if they had never existed.

Lasting Benefits of Spending on Durable Goods

Spending on durable items is better for an individual’s wealth, and it’s also better for the wealth of a nation.

• Trickle-Down Effect: The houses, furniture, and clothing of the rich eventually become useful to people with lower and middle incomes. These people can buy these items when the original wealthy owners get tired of them.
• Improved Living Standards: When wealthy people commonly spend on durable goods, the general comfort and accommodation of the whole population gradually improve.

In countries that have been rich for a long time, you will often find people of lower incomes living in houses and using furniture that are perfectly good and whole. However, these items were clearly not originally built or made for their current users.

• For example, what was once a grand home of the Seymour family is now an inn on the road to Bath.
• The marriage bed of King James I of Great Britain, a royal gift from his queen from Denmark, was, a few years ago, a decorative item in a pub in Dunfermline.
• In some old cities that have either stopped growing or have declined somewhat, you might barely find a single house that could have been built for the people currently living in it. If you go inside these houses, you will often find many excellent, though old-fashioned, pieces of furniture. These items are still very usable but were also clearly not made for their current owners.

Grand palaces, magnificent country estates, and large collections of books, statues, pictures, and other interesting objects are often an ornament and an honor. They benefit not only the local neighborhood but also the entire country they belong to.

• The Palace of Versailles is an ornament and an honor to France.
• Stowe House and Wilton House are for England.
• Italy still commands a kind of respect due to the many such monuments it possesses. This is true even though the wealth that originally produced them has diminished, and the creative genius that designed them seems to have disappeared, perhaps because there are no longer the same opportunities for such work.

Durable Spending, Frugality, and Public Perception

Spending money on durable goods is also favorable for two other reasons: it supports accumulation and encourages frugality.

If a person overspends on durable items, they can easily change their habits without facing public criticism or shame.

• Greatly reducing the number of servants, cutting back from lavish meals to simple ones, or getting rid of a carriage after having used one are all noticeable changes. People assume such changes mean the person admits to previous bad financial decisions.
• Therefore, few people who have unfortunately spent too much in these ways later find the courage to change their habits until they are forced to by financial ruin or bankruptcy.

However, if a person has, at some point, spent too much on building, furniture, books, or pictures, no one assumes they were unwise if they later change their spending.

• With these kinds of items, further spending often becomes unnecessary once a certain amount has already been spent.
• When a person stops buying such things, it usually seems like they have satisfied their tastes, not that they have spent more than they can afford.

Durable Spending Supports More Productive Work

Besides these points, spending on durable goods generally provides a living for a greater number of people than spending on even the most lavish hospitality.

Imagine a great festival where two or three hundred pounds of food are served. Perhaps half of it is thrown away on the garbage heap, and a great deal is always wasted or spoiled.

But what if the money spent on this feast had instead been used to hire workers like masons, carpenters, upholsterers, and mechanics?

• Food of equal value would have been distributed among an even larger number of people.
• These workers would have bought the food in small amounts (like by the penny’s worth or by the pound).
• They would not have lost or thrown away a single ounce of it.

Furthermore, spending in the first way (on a feast) supports unproductive workers. Spending in the second way (on hiring craftsmen) supports productive workers. Therefore, spending on durable goods increases the exchangeable value of the country’s annual output, while spending on lavish hospitality does not.

Not About Generosity, But About Building National Wealth

However, I don’t mean to suggest that one type of spending always shows a more generous or kind spirit than the other.

• When a wealthy person spends their income mainly on hospitality, they share the greater part of it with their friends and companions.
• But when they use their income to buy durable goods, they often spend the whole amount on themselves and give nothing to anyone else without getting something of equal value in return.

Therefore, spending on durables, especially on frivolous items like small ornaments for dress and furniture, jewels, and trinkets, often indicates not only a shallow personality but also a mean and selfish one.

All I mean to say is that one type of expense (on durables) contributes more to the growth of public wealth than the other. This is because:

• It always leads to some accumulation of valuable goods.
• It is more favorable to private saving and therefore to the increase of public capital.
• It supports productive workers rather than unproductive ones.

CHAPTER IV: OF STOCK LENT AT INTEREST

The Lender’s Viewpoint

When stock (which can be money or goods) is lent out at interest, the lender always considers it as capital.

• The lender expects to get the original amount back at some point.
• In the meantime, the lender expects the borrower to pay a certain annual fee, called interest, for the use of the stock.

The Borrower’s Options

The borrower can use the loaned stock in two ways:

1. As Capital: The borrower uses it to pay productive workers. These workers then create products or services that have a value greater than the workers’ wages, generating a profit. In this situation, the borrower can repay the original loan (the capital) and the interest without having to sell other assets or use income from other sources.
2. As Stock for Immediate Consumption: If the borrower uses the loan for personal spending, they act like a prodigal (a wasteful spender). They use up, by supporting idle activities or people, what was intended to support productive industry. In this case, the borrower cannot repay the capital or the interest without using other sources of income, such as selling property or using rent from land they own.

How Loaned Money is Typically Used

Stock lent at interest is certainly used in both these ways, but it is used as capital much more frequently than for immediate consumption.

• A person who borrows money just to spend it on personal consumption will soon be ruined.
• The person who lends them money for such a purpose will generally have reason to regret their foolishness.

Therefore, borrowing or lending for mere consumption is usually against the financial interests of both parties (unless there is extreme usury, meaning charging excessively high interest rates). Although it undoubtedly happens sometimes that people do both, we can be sure it doesn’t happen as often as we might imagine. This is because everyone generally pays attention to their own financial interests.

Ask any rich person of common sense whether they have lent more of their money to:

• People they think will use it profitably in a business?
• Or people who will spend it idly on personal consumption? They will laugh at you for even asking the question.

Even among borrowers, who are not generally famous for being frugal, the number of those who are frugal and industrious is considerably larger than the number of those who are wasteful and idle.

A Special Case: Country Gentlemen and Mortgages

The only people to whom money is commonly lent without the expectation that they will make very profitable use of it are country gentlemen who borrow upon mortgage (using their land as security for the loan).

• Even they rarely borrow just for the sake of spending.
• One might say that what they borrow is usually already spent before they borrow it.
• They have typically consumed a large quantity of goods, provided to them on credit by shopkeepers and tradesmen. They then find it necessary to borrow money at interest to pay off these debts.
• The capital they borrow effectively replaces the capital of those shopkeepers and tradesmen. The country gentlemen could not have paid these debts from the rents of their estates.
• So, this money is not really borrowed in order to be spent, but rather to replace capital that had been spent before.

What Is Really Being Loaned?

Almost all loans at interest are made in money, either paper money or gold and silver coins. But what the borrower really wants, and what the lender really provides, is not the money itself. It is the money’s worth, or the goods that the money can purchase.

• If the borrower wants the loan as stock for immediate consumption, it is those consumable goods that they plan to acquire.
• If the borrower wants it as capital to employ in industry, it is only from those purchasable goods that the industrious workers can be supplied with the tools, materials, and living expenses necessary to do their work.

By means of the loan, the lender, in a way, assigns to the borrower their right to a certain portion of the country’s annual produce of land and labor. The borrower can then use this portion as they please.

The “Monied Interest” and the Amount of Lendable Stock

Therefore, the quantity of stock – or as it is commonly expressed, of money – that can be lent at interest in any country is not determined by the value of the actual currency (whether paper or coin) that is used as the tool for making the loans.

Instead, it is regulated by the value of that part of the annual produce which meets two conditions:

1. It comes either from the ground or from the hands of productive laborers.
2. It is destined not only for replacing a capital but specifically for replacing a capital that the owner does not want to bother employing themselves.

Since such capitals are commonly lent out and paid back in money, they make up what is called the monied interest. This is distinct from:

• The landed interest (income from owning land).
• The trading and manufacturing interests (where owners actively use their own capitals in their businesses).

Even in the monied interest, however, the money is, in a sense, just the deed of assignment. It’s the document or token that transfers these capitals from owners who don’t want to employ them to those who will. These capitals can be much greater in total value than the actual amount of money that serves as the tool for their transfer. The same pieces of money can be used successively for many different loans, as well as for many different purchases.

For example:

• A lends £1,000 to W.
• W immediately uses that £1,000 to buy goods from B.
• B, having no immediate need for the money, lends the exact same £1,000 to X.
• X immediately uses it to buy another £1,000 worth of goods from C.
• C, in the same way and for the same reason, lends the money to Y, who again buys goods with it from D.

In this way, the same physical pieces of money (either coin or paper) can, in just a few days, serve as the instrument for three different loans and three different purchases. Each of these transactions is equal in value to the entire amount of those pieces of money.

What the three money-lenders (A, B, and C) assign to the three borrowers (W, X, and Y) is the power to make those purchases. This power constitutes both the value and the use of the loans. The stock lent by the three money-lenders is equal to the value of the goods that can be purchased with it (£3,000 in this example). This is three times greater than the actual money (£1,000) with which the purchases are made.

These loans, however, can all be perfectly well secured. This is possible if the goods purchased by the different debtors are used in such a way that, in due time, they bring back an equal value (either in coin or paper), plus a profit. And just as the same pieces of money can serve as the instrument for different loans totaling three times (or even thirty times) their value, they can also successively serve as the instrument for repaying those loans.

A Loan as an Assignment of Produce

In this manner, a capital lent at interest can be seen as an assignment from the lender to the borrower of a certain significant portion of the annual produce. This assignment comes with a condition:

• The borrower, in return, must annually assign to the lender a smaller portion of the produce, called the interest, for as long as the loan continues.
• At the end of the loan, the borrower must assign back a portion of produce equally as large as what was originally assigned to them. This is called the repayment.

Although money (either coin or paper) generally serves as the deed of assignment for both the smaller portion (interest) and the larger portion (principal), the money itself is entirely different from what is being assigned by it (which is a claim on real goods and services).

Growth of the Monied Interest

As the share of the annual produce destined for replacing capital increases in any country, what is called the monied interest naturally increases with it. The increase of those particular capitals—from which owners wish to earn income without the trouble of using the capital themselves—naturally goes along with the general increase of all capitals. In other words, as the total stock in a country increases, the quantity of stock available to be lent at interest gradually grows larger and larger.

Why Interest Rates Fall as Lendable Stock Increases

As the quantity of stock to be lent at interest increases, the interest rate (the price that must be paid for the use of that stock) necessarily diminishes. This happens for two main reasons:

1. General Market Principles: It’s a general economic observation that as the quantity of anything available in the market increases, its price tends to fall.
2. Reasons Specific to Capital:
   • As the total capital in a country increases, the profits that can be made by employing that capital necessarily diminish. It becomes gradually more and more difficult to find a profitable way within the country to use any new capital.
   • This leads to competition between different capitals. The owner of one capital tries to get the business or investment opportunity that is currently occupied by another.
   • Usually, the only way to push another capital out of its employment is by offering more reasonable terms. An investor or business owner might have to sell their products somewhat cheaper. To get the goods to sell in the first place, they might also sometimes have to buy raw materials or inputs at a higher price.
   • As the funds available for maintaining productive labor increase, the demand for productive labor grows every day. Laborers easily find employment, but the owners of capital find it difficult to get enough laborers to employ.
   • This competition among employers raises the wages of labor and, as a consequence, sinks the profits of stock (capital).

When the profits that can be made from using capital are reduced in this way (squeezed from both ends, by lower returns and higher labor costs), the price that can be paid for the use of that capital—that is, the rate of interest—must necessarily fall along with those profits.

The True Cause of Falling Interest Rates (A Critique)

Mr. Locke, Mr. Law, Mr. Montesquieu, and many other writers seemed to imagine that the increase in the quantity of gold and silver, following the discovery of the Spanish West Indies (the Americas), was the real cause of the lowering of the rate of interest throughout most of Europe. They argued that because these metals themselves became less valuable, the use of any particular portion of them also necessarily became less valuable, and consequently, the price that could be paid for that use (interest) also fell.

This idea, which at first glance seems plausible, has been so fully disproven by Mr. Hume that it is perhaps unnecessary to say anything more about it. However, the following very short and plain argument may help to explain more clearly the error that seems to have misled those gentlemen.

• Before the discovery of the Spanish West Indies, ten percent seems to have been the common rate of interest throughout most of Europe. Since that time, it has sunk in different countries to six, five, four, and three percent.
• Let us suppose for a moment (though it’s not actually true) that in every particular country, the value of silver has sunk in precisely the same proportion as the rate of interest. For example, in countries where interest has been reduced from ten percent to five percent, let’s assume that the same quantity of silver can now purchase just half the quantity of goods it could have purchased before.
• This assumption is not accurate, but it is the most favorable one for the opinion we are examining. Even with this assumption, it is utterly impossible that the lowering of the value of silver could have the smallest tendency to lower the rate of interest.

Here’s why:

• If one hundred pounds today are worth no more than fifty pounds were worth back then, then ten pounds today must be worth no more than five pounds were worth back then.
• Whatever causes lowered the value of the capital (the principal sum) must necessarily have lowered the value of the interest payment in exactly the same proportion.
• The proportion between the value of the capital and the value of the interest payment would have remained the same, even if the rate of interest had never been altered.
• By altering the rate, on the contrary, the proportion between these two values is necessarily altered.
• If one hundred pounds now are worth no more than fifty pounds were then, five pounds (representing 5% interest today) can be worth no more than two pounds ten shillings were then.
• By reducing the rate of interest, for example, from ten percent to five percent, we are giving for the use of a capital (which is supposed to be equal to one-half of its former value) an interest payment which is equal to only one-fourth of the value of the former interest payment. (The interest payment has fallen more sharply than the supposed fall in the value of silver).

Any increase in the quantity of silver, while the quantity of commodities circulated by means of it remained the same, could have no other effect than to diminish the value of that metal.

• The nominal value (the price in silver pieces) of all sorts of goods would be greater.
• But their real value would be precisely the same as before.
• They would be exchanged for a greater number of pieces of silver. However, the quantity of labor which they could command, or the number of people whom they could maintain and employ, would be precisely the same.

The country’s real capital would stay the same. It might take more silver coins to transfer an equal portion of that capital from one person to another. The paperwork, like a wordy lawyer’s documents, would be more cumbersome. But the actual thing being transferred—the capital itself—would be exactly the same as before. It could only produce the same effects.

Since the funds for supporting productive work would be the same, the demand for that work would also be the same. Therefore, the price of labor, or wages, though it might seem higher in silver coins, would actually be the same in terms of purchasing power. Workers would be paid more silver pieces, but those pieces would only buy the same amount of goods as before.

The profits from investments (stock) would be the same, both in name (nominally) and in reality.

• People usually count wages by the amount of silver paid to the worker. So, when that amount increases, wages appear to go up, even if they can’t buy any more than before.
• But profits from investments are not counted by the number of silver pieces paid. They are counted by the proportion those pieces make up compared to the whole capital invested.

So, if a country’s total capital remains the same as before, the competition between the different individual investments within that capital would also be the same. Everyone would trade with the same advantages and disadvantages. Therefore, the common proportion between capital and profit would be the same. As a result, the common interest rate for money would also be the same. What can generally be given for the use of money is necessarily determined by what can generally be made by using it.

More Goods, Same Money: Different Effects

Now, consider the opposite situation. What if the amount of goods circulated in the country each year increases, but the amount of money used to circulate them stays the same? This would produce many other important effects, besides just raising the value of money (meaning each coin buys more).

• The country’s capital, though it might be expressed as the same amount of money, would actually be larger in real terms.
• The same amount of money could now pay for a greater quantity of labor.
• The amount of productive labor that this capital could support and employ would increase. Consequently, the demand for that labor would also increase.
• Wages would naturally rise with this demand. Yet, they might appear to fall if workers were paid with fewer silver coins (because each coin is now worth more). However, that smaller quantity of money could buy more goods than a larger quantity could before.
• The profits from investments would decrease, both in reality and in appearance.
• Since the whole capital of the country has grown, the competition between the different individual investments that make up that capital would naturally increase as well.
• The owners of these individual investments would have to be satisfied with a smaller share of the output produced by the labor their capital employs.
• The interest rate on money always tends to follow the profits from investments. So, in this scenario, the interest rate might fall greatly, even though the value of money (or the quantity of goods any particular sum could buy) has greatly increased.

Laws About Interest Payments

In some countries, laws have prohibited charging interest on money. But since people can always make some profit by using money, they should always be able to receive some payment for letting others use their money. Experience has shown that instead of preventing high interest rates, such laws actually increase the problem of usury (charging unfairly high interest). The debtor ends up having to pay not only for the use of the money but also for the risk the creditor takes by accepting payment for that use, which is illegal. The debtor is forced, in a way, to insure the creditor against the penalties for usury.

Setting Maximum Interest Rates

In countries where interest is allowed, the law usually sets a maximum interest rate that can be charged without facing a penalty. This is done to prevent the extortion of usury.

This legal maximum rate should always be somewhat above the lowest market price. The lowest market price is what is commonly paid for the use of money by people who can offer the most reliable security for the loan.

• If the legal rate is fixed below the lowest market rate: The effects are almost the same as completely banning interest. The creditor will not lend money for less than its use is worth. The debtor will have to pay the creditor for the risk taken by accepting the full value for using the money (which would be above the artificially low legal rate).
• If the legal rate is fixed precisely at the lowest market rate: This ruins the credit of anyone who cannot provide the very best security, even if they are honest people who respect the laws. It forces them to turn to lenders who charge extremely high, unfair rates (exorbitant usurers).
• In a country like Great Britain, where money is lent to the government at three percent, and to private individuals with good security at four or four and a half percent, the current legal rate of five percent is perhaps as appropriate as any.

The legal interest rate should be somewhat above the lowest market rate, but it should not be much above it.

• If the legal rate of interest in Great Britain, for example, were fixed as high as eight or ten percent, most of the money available for lending would go to prodigals (wasteful spenders) and projectors (people with risky, speculative schemes). Only these types of borrowers would be willing to pay such high interest.
• Sensible people, who will only pay for the use of money a portion of what they are likely to make by using it, would not even try to compete for loans at such high rates.
• As a result, a large part of the country’s capital would be kept out of the hands of those most likely to make a profitable and beneficial use of it. Instead, it would be thrown into the hands of those most likely to waste and destroy it.

When the legal rate of interest is fixed just a little above the lowest market rate, sensible people are universally preferred as borrowers over prodigals and projectors.

• The person lending money gets nearly as much interest from the sensible borrower as they would dare to take from the risky one.
• Crucially, their money is much safer in the hands of the sensible borrowers.
• In this way, a large part of the country’s capital is directed into the hands where it is most likely to be used to good advantage.

No law can reduce the common rate of interest below the lowest ordinary market rate at the time the law is made. For example, despite an order in 1766 by which the French king tried to reduce the rate of interest from five percent to four percent, money continued to be lent in France at five percent. The law was simply avoided in several different ways.

Land Prices and Interest Rates

It’s important to note that the ordinary market price of land, everywhere, depends on the ordinary market rate of interest.

A person who has capital and wants to earn income from it without the trouble of actively managing it themselves will think about two options:

1. Buy land.
2. Lend the capital out at interest.

Land generally offers superior security, along with some other advantages that usually come with this type of property. Because of this, a person will generally be content with a smaller income from land than what they might get by lending out their money at interest. These advantages are enough to make up for a certain difference in income. However, they will only compensate for a certain difference.

• If the rent from land should fall short of the interest from money by too great a difference, nobody would buy land. This would soon reduce its ordinary price.
• On the contrary, if the advantages of owning land should much more than make up for the income difference, everybody would want to buy land. This, in turn, would soon raise its ordinary price.

Historically:

• When the interest rate was at ten percent, land was commonly sold for ten to twelve times its annual rental income (known as “years’ purchase”).
• As the interest rate fell to six, five, and four percent, the price of land rose to twenty, twenty-five, and thirty years’ purchase.

The market rate of interest is higher in France than in England. Consequently, the common price of land is lower in France. In England, land commonly sells at thirty years’ purchase; in France, at twenty years’ purchase.

CHAPTER V: OF THE DIFFERENT EMPLOYMENT OF CAPITALS

How Capital Supports Labor

Although all capitals are intended only for the support of productive labor, the amount of that labor which equal amounts of capital can put into motion varies a great deal. This variation depends on the different ways the capital is used.

The value that this employment adds to the country’s annual produce of land and labor also varies greatly.

Four Main Ways to Employ Capital

Capital can be employed in four different ways:

1. Procuring Raw Materials: This involves obtaining the raw produce annually required for the society’s use and consumption. Examples include:

   • Farming (cultivating lands).
   • Mining.
   • Fishing. The capitals of all those who undertake these activities are employed in this first way.

2. Manufacturing Raw Materials: This involves processing and preparing that raw produce for immediate use and consumption. The capitals of all master manufacturers are employed in this second way.

3. Transporting Goods: This involves moving either raw or manufactured produce from places where they are plentiful to places where they are needed. The capitals of all wholesale merchants are employed in this third way.

4. Distributing Goods (Retail): This involves dividing particular portions of either raw or manufactured produce into small enough parcels to suit the occasional demands of those who want them. The capitals of all retailers are employed in this fourth way.

It is difficult to imagine any way capital could be employed that doesn’t fall under one of these four categories.

Why Each Type of Capital Employment is Essential

Each of these four methods of employing capital is absolutely necessary for either the existence or the expansion of the other three methods, or for the general convenience of society.

• Need for Raw Materials: Unless capital was used to supply raw produce in a certain abundance, neither manufacturing nor trade of any kind could exist.
• Need for Manufacturing: Unless capital was used to manufacture the part of raw produce that needs significant preparation before it’s fit for use, one of two things would happen:
  • The raw produce would never be created in the first place, because there would be no demand for it.
  • Or, if it was produced naturally (like wild fruit), it would have no exchange value and could add nothing to the wealth of society.
• Need for Transportation: Unless capital was used to transport raw or manufactured goods from where they are abundant to where they are needed, no more of either could be produced than what was necessary for the consumption of the local neighborhood. The merchant’s capital allows the surplus produce of one place to be exchanged for that of another. This encourages industry and increases the enjoyments of both places.
• Need for Retail: Unless capital was used to break down and divide portions of raw or manufactured produce into small parcels suited to occasional demands, every person would be forced to buy a much larger quantity of the goods they wanted than their immediate needs required.
  • For example, if there were no such trade as a butcher, everyone would have to buy a whole ox or a whole sheep at a time. This would generally be inconvenient for the rich, and much more so for the poor.
  • If a poor workman had to buy a month’s or six months’ provisions at a time, a large part of the money (stock) they use as capital (for tools or shop furniture, which earns them income) would be forced into the part of their stock reserved for immediate consumption (food), which yields no income.
  • Nothing can be more convenient for such a person than to be able to purchase their food and supplies from day to day, or even from hour to hour, as they need them. This enables them to use almost all their stock as capital. This, in turn, allows them to produce work of greater value. The profit they make this way much more than compensates for the additional price that the retailer’s profit adds to the goods.

The prejudices some political writers have against shopkeepers and tradesmen are entirely without foundation. Far from it being necessary to tax them or restrict their numbers, they can never multiply so much as to hurt the public, though they might multiply enough to hurt one another through competition.

• For example, the quantity of grocery goods that can be sold in a particular town is limited by the demand of that town and its surrounding area. The capital, therefore, that can be employed in the grocery trade cannot exceed what is sufficient to purchase that quantity of goods.
• If this capital is divided between two different grocers, their competition will tend to make both of them sell cheaper than if the capital were in the hands of only one. And if it were divided among twenty grocers, their competition would be that much greater, and the chance of them secretly agreeing to raise prices would be that much less.
• Their competition might perhaps ruin some of themselves, but taking care of this is the business of the parties involved, and it can safely be trusted to their judgment. It can never hurt either the consumer or the producer. On the contrary, competition must tend to make retailers both sell cheaper (to consumers) and buy dearer (from producers or wholesalers) than if the whole trade were monopolized by one or two persons.
• Some retailers might occasionally trick a vulnerable customer into buying something they don’t need. This problem, however, is too minor to deserve public attention. Nor would it necessarily be prevented by restricting the number of retailers.
• To use a common example: It is not the large number of pubs (ale-houses) that causes a general tendency towards drunkenness among ordinary people. Instead, that tendency, arising from other causes, necessarily gives employment to a large number of pubs.

Employers are Productive Laborers

The people whose capitals are employed in any of these four ways are themselves productive laborers. Their labor, when properly directed, becomes fixed and realized in the product or sellable commodity it is applied to. It generally adds to the price of that commodity at least the value of their own maintenance and consumption (which they take as profit). The profits of the farmer, the manufacturer, the merchant, and the retailer are all drawn from the price of the goods which the first two produce, and the last two buy and sell.

Different Employments Support Different Amounts of Labor

However, equal amounts of capital, when employed in each of these four different ways, will immediately put into motion very different quantities of productive labor. They will also increase the value of the annual produce of the society’s land and labor in very different proportions.

• The Retailer’s Capital: This replaces, along with its profits, the capital of the merchant from whom the retailer purchases goods. This enables the merchant to continue their business. The retailer themself is the only productive laborer whom their capital immediately employs. The retailer’s profits make up the entire value that their capital’s employment adds to the annual produce of the society.

• The Wholesale Merchant’s Capital: This replaces, along with their profits, the capitals of the farmers and manufacturers from whom the merchant purchases raw and manufactured goods. This enables those farmers and manufacturers to continue their respective trades. It is mainly through this service that the wholesale merchant indirectly contributes to supporting the productive labor of the society and to increasing the value of its annual produce. The merchant’s capital also employs the sailors and carriers who transport goods from one place to another. It increases the price of those goods by the value not only of the merchant’s profits but also of the transport workers’ wages. This is all the productive labor that the wholesale merchant’s capital immediately puts into motion, and all the value it immediately adds to the annual produce. Its operation in both these respects is significantly greater than that of the retailer’s capital.

• The Master Manufacturer’s Capital:

  • Part of this capital is used as fixed capital in the tools and machinery of the trade. This part replaces, along with its profits, the capital of some other craftsman from whom the manufacturer purchased these instruments.
  • Part of the manufacturer’s circulating capital is used to purchase materials. This replaces, with their profits, the capitals of the farmers and miners from whom these materials are bought.
  • However, a large part of the manufacturer’s capital is always distributed, either annually or in a much shorter period, among the different workmen they employ. It increases the value of the materials by the amount of their wages, and by their master’s profits on the entire stock of wages, materials, and instruments used in the business.
  • Therefore, a manufacturer’s capital immediately puts into motion a much greater quantity of productive labor, and adds a much greater value to the annual produce of the society’s land and labor, than an equal amount of capital in the hands of any wholesale merchant.

• The Farmer’s Capital: No equal amount of capital puts into motion a greater quantity of productive labor than that of the farmer.

  • Not only the farmer’s hired human servants but also their laboring cattle are productive laborers.
  • In agriculture, too, nature labors alongside humans. And though nature’s labor costs nothing, its produce has value, just like the produce of the most expensive workmen.
  • The most important operations of agriculture seem intended not so much to increase the fertility of nature (though they do that too), but rather to direct that fertility towards the production of the plants most profitable to humans. A field overgrown with weeds and brambles might frequently produce as great a quantity of vegetable matter as the best-cultivated vineyard or cornfield. Planting and tilling often regulate more than they stimulate the active fertility of nature. After all the farmer’s labor, a great part of the work always remains to be done by nature.
  • The laborers and laboring cattle, therefore, employed in agriculture, do more than just reproduce a value equal to their own consumption (or to the capital that employs them), along with their owner’s profits, as workmen in manufacturing do. They occasion the reproduction of a much greater value.

Besides replacing the farmer’s capital and all its profits, the labor in agriculture regularly creates the rent for the landlord. This rent can be thought of as the payment for using the powers of nature, which the landlord lends to the farmer. The amount of rent is greater or smaller depending on how fertile the land is believed to be, either naturally or through improvements. Rent is essentially the value of nature’s work that remains after subtracting or accounting for everything that can be considered the work of humans. This share is seldom less than a quarter and often more than a third of the total produce from the land.

No equal amount of productive labor used in manufacturing can ever create such a large additional return (the rent). In manufacturing, nature does nothing; humans do everything. The output in manufacturing must always be in proportion to the strength of the efforts that cause it (human labor and capital).

Therefore, capital used in agriculture not only sets in motion a greater quantity of productive labor than any equal amount of capital used in manufacturing. It also, in proportion to the amount of productive labor it employs, adds a much greater value to the country’s annual produce of land and labor – that is, to the real wealth and income of its people. Of all the ways capital can be employed, farming is by far the most advantageous to society.

Where Different Capitals Reside

• Farming and Retail Capitals: The money invested in farming and in the retail trade of any society must always be located within that society. Their use is almost entirely confined to a specific place – the farm for the farmer, and the shop for the retailer. Generally, these capitals must also belong to people who live in that society, though there are some exceptions.

• Wholesale Merchant’s Capital: In contrast, the capital of a wholesale merchant doesn’t seem to have a fixed or necessary home anywhere. It can move from place to place, wherever it can buy goods cheaply or sell them dearly.

• Manufacturer’s Capital: The capital of a manufacturer must, of course, be located where the manufacturing is carried on. But where this location will be is not always necessarily determined. It can often be a great distance from both the place where the raw materials are grown or extracted and from the place where the completely manufactured product is consumed.

  • For example, the city of Lyons in France, known for its silk manufacturing, is very far from the places that supply its raw silk and also far from many of the markets that buy its finished silks.
  • Fashionable people in Sicily wear clothes made from silks produced in other countries, using raw silk that originated in Sicily itself.
  • Part of the wool from Spain is manufactured into cloth in Great Britain, and some of that cloth is then sent back to Spain to be sold.

Foreign vs. Local Merchants in Exporting Goods

It makes very little difference whether the merchant whose capital is used to export the surplus produce of any society is a local citizen or a foreigner.

• If the merchant is a foreigner, the number of productive laborers in the society is less by only one person (the merchant themself). The value of the society’s annual produce is less only by the profits of that one person.
• The sailors or carriers the merchant employs can still belong to the merchant’s country, the society’s country, or some third country, just as if the merchant were a local.
• A foreigner’s capital gives value to a society’s surplus produce just as effectively as a local’s capital. It does this by exchanging the surplus for something that is in demand at home. It effectively replaces the capital of the person who produces that surplus and enables them to continue their business. This service is the main way that a wholesale merchant’s capital helps to support productive labor and increase the value of the annual produce of the society they trade with.

Importance of Local Manufacturing Capital

It is more important that the capital of a manufacturer resides within the country. This is because manufacturing capital necessarily:

• Puts into motion a greater quantity of productive labor.
• Adds a greater value to the annual produce of the society’s land and labor.

However, a manufacturer’s capital can still be very useful to a country, even if it is not located within it.

• For example, the capitals of British manufacturers who process flax and hemp imported annually from the coasts of the Baltic Sea are surely very useful to the countries that produce those raw materials.
• Those materials are part of the surplus produce of those Baltic countries. If this surplus was not exchanged annually for something in demand there, it would be worthless, and people would soon stop producing it.
• The merchants who export these materials replace the capital of the people who produce them, thereby encouraging them to continue production. The British manufacturers, in turn, replace the capital of those merchants.

When a Nation Lacks Sufficient Capital

A particular country, much like a particular person, may often not have enough capital to do everything it might want to:

• Improve and cultivate all its lands.
• Manufacture and prepare all its raw produce for immediate use and consumption.
• Transport the surplus part of either its raw or manufactured produce to distant markets where it can be exchanged for something in demand at home.

For instance, the inhabitants of many different parts of Great Britain do not have enough capital to improve and cultivate all their lands. Much of the wool from the southern counties of Scotland, after a long journey by land over very bad roads, is manufactured in Yorkshire because there isn’t enough capital to manufacture it at home in Scotland. There are many small manufacturing towns in Great Britain whose inhabitants do not have enough capital to transport the products of their own industry to those distant markets where there is demand for them. If there are any merchants in these towns, they are usually just agents for wealthier merchants who live in some of the larger commercial cities.

Priorities for Using Limited Capital

When a country’s capital is not sufficient for all three purposes (agriculture, manufacturing, and export), the following generally holds true:

1. The greater the share of its capital employed in agriculture, the greater will be the quantity of productive labor it puts into motion within the country. This will also maximize the value its capital adds to the annual produce of the society’s land and labor.
2. After agriculture, the capital employed in manufactures puts into motion the next greatest quantity of productive labor and adds the next greatest value to the annual produce.
3. Capital employed in the trade of exportation has the least effect of these three on domestic labor and value added.

A country that does not have enough capital for all these three purposes has not yet reached the level of wealth and prosperity for which it seems naturally destined. However, trying to do all three prematurely with insufficient capital is certainly not the fastest way for a society to acquire enough capital, any more than it would be for an individual.

The total capital of all individuals in a nation has its limits, just like the capital of a single individual. It is capable of achieving only certain purposes. The capital of all individuals in a nation increases in the same way as that of a single individual: by their continually saving and adding to it whatever they can from their income. Therefore, a nation’s capital is likely to increase fastest when it is employed in the way that provides the greatest income to all the inhabitants of the country. This is because they will then be able to make the greatest savings. The income of all the inhabitants of a country is necessarily in proportion to the value of the annual produce of their land and labor.

The Example of the American Colonies

The main reason for the rapid progress of the American colonies towards wealth and greatness has been that almost all their capital, up to this point, has been employed in agriculture.

• They have very few manufactures, except for those basic household goods (like simple clothes and tools) that necessarily accompany the progress of agriculture. These are usually made by the women and children in every private family.
• The greater part of both the exportation and the coastal trade of America is carried on by the capital of merchants who live in Great Britain.
• Even the stores and warehouses from which goods are sold retail in some provinces, particularly in Virginia and Maryland, often belong to merchants who live in the mother country (Great Britain). This is one of the few instances where the retail trade of a society is carried on by the capital of those who are not resident members of it.

If the Americans were to stop the importation of European manufactured goods, either by organized boycotts or by any other sort of force, they would effectively give a monopoly to those of their own countrymen who could manufacture similar goods. If they were to divert any considerable part of their capital into this manufacturing employment, they would slow down, instead of speed up, the further increase in the value of their annual produce. They would obstruct, instead of promote, the progress of their country towards real wealth and greatness. This would be even more true if they were to try, in the same manner, to monopolize their entire exportation trade for themselves.

Historical Perspective on National Capital

Indeed, the course of human prosperity seems rarely to have lasted long enough to enable any great country to acquire enough capital for all three major purposes (fully developed agriculture, comprehensive manufacturing, and extensive independent foreign trade). Perhaps we might make exceptions if we believe the wonderful historical accounts of the wealth and cultivation of:

• China
• Ancient Egypt
• The ancient state of India (Indostan)

Even these three countries, which according to all accounts were the wealthiest ever in the world, are chiefly renowned for their superiority in agriculture and manufactures. They do not appear to have been leaders in foreign trade.

• The ancient Egyptians had a superstitious dislike of the sea.
• A similar superstition prevails among the people of India.
• The Chinese have never excelled in foreign commerce. The greater part of the surplus produce of all these three countries seems to have always been exported by foreigners. These foreigners gave in exchange for it something else for which there was a demand in those countries, frequently gold and silver.

How Capital Impacts Labor and Value Differently

So, the same amount of capital in any country will put into motion a greater or smaller quantity of productive labor. It will also add a greater or smaller value to the annual produce of its land and labor. This depends on the different proportions in which that capital is employed in agriculture, manufactures, and wholesale trade.

The difference in impact is also very great depending on the different sorts of wholesale trade in which any part of the capital is employed.

Three Types of Wholesale Trade

All wholesale trade—all buying in order to sell again by wholesale—can be categorized into three different types:

1. Home Trade: This involves purchasing the produce of a country’s industry in one part of that same country and selling it in another part. It includes both inland trade (over land) and coasting trade (by sea along the coast).
2. Foreign Trade of Consumption: This involves purchasing foreign goods for use and consumption within one’s own country.
3. Carrying Trade: This involves conducting the commerce of foreign countries, essentially carrying the surplus produce of one foreign country to another foreign country.

Impact of Home Trade

The capital used in purchasing goods in one part of the country to sell in another part of the same country generally replaces two distinct domestic capitals with every such operation. These two capitals had both been employed in the agriculture or manufactures of that country, and this replacement enables them to continue that employment.

• When a merchant sends out a certain value of goods from their location, they generally bring back in return at least an equal value of other goods.
• When both sets of goods are the products of domestic industry, every such operation necessarily replaces two distinct capitals that had both been employed in supporting productive domestic labor. This allows that support to continue.
• For example, the capital that sends Scottish manufactured goods to London and brings back English grain and manufactured goods to Edinburgh necessarily replaces, with every such operation, two British capitals. Both of these had been employed in the agriculture or manufactures of Great Britain.

Impact of Foreign Trade for Home Consumption

The capital used in purchasing foreign goods for home consumption, when this purchase is made with the products of domestic industry, also replaces two distinct capitals with every such operation. However, only one of them is employed in supporting domestic industry.

• The capital that sends British goods to Portugal and brings back Portuguese goods to Great Britain replaces, with every such operation, only one British capital. The other capital replaced is a Portuguese one.
• Therefore, even if the returns from the foreign trade of consumption were as quick as those from the home trade, the capital employed in it would give only half the encouragement to the industry and productive labor of the home country.

Speed of Returns: Home vs. Foreign Trade

But the returns from the foreign trade of consumption are very seldom as quick as those from the home trade.

• The returns from home trade generally come in before the end of the year, and sometimes three or four times within the year.
• The returns from foreign trade of consumption seldom come in before the end of the year, and sometimes not until after two or three years.

Therefore, a capital employed in the home trade might make twelve operations (or be sent out and returned twelve times) before a capital employed in the foreign trade of consumption has made even one. If the capitals are equal in size, the one in home trade will give twenty-four times more encouragement and support to the industry of the country than the one in foreign trade. (This is because it supports two domestic capitals per turnover, twelve times a year, versus one domestic capital per turnover, once a year or less).

Roundabout Foreign Trade

Sometimes, foreign goods for home consumption might be purchased not directly with the produce of domestic industry, but with some other foreign goods. These other foreign goods, however, must have been purchased either immediately with the produce of domestic industry, or with something else that had been purchased with it. This is because (except in cases of war and conquest) foreign goods can only ever be acquired in exchange for something that had been produced at home, either directly, or after two or more different exchanges.

The effects, therefore, of a capital employed in such a roundabout foreign trade of consumption are, in every respect, the same as those of one employed in the most direct trade of the same kind. The main difference is that the final returns are likely to be even more distant, as they depend on the returns of two or three distinct foreign trades.

• For example, if flax and hemp from Riga (in the Baltic) are purchased with tobacco from Virginia, and that tobacco had been purchased with British manufactured goods, the merchant must wait for the returns of two distinct foreign trades before they can use the same capital to re-purchase a similar quantity of British manufactures.
• If the tobacco from Virginia had been purchased, not with British manufactures, but with sugar and rum from Jamaica, which in turn had been purchased with British manufactures, then the merchant must wait for the returns of three distinct foreign trades.

If these two or three distinct foreign trades happen to be carried on by two or three distinct merchants (where the second buys the goods imported by the first, and the third buys those imported by the second, in order to export them again), then each merchant individually will receive the returns on their own capital more quickly. However, the final returns of the whole capital employed in the entire chain of trade will be just as slow as ever.

Whether the whole capital employed in such a roundabout trade belongs to one merchant or to three makes no difference to the country, though it may make a difference to the particular merchants involved. Three times more capital must be employed in both cases to exchange a certain value of British manufactures for a certain quantity of flax and hemp than would have been necessary if the manufactures and the flax and hemp had been directly exchanged for one another.

Therefore, the whole capital employed in such a roundabout foreign trade of consumption will generally give less encouragement and support to the productive labor of the country than an equal capital employed in a more direct trade of the same kind.

Trading with Gold and Silver

Whatever foreign commodity is used to purchase other foreign goods for home consumption, it doesn’t cause any essential difference either in the nature of the trade or in the encouragement and support it can give to the productive labor of the country from which the trade is carried on.

For example, if foreign goods are purchased with the gold of Brazil or the silver of Peru, this gold and silver (like the tobacco of Virginia) must have been purchased with something that either was the produce of the industry of the home country or had been purchased with something else that was such a produce.

Therefore, as far as the productive labor of the country is concerned, the foreign trade of consumption that is carried on by means of gold and silver has all the advantages and all the disadvantages of any other equally roundabout foreign trade. It will replace the capital that is immediately employed in supporting that productive labor just as fast or just as slow as any other roundabout trade.

However, using gold and silver in foreign trade seems to have one advantage over any other equally roundabout foreign trade:

• The transportation of these metals from one place to another is less expensive than that of almost any other foreign goods of equal value. This is because of their small bulk and great value.
• Their freight cost is much less, and their insurance cost is not greater.
• Besides, no goods are less likely to suffer damage during carriage.

Therefore, an equal quantity of foreign goods may frequently be purchased with a smaller quantity of the produce of domestic industry if gold and silver are used as intermediaries, than if any other foreign goods are used. The demand of the country may frequently be supplied more completely and at a smaller expense in this manner than in any other.

Whether this kind of trade, by continually exporting these metals, is likely to make the country poorer in any other way, is a question I will examine in great detail later on.

The Carrying Trade: Supporting Foreign Labor

When a country’s capital is used in the carrying trade, that capital is completely taken away from supporting the productive labor of that particular country. Instead, it is used to support the productive labor of some foreign countries.

• Even if each operation in the carrying trade replaces two distinct capitals, neither of them belongs to the home country whose merchant is conducting the trade.
• For example, consider a Dutch merchant whose capital is used to carry grain from Poland to Portugal, and then to bring fruits and wines from Portugal back to Poland. With every such operation, the Dutch merchant’s capital replaces two capitals. However, neither of these capitals was employed in supporting the productive labor of Holland. One of them supported Polish labor, and the other supported Portuguese labor.
• Only the profits from this trade return regularly to Holland. These profits are the only addition this trade necessarily makes to the annual produce of Holland’s land and labor.

However, there’s an important exception. When the carrying trade of any particular country is conducted using the ships and sailors of that country, then the part of the capital used in it that pays for the freight (shipping costs) is distributed among, and puts into motion, a certain number of productive laborers of that country. Almost all nations that have had any significant share of the carrying trade have, in fact, carried it on in this manner. The trade itself probably got its name from this practice, as the people of such countries became the “carriers” for other countries.

But it does not seem essential to the nature of the trade that it should be done this way. A Dutch merchant, for example, might use their capital to handle the trade between Poland and Portugal by carrying goods between them, not in Dutch ships, but in British ships. It can be assumed that this actually happens on some occasions.

It is for this reason, however, that the carrying trade has been thought to be especially advantageous for a country like Great Britain, whose defense and security depend on the number of its sailors and ships. But the same amount of capital can employ just as many sailors and ships in the foreign trade of consumption, or even in the home trade when carried on by coastal vessels, as it could in the carrying trade.

The number of sailors and ships that any particular amount of capital can employ does not depend on the nature of the trade itself. It depends partly on:

1. The bulkiness of the goods in proportion to their value.
2. The distance of the ports between which they are to be carried. It depends chiefly on the first of these two circumstances (bulkiness). For example, the coal trade from Newcastle to London employs more shipping than all the carrying trade of England, even though the ports are not very far apart.

Therefore, forcing a larger share of a country’s capital into the carrying trade by offering extraordinary encouragements will not always necessarily increase the shipping of that country.

Which Trade Benefits a Country Most?

So, to summarize the impact of different trades:

• Capital employed in the home trade of any country will generally give more encouragement and support to a greater quantity of productive labor in that country. It will also increase the value of its annual produce more than an equal amount of capital employed in the foreign trade of consumption.
• Capital employed in the foreign trade of consumption has, in both these respects (supporting domestic labor and increasing domestic produce value), a still greater advantage over an equal amount of capital employed in the carrying trade.

The riches of every country, and its power (so far as power depends on riches), must always be in proportion to the value of its annual produce. This annual produce is the fund from which all taxes must ultimately be paid. But the great goal of the political economy (economic policy) of every country is to increase its riches and power.

Therefore, a country’s economic policy should:

• Give no preference or superior encouragement to the foreign trade of consumption over the home trade.
• Give no preference to the carrying trade over either of the other two.
• Neither force nor attract a greater share of the country’s capital into either of those two channels (foreign consumption or carrying trade) than what would naturally flow into them on its own.

When Different Trades Become Necessary

However, each of these different branches of trade is not only advantageous but also necessary and unavoidable when the natural course of events, without any force or constraint, introduces it.

• Need for Exports: When the output of any particular branch of industry in a country exceeds what the home market demands, the surplus must be sent abroad. It needs to be exchanged for something for which there is a demand at home. Without such exportation, a part of the productive labor of the country would have to stop, and the value of its annual produce would decrease.

  • For example, Great Britain generally produces more grain, woolen goods, and hardware than its own market requires. The surplus part of these goods must, therefore, be sent abroad and exchanged for something for which there is a demand at home. It is only by means of such exportation that this surplus can gain enough value to compensate for the labor and expense of producing it.
  • Being near the sea coast or on the banks of navigable rivers are advantageous locations for industry only because they make it easier to export and exchange such surplus produce for something else that is more in demand there.

• Need for Re-exports: When the foreign goods that are purchased with the surplus produce of domestic industry then exceed the demand of the home market, the surplus part of those foreign goods must be sent abroad again. This is done to exchange them for something that is more in demand at home.

  • For example, about 96,000 large barrels (hogsheads) of tobacco are annually purchased in Virginia and Maryland with a part of the surplus produce of British industry. But the demand in Great Britain itself perhaps requires no more than 14,000 of these.
  • If the remaining 82,000 hogsheads could not be sent abroad and exchanged for something more in demand at home, the importation of them would have to stop immediately.
  • This, in turn, would stop the productive labor of all those people in Great Britain who are currently employed in making the goods with which these 82,000 hogsheads of tobacco are annually purchased. Those British goods, which are part of the produce of the land and labor of Great Britain, would have no market at home and would be deprived of the market they had abroad. They would simply cease to be produced.
  • Therefore, even the most roundabout foreign trade of consumption can, on some occasions, be as necessary for supporting the productive labor of the country and the value of its annual produce as the most direct trade.

The Carrying Trade as a Sign of Wealth

When the capital stock of any country increases to such a degree that it cannot all be employed in supplying the consumption and supporting the productive labor of that particular country, the surplus part of it naturally flows into the carrying trade. It is then employed in performing the same transport services for other countries.

The carrying trade is the natural effect and symptom of great national wealth; but it does not seem to be the natural cause of it. Those statesmen who have been inclined to favor it with particular encouragements seem to have mistaken the effect and symptom for the cause.

• Holland, which is by far the richest country in Europe in proportion to the extent of its land and the number of its inhabitants, accordingly has the greatest share of the carrying trade of Europe.
• England, perhaps the second richest country in Europe, is also supposed to have a considerable share of it. However, what commonly passes for the carrying trade of England will frequently, perhaps, be found to be no more than a roundabout foreign trade of consumption. Such are, in large part, the trades that carry goods from the East and West Indies, and from America, to different European markets. Those goods are generally purchased either immediately with the produce of British industry, or with something else that had been purchased with that produce. The final returns of those trades are generally used or consumed in Great Britain.
• The trade that is carried on in British ships between the different ports of the Mediterranean, and some trade of the same kind carried on by British merchants between the different ports of India, perhaps make up the principal branches of what is properly the carrying trade of Great Britain.

Limits to Different Types of Trade

• The extent of the home trade, and of the capital that can be employed in it, is necessarily limited by the value of the surplus produce of all those distant places within the country that have occasion to exchange their respective productions with one another.
• The extent of the foreign trade of consumption is limited by the value of the surplus produce of the whole country and of what can be purchased with it.
• The extent of the carrying trade is limited by the value of the surplus produce of all the different countries in the world. Its possible extent, therefore, is practically infinite in comparison to that of the other two types of trade and is capable of absorbing the greatest amounts of capital.

Why Individuals Invest Their Capital

The sole motive that determines the owner of any capital to employ it either in agriculture, in manufactures, or in some particular branch of the wholesale or retail trade, is their own private profit.

• The different quantities of productive labor their capital may put into motion, and the different values it may add to the annual produce of the land and labor of the society, depending on how it is employed, never enter into their thoughts.

Therefore, in countries where agriculture is the most profitable of all employments, and where farming and improving land are the most direct roads to a splendid fortune, the capitals of individuals will naturally be employed in the manner most advantageous to the whole society.

However, the profits of agriculture do not seem to have any superiority over those of other employments in any part of Europe.

• Indeed, “projectors” (people promoting schemes) in every corner of Europe have, within these few years, entertained the public with magnificent accounts of the profits to be made by cultivating and improving land.
• Without going into a detailed discussion of their calculations, a very simple observation may satisfy us that their results must be false. We see every day the most splendid fortunes being acquired in the course of a single lifetime through trade and manufactures. This often happens starting from a very small amount of capital, and sometimes from no capital at all.
• A single instance of such a fortune being acquired by agriculture in the same amount of time, and from such a small starting capital, has perhaps not occurred in Europe during the entire course of the present century.

In all the great countries of Europe, however, much good land still remains uncultivated. The greater part of what is cultivated is far from being improved to the degree of which it is capable. Agriculture, therefore, is almost everywhere capable of absorbing a much greater capital than has ever yet been employed in it.

What circumstances in the policies of Europe have given the trades carried on in towns so great an advantage over the trade carried on in the country? Why do private persons frequently find it more for their advantage to employ their capitals in the most distant carrying trades of Asia and America than in the improvement and cultivation of the most fertile fields in their own neighborhood? I shall try to explain this at full length in the two following books.

BOOK THREE

BOOK THREE of the Different progress of Opulence in Different Nations

CHAPTER I: OF THE NATURAL PROGRESS OF OPULENCE

The Vital Trade Between Towns and Countryside

The most important business in every civilized society happens between the people living in towns and those living in the country. This trade involves exchanging raw goods from the countryside for manufactured products from the towns. This exchange can happen directly, or by using money or paper that acts like money.

• The Country’s Role: The countryside supplies the town with food and the raw materials needed for manufacturing.
• The Town’s Role: The town pays for these supplies by sending back a portion of its manufactured goods to the people in the country.

Since towns don’t actually produce new raw materials like food or wood, we can say that they get all their wealth and essential supplies from the countryside.

A Mutually Beneficial Relationship

However, we shouldn’t think that the town’s gain is the country’s loss. The gains are mutual and go both ways. This division of labor, like in all other cases, benefits everyone involved in the different jobs created.

• People in the country can buy more manufactured goods from the town, using the earnings from a much smaller amount of their own labor, than if they tried to make those goods themselves.
• The town provides a market for the surplus produce of the country. This surplus is what’s left over after the farmers and farmworkers have taken what they need to live. In the town market, country dwellers can exchange this surplus for other things they need or want.

The greater the number of people in a town and the wealthier they are, the larger the market it offers to the country folks. A larger market is always more beneficial to many people. For example, corn grown just a mile from town sells for the same price as corn that comes from twenty miles away. But the price of the distant corn must usually cover not only the cost of growing it and bringing it to market but also provide the farmer with the usual profits from agriculture.

Therefore, the owners and farmers of the land near a town gain an extra benefit. Besides the ordinary profits of farming, the price they get for their goods includes the whole value of the transportation costs that would have been paid for similar goods brought from farther away. They also save this entire transportation cost on the manufactured goods they buy from the town.

If you compare how land is farmed near any large town with how it’s farmed far away from it, you will easily see how much the countryside benefits from trade with the town. Among all the silly ideas that have been spread about the balance of trade, no one has ever seriously claimed that the country loses by trading with the town, or that the town loses by trading with the country that supports it.

The Natural Order: Farms First, Then Towns

In the natural order of things, basic survival (subsistence) comes before comfort and luxury. So, the work that provides food (like farming) must necessarily come before the work that provides conveniences and luxuries (like manufacturing in towns).

Therefore, the cultivation and improvement of the countryside, which provides food, must necessarily happen before towns, which mostly supply conveniences and luxuries, can grow. It is only the surplus produce of the country – what is left over after the farmers have been fed – that provides the food for the town. So, a town can only grow as this surplus produce increases.

Indeed, a town might not always get all its food from the nearby countryside or even from the same region. It might get supplies from very distant countries. While this doesn’t change the general rule, it has led to considerable differences in how wealth has grown in different ages and nations.

People’s Natural Preference for Agriculture

This natural order of things – country development before town growth – is generally supported by the natural inclinations of people, at least when human laws and institutions don’t interfere. If human institutions had never opposed these natural preferences, towns could not have grown larger than what the farming and development of their local area could support. This would be true at least until the entire local area was fully cultivated and improved.

Most people, if they can expect equal or nearly equal profits, will choose to invest their money in improving and farming land rather than in manufacturing or foreign trade.

• A person who invests capital in land has it more directly under their sight and control.
• Their fortune is much less likely to suffer from accidents than that of a trader. A trader often has to trust their capital not only to the winds and waves but also to the more uncertain elements of human foolishness and injustice, by giving large amounts of credit in distant countries to people whose character and situation they can seldom know thoroughly.
• On the other hand, the capital of a landlord, which is invested in improving their land, seems to be as secure as human affairs can allow.

Besides, the beauty of the countryside, the pleasures of country life, and the peace of mind it promises have strong attractions for almost everyone. Wherever the injustice of human laws doesn’t disrupt it, country life also offers a real independence. Since cultivating the ground was the original purpose of humankind, people in every stage of existence seem to keep a fondness for this original type of work.

How Towns Naturally Form and Grow

Indeed, farming cannot be carried on effectively without the help of some craftsmen; otherwise, it would be very inconvenient and constantly interrupted. Farmers frequently need the services of:

• Smiths
• Carpenters
• Wheelwrights (makers of wheels) and ploughwrights (makers of plows)
• Masons and bricklayers
• Tanners (who prepare animal skins)
• Shoemakers
• Tailors

These craftsmen also occasionally need each other’s help. Since their homes are not necessarily tied to a specific piece of land like a farmer’s, they naturally tend to settle near one another. This is how a small town or village forms.

Soon, butchers, brewers, and bakers join them, along with many other craftsmen and retailers. These newcomers are necessary or useful for supplying the occasional wants of the community, and they help the town grow even larger.

The people of the town and the people of the country serve each other. The town is a continuous fair or market where country people come to exchange their raw produce for manufactured goods. This trade supplies the townspeople with both the materials for their work and the food they need to live.

The amount of finished goods the townspeople sell to the country dwellers necessarily controls the amount of materials and provisions they buy from the country. Therefore, neither their employment nor their ability to get food can increase except in proportion to the increase in demand from the country for finished work. And this demand from the country can only increase as farming and land cultivation expand and improve.

So, if human institutions had never disturbed the natural course of things, the growing wealth and size of towns in every society would have been a consequence of, and in proportion to, the improvement and cultivation of the surrounding territory or country.

Land Abundance and Manufacturing: The North American Example

In our North American colonies, where uncultivated land can still be obtained easily, no towns have yet established manufactures for selling goods to distant markets.

• When a craftsman in North America has saved a little more money (stock) than is needed to run their own business supplying the neighboring country, they don’t try to set up a factory to sell goods far away.
• Instead, they use that extra money to buy and improve uncultivated land.
• The craftsman becomes a planter. Neither the high wages nor the easy access to food that North America offers to craftsmen can persuade them to work for other people rather than for themselves.
• They feel that a craftsman is a servant to their customers, from whom they get their living. But a planter who cultivates their own land and gets their necessary food from the labor of their own family is truly a master and independent of the whole world.

Land Scarcity and Manufacturing

On the contrary, in countries where there is either no uncultivated land, or none that can be bought easily, every craftsman who has more money than they can use in local jobs tries to prepare goods for sale in more distant markets.

• The smith might set up some sort of ironworks.
• The weaver might establish some sort of linen or woolen factory. Over time, these different types of manufacturing gradually become more specialized (subdivided). Through this specialization, they are improved and refined in many ways, which are easy to imagine and therefore don’t need further explanation here.

Natural Investment Preferences: Security Matters

When looking for a way to employ capital, and assuming equal or nearly equal profits, manufactures are naturally preferred to foreign commerce. This is for the same reason that agriculture is naturally preferred to manufactures: greater security.

• Just as the capital of a landlord or farmer is more secure than that of a manufacturer, the capital of a manufacturer, being always more under their own sight and control, is more secure than that of a foreign merchant.

In every period of every society, the surplus part of both raw and manufactured produce—that is, the part for which there is no demand at home—must be sent abroad. It needs to be exchanged for something for which there is some demand at home. However, whether the capital that carries this surplus produce abroad is a foreign or a domestic one is of very little importance.

If a society has not yet acquired enough capital both to cultivate all its lands and to manufacture all of its raw produce in the most complete manner, there is even a considerable advantage if that raw produce is exported by a foreign capital. This way, the whole stock of the society can be employed in more useful purposes at home (like farming or basic local manufacturing).

The wealth of ancient Egypt, China, and India clearly shows that a nation can reach a very high degree of prosperity even if the greater part of its export trade is carried on by foreigners. The progress of our North American and West Indian colonies would have been much slower if only their own capital had been used to export their surplus produce.

The Natural Sequence of Investment

Therefore, according to the natural course of things, the greater part of the capital of every growing society is directed in this order:

1. First, to agriculture.
2. Afterwards, to manufactures.
3. Last of all, to foreign commerce.

This order of things is so very natural that in every society that had any territory, it has always, I believe, been observed to some extent. Some of their lands must have been cultivated before any sizable towns could be established. Some sort of basic manufacturing must have been carried on in those towns before they could seriously think about engaging in foreign commerce.

Europe’s “Unnatural” Path

But although this natural order of things must have occurred to some degree in every such society, in all the modern states of Europe, it has, in many respects, been entirely inverted (turned upside down).

• The foreign commerce of some of their cities introduced all their finer manufactures, or those suitable for selling in distant markets.
• Then, manufactures and foreign commerce together gave birth to the principal improvements in agriculture. The customs and traditions introduced by the nature of their original governments, which remained even after those governments had greatly changed, necessarily forced them into this unnatural and backward order of development.

CHAPTER II: OF THE DISCOURAGEMENT OF AGRICULTURE IN THE ANCIENT STATE OF EUROPE AFTER THE FALL OF THE ROMAN EMPIRE

Chaos and Land Monopoly After Rome’s Fall

When the German and Scythian nations overran the western provinces of the Roman Empire, the chaos that followed this great revolution lasted for several centuries. The robbery and violence that the barbarians inflicted upon the ancient inhabitants disrupted the trade between towns and the countryside. The towns were deserted, and the country was left uncultivated. The western provinces of Europe, which had enjoyed a considerable degree of wealth under the Roman Empire, sank into the lowest state of poverty and barbarism.

During these chaotic times, the chiefs and principal leaders of these invading nations acquired or seized for themselves the greater part of the lands in those countries. A large part of these lands was uncultivated. However, no part of them, whether cultivated or not, was left without an owner. All lands were engrossed (taken over and held), and the greater part was controlled by a few great proprietors.

Laws That Prolonged Land Monopoly

This original engrossing of uncultivated lands, though a great problem, might have been only a temporary one. The lands might soon have been divided again and broken into smaller parcels, either through inheritance (succession) or by sale or transfer (alienation). However, two legal practices prevented this:

1. The law of primogeniture hindered them from being divided by succession.
2. The introduction of entails prevented them from being broken into small parcels by alienation.

Understanding Primogeniture (Eldest Son Inherits All)

When land, like movable goods (such as furniture or tools), is considered only as a means of providing a living and enjoyment, the natural law of succession divides it, like movable goods, among all the children of the family. A father is presumed to care equally about the subsistence and enjoyment of all his children. This natural law of succession was followed by the Romans. They made no more distinction between older and younger children, or between males and females, in the inheritance of lands than we do in the distribution of movable goods.

But when land was considered not merely as a means of subsistence, but as a means of power and protection, it was thought better that it should pass down undivided to one person. In those disorderly times, every great landlord was a sort of petty prince.

• His tenants were his subjects.
• He was their judge, and in some respects, their lawmaker in peace, and their leader in war.
• He made war as he saw fit, frequently against his neighbors, and sometimes even against his own king or sovereign.

The security of a landed estate, therefore, and the protection its owner could offer to those who lived on it, depended on its size. To divide it was to ruin it and to expose every part of it to being oppressed and swallowed up by the attacks of its neighbors.

The law of primogeniture, therefore, came into practice over time in the succession of landed estates. It happened for the same reason that it has generally been adopted in the succession of monarchies (though not always at their very beginning). The reasoning was that the power, and consequently the security, of the monarchy should not be weakened by division, so it must pass entire to one of the children.

Deciding which child should receive such an important preference must be determined by some general rule. This rule should not be based on the doubtful distinctions of personal merit, but on some plain and obvious difference that can admit of no dispute. Among the children of the same family, there can be no indisputable difference other than that of sex and that of age. The male sex is universally preferred to the female. When all other things are equal, the elder child everywhere takes precedence over the younger. Hence the origin of the right of primogeniture, and of what is called lineal succession (inheritance in a direct line).

Primogeniture: Outdated but Persistent

Laws often remain in force long after the circumstances that first created them, and which alone could make them reasonable, are gone. In the current state of Europe, the owner of a single acre of land is as perfectly secure in their possession as the owner of a hundred thousand acres.

The right of primogeniture, however, still continues to be respected. Since, of all institutions, it is the best suited to support the pride of family distinctions, it is still likely to last for many centuries. In every other respect, nothing can be more contrary to the real interest of a numerous family than a right which, in order to enrich one child, makes all the other children poor.

Understanding Entails (Restricting Land Transfer)

Entails are the natural consequences of the law of primogeniture. They were introduced to:

• Preserve a certain lineal succession, an idea first established by the law of primogeniture.
• Prevent any part of the original estate from being transferred out of the intended line of inheritance, whether by gift, by will, by sale, or due to the foolishness or misfortune of any of its successive owners.

Entails were completely unknown to the Romans. Neither their legal concepts of “substitutions” nor “fideicommisses” bear any real resemblance to entails, even though some French lawyers have tried to dress up the modern institution of entails in the language and style of those ancient Roman legal forms.

Entails: Once Reasonable, Now Absurd

When great landed estates were like small principalities, entails might not have been unreasonable. Like what are called the fundamental laws of some monarchies, they might frequently have prevented the security of thousands of people from being endangered by the whim or extravagance of one man.

But in the present state of Europe, when small estates as well as great ones get their security from the laws of their country, nothing can be more completely absurd than entails. They are founded upon the most absurd of all suppositions: the idea that every successive generation of people does not have an equal right to the earth and to all that it possesses. Instead, entails imply that the property of the present generation should be restricted and regulated according to the wishes of people who died perhaps five hundred years ago.

Entails, however, are still respected throughout the greater part of Europe. This is particularly true in those countries where noble birth is a necessary qualification for holding either civil or military honors. Entails are thought necessary for maintaining this exclusive privilege of the nobility to the great offices and honors of their country. And since that order of nobility has already seized one unjust advantage over the rest of their fellow citizens, it is thought reasonable that they should have another (entails) to prevent their potential poverty from making their privileged position seem ridiculous.

The common law of England is actually said to dislike things that tie up property forever, like entails. As a result, entails are more restricted in England than in any other European monarchy. However, even England is not completely free of them. In Scotland, it’s believed that more than one-fifth, and perhaps even more than one-third, of all the lands in the country are currently under strict entail.

This way, not only were huge areas of uncultivated land taken over by particular families, but the possibility of these lands ever being divided again was prevented as much as possible, forever.

Why Large Landowners Often Don’t Improve Land

However, it rarely happens that a great proprietor (a very large landowner) is also a great improver of land.

• Chaotic Times: In the disorderly times that gave birth to these outdated institutions (like primogeniture and entails), the great proprietor was busy enough defending their own territories or trying to extend their power over their neighbors. They had no free time to focus on cultivating and improving land.
• Lack of Inclination or Skill: When law and order were finally established, giving them this free time, they often lacked the desire to improve their land. Almost always, they lacked the necessary skills.
• No Spare Money: If their spending on their house and personal lifestyle equaled or exceeded their income (which happened very frequently), they had no spare money (capital) to invest in land improvement.
• Buying More Land Seemed Better: If a great proprietor was a saver, they generally found it more profitable to use their annual savings to buy new lands rather than to improve their old estate.

Improving land for a profit, like all other business projects, requires careful attention to small savings and small gains. A person born to a great fortune, even if naturally thrifty, is very seldom capable of this kind of detailed attention. The situation of such a person naturally makes them pay more attention to ornaments and appearances that please their fancy, rather than to profit, for which they feel they have little need.

• The elegance of their clothes, their carriages and horses, their house, and their household furniture are things they are used to caring about.
• This mindset, formed by habit, follows them when they think about improving land.
• A great landowner might beautify perhaps four or five hundred acres near their main house. They might spend ten times what the land is worth even after all the improvements. They soon find that if they were to improve their whole estate in the same fancy way (and they often have little taste for any other way), they would be bankrupt before they had finished even a tenth of it.

There still remain, in both England and Scotland, some great estates that have stayed in the hands of the same family without interruption since the times of feudal chaos. If you compare the current condition of these estates with the lands of the small proprietors in their neighborhood, you will need no other argument to convince you how unfavorable such huge properties are to improvement.

Little Hope for Improvement from Tenants

If little improvement was to be expected from such great landowners, even less was to be hoped for from the people who actually worked the land under them.

In the ancient state of Europe, the occupiers of land were all tenants at will. This means they had no secure right to stay on the land. They were all, or almost all, slaves. However, their slavery was of a milder kind than the slavery known among the ancient Greeks and Romans, or even in the British West Indian colonies at this time.

• These slaves were considered to belong more directly to the land than to their master. They could, therefore, be sold with the land, but not separately from it.
• They could marry, as long as their master consented. The master could not later break up the marriage by selling the husband and wife to different people.
• If the master injured or murdered any of them, they were subject to some penalty, though usually only a small one.
• Crucially, these slaves were not capable of owning property. Whatever they acquired was considered to be acquired for their master, and the master could take it from them whenever they pleased.

Any farming and improvement that could be done by such slaves was, properly speaking, carried on by their master.

• It was at the master’s expense. The seed, the cattle, and the farming tools all belonged to him.
• It was for the master’s benefit. Such slaves could acquire nothing but their daily food and basic needs.
• So, it was really the landowner themself who, in this situation, occupied their own lands and farmed them using their own serfs or bondmen.

This type of slavery still exists in Russia, Poland, Hungary, Bohemia, Moravia, and other parts of Germany. It is only in the western and southwestern provinces of Europe that it has gradually been abolished completely.

Why Slave Labor is Inefficient

Even if great landowners rarely choose to make big improvements, they are least likely to do so when they use slaves as their workers. The experience of all ages and nations, I believe, shows that the work done by slaves, even though it appears to cost only their maintenance (food and shelter), is in the end the most expensive kind of labor.

• A person who can acquire no property can have no other interest than to eat as much as possible and to work as little as possible.
• Any work they do beyond what is absolutely necessary to get their own food and shelter can only be squeezed out of them by force, not by any motivation of their own.

Both Pliny and Columella (ancient Roman writers) remarked on how much the cultivation of corn (grain) declined in ancient Italy, and how unprofitable it became for the master, when it fell under the management of slaves. In the time of Aristotle, the situation had not been much better in ancient Greece. Speaking of the ideal republic described in the laws of Plato, Aristotle said that to maintain five thousand idle men (the number of warriors thought necessary for its defense), along with their women and servants, would require a territory of boundless size and fertility, like the plains of Babylon.

The Master’s Preference for Slaves

Human pride makes a person love to dominate others. Nothing bothers a proud person so much as being forced to stoop to persuade their inferiors. Therefore, wherever the law allows it, and the nature of the work can afford the cost, a master will generally prefer the services of slaves to that of freemen.

• The planting of sugar and tobacco can afford the expense of slave cultivation.
• The raising of corn, it seems, cannot afford this expense in current times.
• In the English colonies where the main crop is corn, the vast majority of the work is done by freemen.
• The recent decision by the Quakers in Pennsylvania to set all their Negro slaves free suggests that their number of slaves cannot have been very large. If slaves had made up a considerable part of their property, such a decision could never have been agreed to.
• In the British sugar colonies, on the other hand, all the work is done by slaves. In the tobacco colonies, a very great part of it is done by slaves.
• The profits of a sugar plantation in any of our West Indian colonies are generally much greater than those of any other type of farming known either in Europe or America. The profits of a tobacco plantation, though lower than those of sugar, are higher than those of corn, as has already been mentioned. Both sugar and tobacco can afford the expense of slave cultivation, but sugar can afford it even better than tobacco. Accordingly, the number of Negroes is much greater, in proportion to the number of whites, in our sugar colonies than in our tobacco colonies.

The Rise of Sharecroppers (Metayers)

The slave cultivators of ancient times were gradually replaced by a type of farmer known today in France as Metayers. In Latin, they are called Coloni Partiarii. They have been out of use in England for so long that I currently know no English name for them.

• The system worked like this: The landowner (proprietor) supplied the metayer with the seed, cattle, and farming tools – in short, the whole stock (capital) necessary for cultivating the farm.
• The produce was then divided equally between the landowner and the farmer. This division happened after setting aside whatever was judged necessary for keeping up the stock of tools and animals, which was returned to the landowner if the farmer either quit or was removed from the farm.

Land occupied by such tenants is, properly speaking, cultivated at the expense of the landowner, much like land occupied by slaves, because the landowner still provides the initial capital. However, there is one very essential difference between metayers and slaves:

• Metayers were freemen. This means they were capable of acquiring property.
• Since they received a specific share of the land’s produce, they had a clear interest in making the whole produce as large as possible, so that their own share would also be as large as possible.
• A slave, on the other hand, who could acquire nothing but their basic maintenance, would naturally try to do as little work as possible, making the land produce as little as possible over and above that maintenance.

It is probable that serfdom (tenure in villanage) gradually disappeared throughout most of Europe partly because of this advantage of metayers having an incentive to produce more. Another reason was likely the actions of kings (the sovereign). Kings were always jealous of the great lords and gradually encouraged the serfs (villains) to challenge the lords’ authority. These challenges eventually seemed to make this type of servitude too inconvenient for the lords.

However, the exact time and manner in which this important revolution—the end of widespread serfdom—came about is one of the most obscure points in modern history. The Church of Rome claims great credit for it. It is certain that as early as the twelfth century, Pope Alexander III published a decree (a bull) for the general emancipation of slaves. It seems, however, to have been more of a pious recommendation than a law that demanded strict obedience from the faithful. Slavery continued to exist almost universally for several centuries afterwards. It was gradually abolished by the combined effect of the two interests mentioned above: that of the landowner (finding motivated labor more beneficial) on the one hand, and that of the king (weakening powerful lords) on the other.

A serf who was set free, and at the same time allowed to continue living on the land, would have had no capital of their own. They could only cultivate the land using what the landlord advanced to them. Therefore, they must have become what the French called a metayer.

Metayers Had Little Reason to Invest Their Own Savings

However, it could never have been in the interest of even these metayers to use any part of the little money they might save from their own share of the produce to make further improvements to the land. This was because the lord, who contributed nothing to such extra improvements, was entitled to get one-half of whatever additional produce resulted.

• The tithe, which is only a tenth of the produce paid to the church, is found to be a very great obstacle to improvement.
• Therefore, a “tax” or share amounting to one-half of the produce from any new investment made by the metayer must have been an effective barrier to such improvements.

It might be in the interest of a metayer to make the land produce as much as possible using the tools and animals furnished by the landowner. But it could never be in their interest to mix any of their own capital with it for improvements.

In France, where it’s said that five out of six parts of the whole kingdom are still farmed by this type of cultivator, landowners complain that their metayers take every opportunity to use the master’s cattle for transportation work rather than for farm cultivation. This is because, in transportation, the metayers get to keep all the profits for themselves. In cultivation, they have to share the profits with their landlord.

This type of tenant still exists in some parts of Scotland. They are called steel-bow tenants. Those ancient English tenants, who legal scholars Chief Baron Gilbert and Doctor Blackstone said were more like managers (bailiffs) for the landlord than actual farmers, were probably of the same kind.

The Emergence of True Farmers Paying Fixed Rent

This type of tenancy (metayers) was succeeded, though by very slow degrees, by farmers properly so called. These were farmers who cultivated the land with their own capital (stock) and paid a fixed, certain rent to the landlord.

• When such farmers have a lease for a specific number of years, they may sometimes find it in their interest to invest part of their own capital in further improving the farm. This is because they might expect to get back their investment, along with a large profit, before the lease expires.

However, the security of possession even for such farmers was extremely uncertain for a long time, and it still is in many parts of Europe.

• Before the end of their lease term, they could be legally kicked off the land by a new purchaser of the property. In England, this could even happen through a fictitious legal action called a “common recovery.”
• If they were turned out illegally by the violence of their master, the legal process by which they could seek compensation was extremely imperfect. It did not always put them back in possession of the land but only awarded them damages, which never truly amounted to their real loss.

Even in England, perhaps the country in Europe where independent small farmers (the yeomanry) have always been most respected, it was not until about the 14th year of King Henry VII’s reign (late 15th century) that the legal action of ejectment was invented. Through this action, the tenant could recover not just damages but also possession of the land. Also, their claim was not necessarily decided by the uncertain decision of a single court hearing (assize). This action has been found to be such an effective remedy that, in modern legal practice, when a landlord needs to sue for possession of land, they seldom use the legal actions that properly belong to them as a landlord (like the writ of right or the writ of entry). Instead, they often sue in the name of their tenant using the writ of ejectment.

• In England, therefore, the security of the tenant is equal to that of the landowner.
• Furthermore, in England, a lease for life on land worth forty shillings a year is considered a freehold. This entitles the person leasing the land (the lessee) to vote for a member of Parliament. Since a great part of the yeomanry have freeholds of this kind, the entire group becomes respectable to their landlords because of the political influence this gives them.
• I believe there is nowhere in Europe, except in England, any instance of a tenant building on land for which they had no lease, trusting that the honor of their landlord would prevent them from taking advantage of such an important improvement.

These laws and customs, so favorable to the yeomanry, have perhaps contributed more to the present greatness and prosperity of England than all their boasted regulations of commerce put together.

Lease Security in Great Britain

The law that protects the longest leases against successors of every kind (new owners, heirs, etc.) is, as far as I know, unique to Great Britain. It was introduced into Scotland as early as 1449, by a law of King James II. Its beneficial influence, however, has been greatly hindered by entails. The heirs of entailed estates are generally restricted from letting leases for any long term of years, frequently for not more than one year. A recent act of Parliament has, in this respect, somewhat loosened these restrictions, though they are still far too tight. In Scotland, besides, as no leasehold gives a vote for a member of Parliament, the yeomanry are less respected by their landlords on this account than in England.

Short Leases and Landlord-Focused Laws Elsewhere

In other parts of Europe, even after it was found convenient to provide tenants some security against both heirs and new purchasers, the term of their security was still limited to a very short period. In France, for example, it was limited to nine years from the beginning of the lease. It has recently been extended to twenty-seven years in that country, but this is still too short a period to encourage a tenant to make the most important and costly improvements.

The landowners were anciently the lawmakers in every part of Europe. The laws relating to land, therefore, were all designed to promote what they supposed to be the interest of the landowner. They had imagined that it was in their interest that no lease granted by any of their predecessors should prevent them from enjoying the full value of their land for many years to come. Greed and injustice are always shortsighted. They did not foresee how much this type of regulation would obstruct improvement and thereby hurt, in the long run, the real interest of the landlord.

Other Burdens on Farmers: Arbitrary Services

Besides paying rent, farmers in ancient times were also supposed to be bound to perform a great number of services for the landlord. These services were seldom clearly specified in the lease or regulated by any precise rule. Instead, they were determined by the custom and tradition (“use and wont”) of the local manor or barony. These services, therefore, being almost entirely arbitrary, subjected the tenant to many troubles and annoyances. In Scotland, the abolition of all services not precisely stated in the lease has, in the course of a few years, very much improved the condition of the yeomanry of that country.

The public services to which the yeomanry were bound were no less arbitrary than the private ones.

• Road Maintenance: One such service was making and maintaining the high roads, a burden which still exists, I believe, everywhere, though with different degrees of oppression in different countries.
• Purveyance: This was not the only public service. When the king’s troops, his household, or his officers of any kind passed through any part of the country, the yeomanry were legally bound to provide them with horses, carriages, and provisions. The price for these was regulated by the king’s buyer (the purveyor). Great Britain is, I believe, the only monarchy in Europe where the oppression of purveyance has been entirely abolished. It still exists in France and Germany.

Oppressive Public Taxes: The Taille

The public taxes to which farmers were subject were as irregular and oppressive as the services. The ancient lords, though extremely unwilling to grant any financial aid from their own pockets to their king, easily allowed him to tax their tenants (an action they called “tallage”). They did not have enough knowledge to foresee how much this would eventually affect their own income from rents.

The taille, as it still exists in France, can serve as an example of these ancient taxes.

• It is a tax on the supposed profits of the farmer. These profits are estimated by the amount of stock (animals, equipment, etc.) the farmer has on the farm.
• It is therefore in the farmer’s interest to appear to have as little stock as possible. Consequently, it is in their interest to use as little stock as possible in farming the land, and to use none at all in improving it.
• Should any extra stock happen to accumulate in the hands of a French farmer, the taille acts almost as a complete prohibition against that stock ever being used to improve the land.
• This tax, besides, is supposed to bring dishonor to whoever is subject to it. It is seen as degrading a person below not only the rank of a gentleman but also that of a respectable townsman (a burgher). Whoever rents the lands of another becomes subject to this tax. No gentleman, nor even any townsman who has capital, will submit to this degradation.
• This tax, therefore, not only hinders any capital that accumulates on the land from being used for its improvement but also drives all other capital away from the land.

The ancient “tenths and fifteenths,” which were common taxes in England in former times, seem, as far as they affected the land, to have been taxes of the same nature as the taille.

Conclusion: Discouraged Farmers, Slow Improvement

Under all these discouragements, little improvement of the land could be expected from its occupiers. That group of people, even with all the liberty and security that law can provide, must always struggle to improve land under great disadvantages.

A farmer, when compared to a landowner who farms their own land, is like a merchant who trades with borrowed money compared to one who trades with their own money. The capital of both can grow. However, the capital of the farmer (or the merchant with borrowed money), even with equally good management, will always grow more slowly than that of the other. This is because a large share of the farmer’s profits is used to pay rent, much like a large share of the merchant’s profits is used to pay interest on the loan.

In the same way, lands cultivated by a farmer will, with equally good management, be improved more slowly than lands cultivated by the landowner themself. This is because a large share of the produce from the farmer’s land is taken by the rent. If the farmer had been the landowner, that share could have been used for further improvement of the land.

Besides, the social position of a farmer is, by the nature of things, lower than that of a landowner. Throughout most of Europe, farmers (the yeomanry) are regarded as a lower rank of people, even compared to skilled tradesmen and mechanics. In all parts of Europe, they are considered lower than great merchants and master manufacturers. Therefore, it rarely happens that a person with any significant amount of capital would choose to leave a higher-status profession to place themselves in a lower-status one like farming.

So, even in the current state of Europe, little capital is likely to move from any other profession into the improvement of land through farming. Perhaps more capital moves this way in Great Britain than in any other country. However, even in Great Britain, the large amounts of capital that are, in some places, used in farming have generally been acquired through farming itself. Farming is perhaps the trade in which, of all others, capital is usually acquired most slowly.

After small landowners, however, rich and successful farmers are, in every country, the main people who improve the land. There are perhaps more such farmers in England than in any other European monarchy. In the republican governments of Holland and of Berne in Switzerland, the farmers are said to be just as skilled and successful as those in England.

Old Policies That Harmed Farming

Beyond all these issues, the ancient policies of Europe were unfavorable to the improvement and cultivation of land. This was true whether the farming was carried on by the landowner or by a tenant farmer. These policies harmed agriculture in two main ways:

1. Bans on Exporting Grain: There was a general prohibition on exporting corn (grain) without a special license. This seems to have been a very widespread regulation.
2. Restrictions on Inland Trade: There were restraints placed on the internal trade, not only of corn but of almost every other type of farm produce. These restraints came from:
   • Absurd laws against engrossers (people who buy up large quantities of goods to control the market), regraters (people who buy goods and resell them in the same market at a higher price), and forestallers (people who intercept goods on their way to market to buy them up).
   • The special privileges of fairs and markets, which often restricted where and when goods could be sold.

It has already been mentioned how the ban on exporting corn, along with some encouragement given to importing foreign corn, hindered the cultivation of ancient Italy. Italy was naturally the most fertile country in Europe and, at that time, the center of the greatest empire in the world. It is not perhaps very easy to imagine the extent to which such restrictions on the internal trade of this vital commodity, combined with the general ban on exports, must have discouraged the cultivation of countries that were less fertile and less favorably situated.

CHAPTER III: OF THE RISE AND PROGRESS OF CITIES AND TOWNS AFTER THE FALL OF THE ROMAN EMPIRE

Town Dwellers After Rome’s Fall

After the fall of the Roman Empire, the inhabitants of cities and towns were not treated any more favorably than those living in the countryside. Indeed, they were a very different group of people from the first inhabitants of the ancient republics of Greece and Italy.

• Those ancient city dwellers were mostly landowners. The public territory had originally been divided among them, and they found it convenient to build their houses near each other and to surround them with a wall for common defense.

After the fall of the Roman Empire, however, the landowners seem generally to have lived in fortified castles on their own estates, surrounded by their own tenants and dependents. The towns were chiefly inhabited by tradesmen and mechanics (craftsmen). In those days, these town dwellers seem to have been in a servile (slave-like) condition, or very close to it.

The privileges that we find granted by ancient charters (official documents) to the inhabitants of some of the main towns in Europe clearly show what their situation was before those grants.

• If people are granted as a privilege the right to give away their own daughters in marriage without their lord’s consent…
• If it’s a privilege that upon their death, their own children, and not their lord, should inherit their goods…
• If it’s a privilege that they might dispose of their own belongings by making a will… …then, before these grants, those people must have been either completely or very nearly in the same state of serfdom (villanage) as the farmers and laborers in the countryside.

Early Town Dwellers: Poor and Mobile

Indeed, they seem to have been a very poor, low-status group of people. They used to travel about with their goods from place to place, and from fair to fair, much like the hawkers and peddlers of current times.

In all the different countries of Europe back then, just as in several of the Tartar governments of Asia today, taxes used to be charged on the persons and goods of travelers:

• When they passed through certain manors (large estates).
• When they went over certain bridges.
• When they carried their goods from place to place within a fair.
• When they set up a booth or stall in a fair to sell their goods.

These different taxes were known in England by names like passage, pontage, lastage, and stallage.

Sometimes the king, and sometimes a great lord (who, it seems, occasionally had the authority to do this), would grant to particular traders an exemption from such taxes. This was especially true for traders who lived on the lord’s own lands (demesnes). Such traders, even though in other respects they were in a nearly slave-like condition, were for this reason called Free-traders. In return, they usually paid their protector a kind of annual head tax (poll-tax). In those days, protection was seldom granted without a valuable payment in return. This tax might have been considered compensation for what their patrons (protectors) might lose from exempting them from other taxes.

At first, both these poll-taxes and these exemptions seem to have been entirely personal. They likely affected only particular individuals, either for their lifetimes or as long as their protectors wished. In the very incomplete records that have been published from the Domesday Book about several English towns, mention is frequently made of the tax that particular townsmen (burghers) paid, either to the king or to some other great lord, for this sort of protection. Sometimes only the total amount of all these taxes for a town is mentioned.

Towns Gain Freedom Sooner Than the Countryside

No matter how slave-like the original condition of town inhabitants may have been, it appears clear that they achieved liberty and independence much earlier than the farmers and laborers in the countryside.

The part of the king’s income that came from such poll-taxes in any particular town was commonly leased out for a fixed rent for a number of years. This lease was sometimes given to the sheriff of the county, and sometimes to other people. The townsmen themselves frequently gained enough credit and trust to be allowed to lease the right to collect the taxes that arose out of their own town. They then became jointly and individually responsible for paying the whole rent to the king.

Leasing out revenue collection in this manner was quite common for, I believe, the kings of all the different countries of Europe. They frequently used to lease whole manors to all the tenants of those manors. The tenants would become jointly and individually responsible for the whole rent. In return, however, they were allowed to collect it in their own way and to pay it into the king’s treasury by the hands of their own appointed official (bailiff). This also meant they were completely freed from the disrespectful and abusive behavior of the king’s tax officers – a circumstance regarded as extremely important in those days.

From Yearly Leases to Perpetual Freedom

At first, the lease for the town’s taxes (the “farm of the town”) was probably granted to the townsmen in the same way it had been to other tax farmers: for a limited number of years only. Over time, however, it seems to have become general practice to grant this lease to them in fee, that is, forever. They would pay a fixed rent that was never afterwards to be increased.

Since the payment of this rent became perpetual, the exemptions from other taxes, in return for which the rent was paid, naturally became perpetual too. Those exemptions, therefore, stopped being personal. They could no longer be considered as belonging to individuals as individuals, but as rights belonging to them as burghers (citizens) of a particular burgh (town). Because of this, the town was called a free burgh, for the same reason that the individuals had been called free burghers or free traders.

Key Privileges Granted to Free Towns

Along with this grant of a perpetual lease on their taxes, other important privileges mentioned earlier were generally given to the burghers of the town:

• They could give away their own daughters in marriage.
• Their children would inherit their property.
• They could dispose of their own belongings by making a will.

I do not know for certain whether such privileges had usually been granted to individual burghers along with the freedom of trade before this time. I think it is not unlikely that they were, though I cannot produce any direct evidence of it. But however this may have been, with the principal characteristics of serfdom and slavery thus taken away from them, they now, at least, became truly free in our present understanding of the word Freedom.

Towns Become Self-Governing Corporations

And that was not all. At the same time, these towns were generally established as a commonalty or corporation. This came with further important privileges:

• The privilege of having magistrates and a town council of their own.
• The privilege of making by-laws for their own government.
• The privilege of building walls for their own defense.
• The privilege of organizing all their inhabitants under a sort of military discipline, by requiring them to “watch and ward.” This meant, as anciently understood, to guard and defend those walls against all attacks and surprises, by night as well as by day.

In England, town corporations were generally exempted from having to attend the hundred courts and county courts (local courts controlled by rural lords). All legal cases that arose among them, except for “pleas of the crown” (serious crimes against the king or state), were left to be decided by their own magistrates. In other countries, towns were frequently granted much greater and more extensive legal powers.

Why Kings Granted Towns Such Powers

It was probably necessary to grant towns that were allowed to lease their own revenues some sort of power to compel their own citizens to make payments. In those disorderly times, it might have been extremely inconvenient to have left them to seek this sort of justice from any other court.

But it must seem extraordinary that the kings of all the different countries of Europe should have exchanged, in this manner, a source of their income that was likely to improve naturally over time (as towns grew richer) for a fixed rent that could never be increased. It also seems strange that they should have, in this way, voluntarily created a sort of independent republic in the heart of their own kingdoms.

To understand this, we must remember that in those days, the king of perhaps no country in Europe was able to protect the weaker part of his subjects from the oppression of the great lords throughout the whole extent of his lands.

• Those whom the laws could not protect, and who were not strong enough to defend themselves, were forced either to seek the protection of some great lord (and to become his slaves or vassals to get it) or to join together in a league of mutual defense for their common protection.

The inhabitants of cities and towns, considered as single individuals, had no power to defend themselves. But by joining in a league of mutual defense with their neighbors, they were capable of offering a significant resistance.

• The lords despised the townsmen, whom they considered not only as being of a different social order but as a bunch of freed slaves, almost of a different species from themselves.
• The wealth of the townsmen never failed to provoke the envy and anger of the lords, who plundered them on every occasion without mercy or regret.
• The townsmen naturally hated and feared the lords. The king also hated and feared the lords. However, though the king might perhaps have despised the townsmen, he had no reason either to hate or fear them.

A Mutual Interest: Therefore, mutual interest led the townsmen to support the king, and the king to support them against the lords. The townsmen were the enemies of the king’s enemies, and it was in the king’s interest to make them as secure and independent of those enemies as he could.

• By granting them their own magistrates, the privilege of making their own laws, the right to build walls for their own defense, and the power to organize their inhabitants for military defense, the king gave them all the means of security and independence from the barons (the great lords) that it was in his power to give.
• Without the establishment of some regular government of this kind, and without some authority to compel their inhabitants to act according to a common plan, no voluntary league of mutual defense could have either provided them any permanent security or enabled them to give the king any considerable support.
• By granting them the lease of their town’s revenues forever, the king removed any reason for those whom he wished to have as his friends and allies to be jealous or suspicious that he might later oppress them, either by raising the rent for their town or by leasing it to some other tax farmer.

Kings Who Favored Towns

The kings who were on the worst terms with their barons seem, accordingly, to have been the most generous in granting these kinds of privileges to their towns.

• King John of England, for example, appears to have been a most generous benefactor to his towns.
• Philip the First of France lost all authority over his barons. Towards the end of his reign, his son Louis (known later as Louis the Fat), after consulting with bishops, decided on two main ways to restrain the violence of the great lords:
  1. To create a new system of courts by establishing magistrates and a town council in every sizable town on his royal lands.
  2. To form a new militia by making the inhabitants of those towns, under the command of their own magistrates, march out on proper occasions to help the king. French historians date the institution of city magistrates and councils in France from this period.
• It was during the troubled reigns of the princes of the House of Suabia in Germany that most of the free towns there received their first grants of privileges, and that the famous Hanseatic League (a powerful commercial and defensive confederation of merchant guilds and market towns) first became formidable.

Town Militias and the Rise of Independent Cities

The militias of the cities, in those times, seem to have been no worse than those of the countryside. Since city militias could be assembled more readily on any sudden occasion, they frequently had the advantage in their disputes with the neighboring lords.

In countries such as Italy and Switzerland—where, either because of their distance from the main seat of government, the natural defensive strength of the country itself, or some other reason, the king eventually lost all of his authority—the cities generally became independent republics. They conquered all the nobility in their neighborhood, forcing them to tear down their castles in the country and to live, like other peaceable inhabitants, in the city.

• This is the short history of the republic of Berne, as well as of several other cities in Switzerland.
• If you exclude Venice (for that city’s history is somewhat different), it is the history of all the considerable Italian republics, of which so great a number arose and perished between the end of the twelfth and the beginning of the sixteenth century.

Towns in Stronger Monarchies Gain Influence

In countries such as France or England, where the authority of the king, though frequently very low, was never completely destroyed, the cities had no opportunity to become entirely independent. They did, however, become so important that the king could impose no tax upon them, besides the agreed-upon fixed rent for the town, without their own consent.

• They were, therefore, called upon to send deputies (representatives) to the general assembly of the “states” (or estates) of the kingdom. There, they might join with the clergy and the barons in granting, on urgent occasions, some extraordinary financial aid to the king.
• Being generally more favorable to the king’s power, their deputies seem sometimes to have been used by him as a counterbalance in those assemblies to the authority of the great lords.
• This is the origin of the representation of towns (burghs) in the states-general (national assemblies) of all the great monarchies in Europe.

Cities: Havens of Order and Early Industry

In this manner, order and good government, and along with them the liberty and security of individuals, were established in cities at a time when the farmers and laborers in the countryside were exposed to every sort of violence.

• Men in a defenseless state naturally content themselves with acquiring only their necessary subsistence, because to acquire more might only tempt the injustice of their oppressors.
• On the contrary, when people are secure in enjoying the fruits of their industry, they naturally exert that industry to better their condition and to acquire not only the necessities but also the conveniences and elegancies of life.
• Therefore, that industry which aims at something more than necessary subsistence was established in cities long before it was commonly practiced by the farmers and laborers in the countryside.

If a poor cultivator, oppressed with the servitude of serfdom, managed to accumulate some little capital, he would naturally hide it with great care from his master, to whom it would otherwise have belonged. He would then take the first opportunity to run away to a town. The law at that time was so indulgent to the inhabitants of towns, and so desirous of diminishing the authority of the lords over the people of the country, that if a serf could conceal himself in a town from the pursuit of his lord for a year, he was free forever.

Okay, I’m ready to simplify this final section of Book Three.

Therefore, any money or capital that was saved up by the hardworking people in the countryside naturally sought safety in cities. Cities were the only places where a person who had earned that capital could feel secure with it.

How Cities Get Their Supplies

It’s true that the people living in a city must always, in the end, get their food and all the materials and resources for their industries from the countryside. However, people in a city located near the sea coast or on the banks of a navigable river are not necessarily limited to getting these supplies only from the countryside in their immediate neighborhood.

• They have a much wider range. They can draw supplies from the most distant corners of the world.
• They can do this either by exchanging the manufactured products of their own industry for these supplies, or by acting as carriers (transporters) between distant countries, exchanging the produce of one country for that of another.

In this way, a city could grow to achieve great wealth and splendor, even while the countryside in its own neighborhood, and all the countries it traded with, were poor and miserable. Each of those countries, perhaps, taken by itself, could provide the city with only a small part of its food or its business. But all of them taken together could provide it with both a great amount of food and a great deal of business.

However, within the small circle of trade in those times, some countries were wealthy and industrious.

• Such was the Greek Empire (the Byzantine Empire) as long as it existed.
• Such was the empire of the Saracens during the rule of the Abasside caliphs.
• Such also was Egypt until it was conquered by the Turks.
• Parts of the Barbary Coast of North Africa, and all those provinces of Spain that were under the government of the Moors, were also in this category.

Italian Cities: Pioneers of Commerce

The cities of Italy seem to have been the first in Europe to be raised by trade to any significant level of wealth. Italy was located in the center of what was, at that time, the improved and civilized part of the world.

The Crusades, too, played a role. Although the Crusades must have slowed down the progress of the greater part of Europe because of the great waste of money and destruction of people they caused, they were extremely favorable to the growth of some Italian cities.

• The great armies that marched from all parts of Europe to conquer the Holy Land gave extraordinary encouragement to the shipping industries of Venice, Genoa, and Pisa. These cities were involved sometimes in transporting the armies and always in supplying them with provisions.
• They were, one might say, the supply managers (commissaries) for these armies.
• This most destructive madness (the Crusades) that ever affected the European nations became a source of wealth for these Italian republics.

Trade, Luxury, and Economic Exchange

The inhabitants of trading cities, by importing improved manufactured goods and expensive luxuries from richer countries, provided something for the great landowners to spend their money on, satisfying their vanity. These landowners eagerly purchased these luxury items with large quantities of the raw produce from their own lands.

The trade of a great part of Europe in those times, accordingly, consisted chiefly in exchanging their own raw produce for the manufactured produce of more civilized nations.

• For example, the wool of England used to be exchanged for the wines of France and the fine cloths of Flanders.
• This is similar to how, at the present day, the grain of Poland is exchanged for the wines and brandies of France, and for the silks and velvets of France and Italy.

How Foreign Trade Sparked Local Manufacturing

In this way, a taste for finer and more improved manufactured goods was introduced by foreign trade into countries where no such industries previously existed. But when this taste became so widespread as to create a significant demand, merchants naturally tried to establish some manufactures of the same kind in their own country. They did this to save the expense of transportation.

This is how the first manufactures designed for distant sale (not just local use) seem to have been established in the western provinces of Europe after the fall of the Roman Empire.

It must be noted that no large country ever did or could survive without some sort of manufacturing being carried on within it. When it is said of any such country that it has no manufactures, it must always be understood to mean the finer and more improved types of manufactures, or those that are suitable for selling in distant markets. In every large country, both the clothing and household furniture of the vast majority of the people are the products of their own local industry. This is even more universally true in those poor countries that are commonly said to have no manufactures, than in those rich ones that are said to have many. In the latter (rich countries), you will generally find, both in the clothes and household furniture of the lowest rank of people, a much greater proportion of foreign-made products than in the former (poor countries).

Two Paths for Developing Export-Oriented Manufactures

Those manufactures that are fit for distant sale seem to have been introduced into different countries in two different ways:

1. Through Imitation, Driven by Merchants (Offspring of Foreign Commerce):

   • Sometimes, they were introduced, as mentioned above, by what might be called the “forceful action” of the capital (stocks) of particular merchants and business starters (undertakers). These individuals established manufactures in imitation of some foreign manufactures of the same kind.
   • Such manufactures, therefore, are the offspring of foreign commerce.
   • Examples include:
     • The ancient manufactures of silks, velvets, and brocades that flourished in Lucca, Italy, during the thirteenth century. (They were later banished from there by the tyranny of Castruccio Castracani, one of Machiavelli’s historical figures. In 1310, nine hundred families were driven out of Lucca. Thirty-one of these families moved to Venice and offered to introduce the silk manufacturing process there. Their offer was accepted, many privileges were granted to them, and they began the manufacture with three hundred workmen.)
     • The manufactures of fine cloths that anciently flourished in Flanders, and which were introduced into England at the beginning of the reign of Queen Elizabeth I.
     • The current silk manufactures of Lyons (France) and Spitalfields (London).
   • Manufactures introduced in this manner are generally based on foreign raw materials, as they are imitations of foreign manufactures.
     • When the Venetian silk manufacture was first established, the raw materials were all brought from Sicily and the Levant (eastern Mediterranean). The older silk manufacture of Lucca was also carried on with foreign materials.
     • The cultivation of mulberry trees and the breeding of silkworms do not seem to have been common in the northern parts of Italy before the sixteenth century. These skills were not introduced into France until the reign of King Charles IX.
     • The manufactures of Flanders were carried on chiefly with Spanish and English wool. Spanish wool was the material, not of the very first woolen manufacture in England, but of the first that was good enough for distant sale.
     • More than half the materials of the Lyons silk manufacture today are foreign silk; when it was first established, all or very nearly all of the silk was foreign. No part of the materials for the Spitalfields silk manufacture is ever likely to be produced in England.
   • The location of such manufactures, since they are generally introduced by the plans and projects of a few individuals, is sometimes established in a coastal city and sometimes in an inland town, depending on what their interests, judgment, or personal preferences happen to determine.

2. Through Natural Growth from Local Crafts (Offspring of Agriculture):

   • At other times, manufactures for distant sale grow up naturally, and as it were, on their own. They develop by the gradual refinement of those household and coarser manufactures that must always be carried on even in the poorest and least developed countries.
   • Such manufactures are generally based on the raw materials that the country itself produces.
   • They seem frequently to have been first refined and improved in inland regions that were not at a very great distance, but at a considerable distance, from the sea coast, and sometimes even from any river suitable for boat transport.
   • Here’s how this natural growth happens:
     • An inland country that is naturally fertile and easily cultivated produces a large surplus of food, more than is needed to support the farmers.
     • Due to the expense of land transport and the inconvenience of river navigation, it may often be difficult to send this food surplus abroad.
     • This abundance, therefore, makes food cheap. This encourages a large number of workmen to settle in the neighborhood because they find that their labor there can get them more of the necessities and conveniences of life than in other places.
     • These workmen process the raw materials for manufacturing that the land produces. They then exchange their finished work (or the money they get for it) for more raw materials and food.
     • They give a new value to the surplus part of the raw produce by saving the expense of carrying it to a port or some distant market. They also provide the farmers with something in exchange for it that is either useful or agreeable to them, on easier terms than they could have obtained it before.
     • The farmers get a better price for their surplus produce and can purchase other conveniences they need more cheaply. They are thus both encouraged and able to increase this surplus produce by further improving and better cultivating the land.
     • So, just as the fertility of the land gave birth to the manufacture, the progress of the manufacture reacts upon the land and increases its fertility still further.
     • The manufacturers first supply their own neighborhood. Afterwards, as their work improves and becomes more refined, they supply more distant markets.
     • Although neither the raw produce nor even coarsely manufactured goods could, without the greatest difficulty, bear the expense of considerable land transport, refined and improved manufactured goods easily can. A small volume of such goods often contains the price of a great quantity of raw produce.
     • A piece of fine cloth, for example, which weighs only eighty pounds, contains in it the price not only of eighty pounds of wool but sometimes of several thousand pounds of grain (which was needed to maintain the different working people and their immediate employers).
     • The grain, which could with difficulty have been carried abroad in its original form, is in this manner effectively exported in the form of the complete manufactured product, and can easily be sent to the most remote corners of the world.
   • In this manner, the manufactures of English towns like Leeds, Halifax, Sheffield, Birmingham, and Wolverhampton have grown up naturally, as if of their own accord. Such manufactures are the offspring of agriculture.
   • In the modern history of Europe, the expansion and improvement of these “offspring of agriculture” manufactures have generally happened after the expansion and improvement of those manufactures that were the “offspring of foreign commerce.” England was known for its manufacture of fine cloths made of Spanish wool more than a century before any of the manufactures that now flourish in the towns mentioned above were fit for foreign sale.
   • The expansion and improvement of these latter (agriculture-based) manufactures could not take place except as a consequence of the expansion and improvement of agriculture itself. This agricultural improvement was the last and greatest effect of foreign commerce and of the manufactures immediately introduced by it, which I shall now proceed to explain.

CHAPTER IV: HOW THE COMMERCE OF THE TOWNS CONTRIBUTED TO THE IMPROVEMENT OF THE COUNTRY

The increase in wealth and population of commercial and manufacturing towns contributed to the improvement and cultivation of the countries to which they belonged in three different ways.

First Way: Providing a Good Market

Towns provided a great and ready market for the raw produce of the country. This encouraged the cultivation and further improvement of the land.

• This benefit was not even confined to the countries in which the towns were located. It extended more or less to all those countries with which they had any dealings.
• To all of them, the towns offered a market for some part of either their raw or manufactured produce. Consequently, they gave some encouragement to the industry and improvement of all those countries.
• Their own country, however, because of its closeness, necessarily received the greatest benefit from this market. Its raw produce, having to be transported a shorter distance, meant that traders could pay the growers a better price for it and yet still sell it as cheaply to consumers as produce from more distant countries.

Second Way: Wealth from Cities Invested in Land

The wealth acquired by the inhabitants of cities was frequently used to purchase lands that were for sale. A great part of this land would often be uncultivated.

• Merchants often want to become country gentlemen. When they do, they are generally the best of all land improvers.
• A merchant is accustomed to using their money chiefly in profitable projects. In contrast, a mere country gentleman is accustomed to using their money chiefly on personal expenses.
• The merchant often sees their money go from them and then return to them with a profit. The country gentleman, once they part with their money, very seldom expects to see any more of it.
• These different habits naturally affect their temperament and attitude in every sort of business. A merchant is commonly a bold entrepreneur, while a country gentleman is a timid one.
• The merchant is not afraid to invest a large amount of capital all at once in improving their land, especially when there is a probable prospect of raising the value of the land in proportion to the expense.
• The country gentleman, if he has any capital (which is not always the case), seldom dares to use it in this manner. If he improves his land at all, it is commonly not with a large sum of capital, but with what he can save from his annual income.
• Anyone who has had the fortune to live in a trading town situated in an undeveloped country must have frequently observed how much more energetic and ambitious the land improvement efforts of merchants were compared to those of mere country gentlemen.
• Besides, the habits of order, economy, and attention to detail, which mercantile business naturally forms in a merchant, make him much better suited to carry out any project of improvement profitably and successfully.

Third Way: Commerce Brought Order, Good Government, and Security

Thirdly, and lastly, commerce and manufactures gradually introduced order and good government. With these came the liberty and security of individuals among the inhabitants of the countryside. Before this, country dwellers had lived almost in a continual state of war with their neighbors and in a state of slave-like dependence on their superiors.

• This, though it has been the least observed, is by far the most important of all their effects.
• Mr. Hume is the only writer who, as far as I know, has previously taken notice of this.

Life Before Widespread Commerce: The Great Landowner

In a country that has neither foreign trade nor any fine manufactures, a great landowner has nothing for which he can exchange the greater part of the produce of his lands (which is over and above what the cultivators need for their own maintenance). Therefore, he consumes the whole surplus in rustic hospitality at home.

• If this surplus produce is sufficient to maintain a hundred or a thousand men, he can use it in no other way than by feeding and supporting a hundred or a thousand men.
• He is therefore at all times surrounded by a multitude of retainers and dependents. These people have nothing of equivalent value to give in return for their maintenance. They are fed entirely by his generosity (bounty).
• Consequently, they must obey him, for the same reason that soldiers must obey the prince who pays them.

Before the expansion of commerce and manufactures in Europe, the hospitality of the rich and the great, from the king down to the smallest baron, exceeded anything which in current times we can easily imagine.

• Westminster Hall was the dining room of King William Rufus, and it frequently might not have been too large for his company.
• It was considered a sign of magnificence in Thomas Becket that he scattered clean hay or rushes on the floor of his hall during the appropriate season. This was so that the knights and squires who could not get seats would not spoil their fine clothes when they sat down on the floor to eat their dinner.
• The great Earl of Warwick is said to have entertained thirty thousand people every day at his different manors. Though this number may have been exaggerated, it must have been very great to allow for such an exaggeration.
• A hospitality very similar to this was practiced not many years ago in many different parts of the highlands of Scotland. It seems to be common in all nations where commerce and manufactures are little known.
• Dr. Pocock says, “I have seen an Arabian chief dine in the streets of a town where he had come to sell his cattle, and invite all passengers, even common beggars, to sit down with him and share his banquet.”

Dependence of Farmers on the Great Landowner

The farmers (occupiers of land) were in every respect as dependent upon the great landowner as his retainers were. Even those farmers who were not in a state of serfdom were tenants at will. They paid a rent that was in no way equivalent to the food and livelihood that the land provided them.

• A few years ago in the highlands of Scotland, a crown, half a crown, a sheep, or a lamb was a common rent for lands that could support a whole family. In some places, it is still so today. Nor will money at present purchase a greater quantity of goods there than in other places.
• In a country where the surplus produce of a large estate must be consumed on the estate itself, it will frequently be more convenient for the landowner that part of it be consumed at a distance from his own house. This is provided that those who consume it are as dependent upon him as either his retainers or his domestic servants. He is thereby saved from the embarrassment of either too large a company or too large a family at his main residence.
• A tenant at will, who possesses land sufficient to maintain his family for little more than a token rent (quit-rent), is as dependent upon the landowner as any servant or retainer whatever. He must obey the landowner with as little hesitation.
• Such a landowner, just as he feeds his servants and retainers at his own house, also effectively feeds his tenants at their houses. The subsistence of both groups is derived from his bounty, and its continuation depends upon his good pleasure.

The Basis of Barons’ Power

The power of the ancient barons was founded upon the authority which the great landowners necessarily had in such a state of things over their tenants and retainers.

• They necessarily became the judges in peace and the leaders in war for all who lived on their estates.
• They could maintain order and enforce the law within their respective lands because each of them could, in their own territory, turn the whole force of all the inhabitants against the injustice of any single person.
• No other person had sufficient authority to do this. The king, in particular, did not.

In those ancient times, the king was little more than the greatest landowner in his own lands. The other great landowners would pay him certain respects, mainly for the sake of common defense against their common enemies. If the king had tried to enforce payment of a small debt within the lands of a great proprietor, where all the inhabitants were armed and used to standing by one another, it would have cost him almost the same effort as trying to put down a civil war.

• He was, therefore, forced to give up the administration of justice throughout most of the country to those who were actually capable of administering it (the great lords).
• For the same reason, he had to leave the command of the country’s militia to those whom that militia would actually obey.

Lords’ Powers Came Before Feudal Law

It is a mistake to imagine that these powers of landowners over their territories (territorial jurisdictions) started with feudal law.

• The great landowners possessed many rights “allodially” – meaning they owned them outright, not as grants from a king – several centuries before even the name of feudal law was known in Europe. These rights included:
  • The highest legal powers, both civil (disputes between people) and criminal.
  • The power to raise troops.
  • The power to coin money.
  • Even the power to make local laws (by-laws) for the government of their own people.
• The authority and legal powers of the Saxon lords in England seem to have been just as great before the Norman Conquest as those of any of the Norman lords after it. But feudal law is not thought to have become the common law of England until after the Conquest.
• It is a fact that admits of no doubt that the great lords in France possessed the most extensive authority and legal powers allodially, long before feudal law was introduced into that country.
• This authority and these powers all naturally resulted from the state of property ownership (large estates owned by a few) and the customs and social conditions of the time (many dependent people).

Even without going back to the distant ancient history of either the French or English monarchies, we can find many proofs in much later times that such causes will always produce such effects.

• For example, not thirty years ago, Mr. Cameron of Lochiel, a gentleman in Lochaber, Scotland, exercised the highest criminal legal power over his own people. He did this without any legal warrant whatsoever. He was not what was then called a “lord of regality” (a lord with special royal privileges), nor even a direct tenant of the king (a tenant in chief). He was merely a vassal (a subordinate holder of land) of the Duke of Argyle and was not even a justice of the peace.
• He is said to have used this power with great fairness, though without the formal procedures of justice. It is not unlikely that the state of that part of the country at that time made it necessary for him to assume this authority in order to maintain public peace.
• This gentleman, whose income from rent never exceeded five hundred pounds a year, brought eight hundred of his own people with him into the rebellion of 1745.

Feudal Law: An Attempt to Limit Lords’ Power

The introduction of feudal law, far from extending the power of the great allodial lords (those who owned land outright), can be seen as an attempt to moderate their authority.

• It established a regular system of subordination, with a long series of services and duties, from the king down to the smallest landowner.
• If a landowner died leaving a child heir (a minor), the rent from the land, along with its management, fell into the hands of the child’s immediate superior lord. Consequently, the lands of all great child proprietors fell into the hands of the king.
• The king was responsible for the child’s maintenance and education. As guardian, the king was also thought to have the right to arrange the child’s marriage, as long as it was in a manner suitable to their rank.

But although this system necessarily tended to strengthen the authority of the king and to weaken that of the great proprietors, it could not do either sufficiently to establish order and good government among the people of the country. This was because it could not sufficiently change the state of property ownership and social customs from which the disorders arose.

• The authority of the government still continued to be, as before, too weak at the top (the king) and too strong in the lower members (the great lords). The excessive strength of these lower members was the cause of the weakness at the top.
• After the establishment of feudal subordination, the king was just as incapable of restraining the violence of the great lords as he had been before. They still continued to make war according to their own judgment, almost constantly upon one another, and very frequently upon the king. The open countryside still continued to be a scene of violence, robbery, and disorder.

How Commerce and Manufacturing Succeeded

But what all the violence of the feudal institutions could never achieve, the silent and gradual effects of foreign commerce and manufactures eventually brought about.

• These gradually provided the great landowners with something for which they could exchange the entire surplus produce of their lands.
• This “something” was goods they could consume themselves, without sharing with either their tenants or their retainers (armed followers).
• “All for ourselves and nothing for other people” seems, in every age of the world, to have been the vile motto of the masters of mankind.
• Therefore, as soon as these great landowners could find a way to consume the whole value of their rents themselves, they had no desire to share them with any other people.
• For a pair of diamond buckles, perhaps, or for something equally frivolous and useless, they exchanged the maintenance (or the money to pay for the maintenance) of a thousand men for a year. With it, they exchanged the whole power and authority that maintaining those men could give them.
• The buckles, however, were to be all their own, and no other human being was to have any share of them. In contrast, in the older method of spending, they would have had to share with at least a thousand people. For those making the choice (the lords), who preferred their own vanity, this difference was perfectly decisive.
• Thus, for the satisfaction of the most childish, the meanest, and the most sordid of all vanities, they gradually traded away their entire power and authority.

The Shift in Spending Habits and Power

• In a country with no foreign trade or fine manufactures: A man with an income of ten thousand pounds a year cannot easily use his money in any other way than by supporting, perhaps, a thousand families. All these families are necessarily under his command.
• In the present state of Europe: A man with ten thousand pounds a year can spend his entire income (and he generally does so) without directly supporting twenty people, or being able to command more than ten footmen (who are not worth commanding anyway).
• Indirect Support: Indirectly, perhaps, he supports as great or even a greater number of people than he could have done by the ancient method of spending. Although the quantity of expensive, fine products for which he exchanges his whole income is very small, the number of workmen employed in collecting and preparing those products must necessarily have been very large. The great price of these items generally comes from the wages of their labor and the profits of all their immediate employers. By paying that price, he indirectly pays all those wages and profits and thus indirectly contributes to the support of all the workmen and their employers.
• Loss of Direct Dependence: However, he generally contributes only a very small proportion to the support of each individual worker – to very few perhaps a tenth, to many not a hundredth, and to some not a thousandth, or even a ten-thousandth part of their whole annual living expenses. Therefore, although he contributes to the maintenance of them all, they are all more or less independent of him, because generally they can all be supported without him.

When great landowners spend their rental income on maintaining their tenants and retainers, each of them entirely supports all his own tenants and all his own retainers. But when they spend their rents on supporting tradesmen and craftsmen, all the landowners taken together may, perhaps, support as great a number of people as before, or even a greater number (on account of the waste that happens with rustic hospitality).

• However, each landowner, taken individually, often contributes only a very small share to the maintenance of any single person among this larger number of tradesmen and craftsmen.
• Each tradesman or craftsman gets his living from the business of not just one, but of a hundred or a thousand different customers. Therefore, although he is in some measure obliged to them all, he is not absolutely dependent upon any one of them.

Consequences for Landowners and Tenants

As the personal expenses of the great landowners gradually increased in this manner, it was impossible that the number of their retainers should not as gradually decrease, until they were at last dismissed altogether. The same cause gradually led them to dismiss the unnecessary part of their tenants.

• Farms were enlarged.
• Despite complaints about depopulation, the number of people working the land was reduced to the number necessary for cultivating it, according to the imperfect state of farming and improvement in those times.

By removing the “unnecessary mouths” (people who were supported but not essential for production) and by demanding the full value of the farm from the farmer, a greater surplus (or the money for a greater surplus) was obtained for the landowner. The merchants and manufacturers soon provided him with ways to spend this extra income on his own person, in the same manner as he had done with the rest of his income.

As this same cause continued to operate, the landowner became eager to raise his rents above what his lands, in their current state of improvement, could actually provide. His tenants could agree to this higher rent on one condition only: that they should be secured in their possession of the land for a term of years long enough to give them time to recover, with a profit, whatever they might invest in further improving the land. The expensive vanity of the landlord made him willing to accept this condition. This is how long leases originated.

Even a tenant at will (one with no formal lease) who pays the full value of the land is not completely dependent upon the landlord. The financial advantages they receive from one another are mutual and equal. Such a tenant will not risk his life or his fortune in the service of the landowner. But if a tenant has a lease for a long term of years, he is altogether independent. His landlord must not expect from him even the most trivial service beyond what is either expressly stated in the lease or required of him by the common and known law of the country.

The Fall of the Lords and Rise of Order

With the tenants having become independent in this manner, and the retainers being dismissed, the great landowners were no longer capable of interrupting the regular execution of justice or of disturbing the peace of the country.

• They had sold their birthright (their power and authority), not like Esau in the Bible for a bowl of stew in a time of hunger and necessity, but in the indulgence of plenty, for trinkets and baubles that were more fit to be the playthings of children than the serious pursuits of men.
• As a result, they became as insignificant as any substantial townsman or tradesman in a city.
• A regular government was established in the country as well as in the city. Nobody had sufficient power to disturb its operations in one place any more than in the other.

An Aside: Old Families in Commercial vs. Non-Commercial Countries

It does not, perhaps, directly relate to the present subject, but I cannot help remarking that very old families—those that have possessed some considerable estate from father to son for many successive generations—are very rare in commercial countries. In countries that have little commerce, on the contrary, such as Wales or the highlands of Scotland, they are very common. Arabian histories seem to be full of genealogies. There is a history written by a Tartar Khan, which has been translated into several European languages, and which contains scarcely anything else. This is proof that ancient families are very common among those nations.

In countries where a rich man can spend his income in no other way than by supporting as many people as that income can maintain, he is not likely to run through his fortune quickly. His generosity, it seems, is seldom so excessive as to attempt to support more people than he can afford. But where he can spend the greatest income on his own person, he frequently has no limits to his expense. This is because he frequently has no limits to his vanity or to his affection for his own person. In commercial countries, therefore, riches, despite the most forceful laws designed to prevent their being wasted, very seldom remain long in the same family. Among simple nations, on the contrary, riches frequently do remain in the same family without any such laws. For among nations of shepherds, such as the Tartars and Arabs, the consumable nature of their property (mostly livestock) necessarily makes all such laws to preserve wealth in families impossible.

An Unintended Revolution

A revolution of the greatest importance to public happiness was brought about in this way by two different groups of people who had not the least intention to serve the public:

1. The great landowners: Their sole motive was to satisfy the most childish vanity.
2. The merchants and craftsmen: They were much less ridiculous. They acted merely from a view to their own interest, and in pursuit of their own “peddler principle” of turning a penny wherever a penny was to be made.

Neither of these groups had any knowledge or foresight of the great revolution that the foolishness of the one and the industry of the other was gradually bringing about.

Conclusion: How City Commerce Transformed the Countryside

It is in this way that, through the greater part of Europe, the commerce and manufactures of cities, instead of being the effect of the improvement and cultivation of the country, have actually been the cause and occasion of it.

This order of development, however, being contrary to the natural course of things (where agriculture improves first and then supports cities), is necessarily both slow and uncertain.

• Compare the slow progress of those European countries whose wealth depends very much on their commerce and manufactures with the rapid advances of our North American colonies, whose wealth is founded entirely on agriculture.
• Through the greater part of Europe, the number of inhabitants is not thought to double in less than five hundred years. In several of our North American colonies, it is found to double in twenty or twenty-five years.

In Europe, the law of primogeniture and various types of perpetuities (like entails) prevent the division of great estates. This, in turn, hinders the multiplication of small landowners.

• A small landowner, however, who knows every part of his little territory, who views it with all the affection that property (especially small property) naturally inspires, and who for that reason takes pleasure not only in cultivating it but in adorning it, is generally, of all improvers, the most industrious, the most intelligent, and the most successful.
• These same regulations also keep so much land out of the market that there are always more people with capital wanting to buy land than there is land available to sell. As a result, what land is sold always sells at a monopoly price. The rent from the land never pays the interest that could have been earned on the purchase money. Besides, owning land comes with the burden of repairs and other occasional charges, to which money lent out at interest is not liable.
• To purchase land is everywhere in Europe a most unprofitable use of a small amount of capital.
• For the sake of the superior security it offers, a man of moderate circumstances, when he retires from business, will sometimes choose to invest his small capital in land. A professional person too, whose income is derived from another source, often loves to secure his savings in the same way.
• But a young man who, instead of going into trade or some profession, were to use a capital of two or three thousand pounds to purchase and cultivate a small piece of land, might indeed expect to live very happily and very independently. However, he must say goodbye forever to all hope of either great fortune or great public recognition, which he might have had the same chance of acquiring as other people if he had used his capital differently.
• Such a person too, though he cannot aspire to be a landowner, will often disdain to be merely a farmer.
• Therefore, the small quantity of land that is brought to market, and the high price of what is brought there, prevents a great number of capitals from being used in its cultivation and improvement, capitals which would otherwise have taken that direction.

In North America, on the contrary, fifty or sixty pounds is often found to be a sufficient amount of capital to begin a plantation with. The purchase and improvement of uncultivated land is there the most profitable employment for the smallest as well as the largest amounts of capital. It is also the most direct road to all the fortune and public recognition that can be acquired in that country. Such land, indeed, is available in North America for almost nothing, or at a price much below the value of what it can naturally produce – a situation impossible in Europe, or indeed, in any country where all lands have long been private property.

If landed estates, however, were divided equally among all the children upon the death of any landowner who left a numerous family, the estate would generally be sold. So much land would come to market that it could no longer sell at a monopoly price. The free rent of the land (rent after all expenses) would come closer to paying the interest on the purchase-money, and a small capital might be used in purchasing land as profitably as in any other way.

England’s Situation

England, on account of:

• The natural fertility of its soil,
• The great extent of its sea-coast in proportion to the size of the whole country,
• And the many navigable rivers that run through it and provide the convenience of water transport to some of the most inland parts of it, is perhaps as well-suited by nature as any large country in Europe to be the center of foreign commerce, of manufactures for distant sale, and of all the improvements that these can bring.

From the beginning of the reign of Queen Elizabeth I, the English legislature has also been particularly attentive to the interests of commerce and manufactures. In reality, there is no country in Europe, not even Holland itself, whose laws are, on the whole, more favorable to this sort of industry. Commerce and manufactures have accordingly been continually advancing during all this period.

The cultivation and improvement of the country has, no doubt, been gradually advancing too. But it seems to have followed slowly, and at a distance, the more rapid progress of commerce and manufactures. The greater part of the country must probably have been cultivated before the reign of Elizabeth I. Yet, a very great part of it still remains uncultivated today, and the cultivation of the far greater part is much inferior to what it could be.

The law of England, however, helps farming not only indirectly by protecting trade but also with several direct encouragements.

• Exporting Grain: Except in times of food shortages, exporting grain (corn) is not only allowed but also encouraged with a government payment (a bounty) to exporters.
• Importing Grain: In times when there is a moderate amount of grain, taxes on importing foreign grain are so high that they pretty much stop such imports.
• Importing Livestock: Importing live cattle, except from Ireland, is banned at all times. Permission to import them from Ireland was only granted recently.

Because of these rules, those who farm the land in England have a kind of monopoly against their own countrymen for the two biggest and most important products of the land: bread and meat.

These encouragements, though perhaps ultimately not as effective as they seem (as I will try to show later), at least demonstrate the good intention of the lawmakers to support agriculture. But what is much more important than all of them is that the independent farmers (the yeomanry) of England are made as secure, as independent, and as respected as the law can make them.

Therefore, no country that has the law of primogeniture (where the eldest son inherits all the land), that pays tithes (a tax to the church), and where land can be tied up indefinitely in families (perpetuities, like entails), even if this goes against the general spirit of the law, can give more encouragement to agriculture than England does.

Even so, this is the current state of farming in England (meaning it’s not as good as it could be). What would it have been like if the law had given no direct encouragement to agriculture beyond what comes indirectly from the progress of trade, and if the independent farmers had been left in the same poor condition as in most other countries of Europe? It is now more than two hundred years since the beginning of the reign of Queen Elizabeth I, a period as long as the course of human prosperity usually lasts.

Comparing England with Other Nations

• France: France seems to have had a considerable amount of foreign trade nearly a century before England became well-known as a commercial country. The French navy was quite large for its time, even before King Charles VIII’s expedition to Naples in the late 15th century. However, the farming and agricultural improvement of France are, on the whole, not as advanced as England’s. The laws of France have never given the same direct encouragement to agriculture.

• Spain and Portugal: The foreign trade of Spain and Portugal with other parts of Europe is very significant, though it is mostly carried on in foreign ships. Their trade with their own colonies is carried on in their own ships and is much greater, because of the great riches and size of those colonies. But this trade has never led to any significant manufacturing industries for distant sale in either Spain or Portugal. The greater part of both countries still remains uncultivated. Portugal’s foreign trade is older than that of any other large country in Europe, except for Italy.

• Italy: Italy is the only large country in Europe that seems to have been cultivated and improved in every part by means of foreign trade and manufacturing for distant sale. According to the historian Guicciardini, before the invasion of Charles VIII of France (late 15th century), Italy was cultivated just as much in its most mountainous and barren parts as in its flattest and most fertile plains. The advantageous location of the country and the great number of independent states that existed in it at that time probably contributed significantly to this general cultivation. It is also possible, despite this general statement from one of the most sensible and careful modern historians, that Italy at that time was not better cultivated than England is at present.

The Fragility of Wealth from Trade Alone

However, the capital (wealth) that is acquired by any country through commerce and manufactures is a very precarious and uncertain possession. This is true until some part of that capital has been secured and made real by being invested in the cultivation and improvement of its lands.

It has been said very correctly that a merchant is not necessarily the citizen of any particular country. It makes little difference to him from what place he carries on his trade. A very small problem or annoyance will make him move his capital, and along with it all the industry and jobs it supports, from one country to another. No part of his capital can truly be said to belong to any particular country until it has been spread, so to speak, over the face of that country, either in the form of buildings or in the lasting improvement of lands.

For example, no trace now remains of the great wealth said to have been possessed by most of the Hanseatic towns (a medieval trading league in Northern Europe), except in obscure history books from the thirteenth and fourteenth centuries. It is even uncertain where some of them were located, or to what modern towns in Europe the Latin names given to some of them belong.

But consider this contrast:

• Although the misfortunes of Italy at the end of the fifteenth and beginning of the sixteenth centuries greatly reduced the trade and manufacturing of the cities in Lombardy and Tuscany, those regions still continue to be among the most populous and best-cultivated in Europe.
• The civil wars in Flanders, and the Spanish government that followed them, chased away the great commerce of cities like Antwerp, Ghent, and Bruges. But Flanders still continues to be one of the richest, best-cultivated, and most populous provinces of Europe.

The ordinary upheavals of war and changes in government can easily dry up the sources of wealth that arise from commerce only. Wealth that arises from the more solid improvements of agriculture is much more durable. It cannot be destroyed except by those more violent and prolonged disasters caused by the destructive raids of hostile and barbarous nations, continued for a century or two together – such as those that happened for some time before and after the fall of the Roman Empire in the western provinces of Europe.