Ricardo's Principles of Political Economy and Taxations, Part 3
Part 3
Chapter 23
On Bounties on Production
It may not be uninstructive to consider the effects of a bounty on
the production of raw produce and other commodities, with a view to
observe the application of the principles which I have been
endeavouring to establish, with regard to the profits of stock, the
division of the annual produce of the land and labour, and the
relative prices of manufactures and raw produce. In the first place
let us suppose that a tax was imposed on all commodities for the
purpose of raising a fund to be employed by Government, in giving a
bounty on the production of corn. As no part of such a tax would be
expended by Government, and as all that was received from one class of
the people, would be returned to another, the nation collectively
would neither be richer nor poorer, from such a tax and bounty. It
would be readily allowed, that the tax on commodities by which the
fund was created, would raise the price of the commodities taxed; all
the consumers of those commodities, therefore, would contribute
towards that fund; in other words, their natural or necessary price
being raised, so would, too, their market price. But for the same
reason that the natural price of those commodities would be raised,
the natural price of corn would be lowered; before the bounty was paid
on production, the farmers obtained as great a price for their corn as
was necessary to repay them their rent and their expenses, and afford
them the general rate of profits; after the bounty, they would receive
more than that rate, unless the price of corn fell by a sum at least
equal to the bounty. The effect then of the tax and bounty, would be
to raise the price of commodities in a degree equal to the tax levied
on them, and to lower the price of corn by a sum equal to the bounty
paid. It will be observed, too, that no permanent alteration could be
made in the distribution of capital between agriculture and
manufactures, because as there would be no alteration, either in the
amount of capital or population, there would be precisely the same
demand for bread and manufactures. The profits of the farmer would be
no higher than the general level, after the fall in the price of corn;
nor would the profits of the manufacturer be lower after the rise of
manufactured goods; the bounty then would not occasion any more
capital to be employed on the land in the production of corn, nor any
less in the manufacture of goods. But how would the interest of the
landlord be affected? On the same principles that a tax on raw produce
would lower the corn rent of land, leaving the money rent unaltered, a
bounty on production, which is directly the contrary of a tax, would
raise corn rent, leaving the money rent unaltered.(57*) With the same
money rent the landlord would have a greater price to pay for his
manufactured goods, and a less price for his corn; he would probably
therefore be neither richer nor poorer.
Now, whether such a measure would have any operation on the wages
of labour, would depend on the question, whether the labourer, in
purchasing commodities, would pay as much towards the tax as he would
receive from the effects of the bounty, in the low price of his food.
If these two quantities were equal, wages would continue unaltered;
but if the commodities taxed were not those consumed by the labourer,
his wages would fall, and his employer would be benefited by the
difference. But this is no real advantage to his employer; it would
indeed operate to increase the rate of his profits, as every fall of
wages must do; but in proportion as the labourer contributed less to
the fund from which the bounty was paid, and which, let it be
remembered, must be raised, his employer must contribute more; in
other words, he would contribute as much to the tax by his
expenditure, as he would receive in the effects of the bounty and the
higher rate of profits together. He obtains a higher rate of profits
to requite him for his payment, not only of his own quota of the tax,
but of his labourer's also; the remuneration which he receives for his
labourer's quota, appears in diminished wages, or, which is the same
thing, in increased profits; the remuneration for his own appears in
the diminution in the price of the corn which he consumes, arising
from the bounty.
Here it will be proper to remark the different effects produced on
profits from an alteration in the real labour, or natural, value of
corn, and an alteration in the relative value of corn, from taxation
and from bounties. If corn is lowered in price by an alteration in its
labour price, not only will the rate of the profits of stock be
altered, but the condition of the capitalist will be improved. With
greater profits, he will have no more to pay for the objects on which
those profits are expended; which does not happen, as we have just
seen, when the fall is occasioned artificially by a bounty. In the
real fall in the value of corn, arising from less labour being
required to produce one of the most important objects of man's
consumption, labour is rendered more productive. With the same capital
the same labour is employed, and an increase of productions is the
result; not only then will the rate of profits be increased, but the
condition of him who obtains them will be improved; not only will each
capitalist have a greater money revenue, if he employs the same money
capital, but also when that money is expended, it will procure him a
greater sum of commodities; his enjoyments will be augmented. In the
case of the bounty, to balance the advantage which he derives from the
fall of one commodity, he has the disadvantage of paying a price more
than proportionally high for another; he receives an increased rate of
profits in order to enable him to pay this higher price; so that his
real situation, though not deteriorated, is in no way improved: though
he gets a higher rate of profits, he has no greater command of the
produce of the land and labour of the country. When the fall in the
value of corn is brought about by natural causes, it is not
counteracted by the rise of other commodities; on the contrary, they
fall from the raw material falling from which they are made: but when
the fall in corn is occasioned by artificial means, it is always
counteracted by a real rise in the value of some other commodity, so
that if corn be bought cheaper, other commodities are bought dearer.
This then is a further proof, that no particular disadvantage
arises from taxes on necessaries, on account of their raising wages
and lowering the rate of profits. Profits are indeed lowered, but only
to the amount of the labourer's portion of the tax, which must at all
events be paid either by his employer or by the consumer of the
produce of the labourer's work. Whether you deduct £50 per annum from
the employer's revenue, or add £50 to the prices of the commodities
which he consumes, can be of no other consequence to him or to the
community, than as it may equally affect all other classes. If it be
added to the prices of the commodity, a miser may avoid the tax by not
consuming; if it be indirectly deducted from every man's revenue, he
cannot avoid paying his fair proportion of the public burthens.
A bounty on the production of corn then, would produce no real
effect on the annual produce of the land and labour of the country,
although it would make corn relatively cheap, and manufactures
relatively dear. But suppose now that a contrary measure should be
adopted, that a tax should be raised on corn for the purpose of
affording a fund for a bounty on the production of commodities.
In such case, it is evident that corn would be dear, and
commodities cheap; labour would continue at the same price if the
labourer were as much benefited by the cheapness of commodities as he
was injured by the dearness of corn; but if he were not, wages would
rise, and profits would fall, while money rent would continue the same
as before; profits would fall, because, as we have just explained,
that would be the mode in which the labourer's share of the tax would
be paid by the employers of labour. By the increase of wages the
labourer would be compensated for the tax which he would pay in the
increased price of corn; by not expending any part of his wages on the
manufactured commodities, he would receive no part of the bounty; the
bounty would be all received by the employers, and the tax would be
partly paid by the employed; a remuneration would be made to the
labourers, in the shape of wages, for this increased burden laid upon
them, and thus the rate of profits would be reduced. In this case too
there would be a complicated measure producing no national result
whatever.
In considering this question, we have purposely left out of our
consideration the effect of such a measure on foreign trade; we have
rather been supposing the case of an insulated country, having no
commercial connexion with other countries. We have seen that as the
demand of the country for corn and commodities would be the same,
whatever direction the bounty might take, there would be no temptation
to remove capital from one employment to another: but this would no
longer be the case if there were foreign commerce, and that commerce
were free. By altering the relative value of commodities and corn, by
producing so powerful an effect on their natural prices, we should be
applying a strong stimulus to the exportation of those commodities
whose natural prices were lowered, and an equal stimulus to the
importation of those commodities whose natural prices were raised, and
thus such a financial measure might entirely alter the natural
distribution of employments; to the advantage indeed of the foreign
countries, but ruinously to that in which so absurd a policy was
adopted.
Chapter 24
Doctrine of Adam smith concerning the Rent of Land
'Such parts only of the produce of land', says Adam Smith, 'can
commonly be brought to market, of which the ordinary price is
sufficient to replace the stock which must be employed in bringing
them thither, 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 land. If it is not more, though the commodity can be
brought to market, it can afford no rent to the landlord. Whether the
price is, or is not more, depends upon the demand.'
This passage would naturally lead the reader to conclude that its
author could not have mistaken the nature of rent, and that he must
have seen that the quality of land which the exigencies of society
might require to be taken into cultivation, would depend on 'the
ordinary price of its produce,' whether it were 'sufficient to replace
the stock, which must be employed in cultivating it, together with its
ordinary profits.' But he had adopted the notion that 'there were 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 he considered food as one of those parts.
He says, that 'land, in almost any situation, produces a greater
quantity of food than what is sufficient to maintain all the labour
necessary for bringing it to market, in the most liberal way in which
that labour is ever maintained. The surplus, too, is always more than
sufficient to replace the stock which employed that labour, together
with its profits. Something, therefore, always remains for a rent to
the landlord.' But what proof does he give of this? - no other than
the assertion that, the most desert moors in Norway and Scotland
produce some sort of pasture for cattle, of which the milk and the
increase are always more than sufficient, not only to maintain all the
labour necessary for tending them, and to pay the ordinary profit to
the farmer, or owner of the herd or flock, but to afford some small
rent to the landlord.'
Now of this I may be permitted to entertain a doubt; I believe
that as yet in every country, from the rudest to the most refined,
there is land of such a quality that it cannot yield a produce more
than sufficiently valuable to replace the stock employed upon it,
together with the profits ordinary and usual in that country. In
America we all know that this is the case, and yet no one maintains
that the principles which regulate rent, are different in that country
and in Europe. But if it were true that England had so far advanced in
cultivation, that at this time there were no lands remaining which did
not afford a rent, it would be equally true, that there formerly must
have been such lands; and that whether there be or not, is of no
importance to this question, for it is the same thing if there be any
capital employed in Great Britain on land which yields only the return
of stock with its ordinary profits, whether it be employed on old or
on new land. If a farmer agrees for land on a lease of seven or
fourteen years, he may propose to employ on it a capital of £10,000
knowing that at the existing price of grain and raw produce, he can
replace that part of his stock which he is obliged to expend, pay his
rent, and obtain the general rate of profit. He will not employ
£11,000, unless the last £1,000 can be employed so productively as to
afford him the usual profits of stock. In his calculation, whether he
shall employ it or not, he considers only whether the price of raw
produce is sufficient to replace his expenses and profits, for he
knows that he shall have no additional rent to pay. Even at the
expiration of his lease his rent will not be raised; for if his
landlord should require rent, because this additional £1,000 was
employed, he would withdraw it; since by employing it, he gets, by the
supposition, only the ordinary and usual profits which he may obtain
by any other employment of stock; and, therefore, he cannot afford to
pay rent for it, unless the price of raw produce should further rise,
or, which is the same thing, unless the usual and general rate of
profits should fall.
If the comprehensive mind of Adam Smith had been directed to this
fact, he would not have maintained that rent forms one of the
component parts of the price of raw produce; for price is every where
regulated by the return obtained by this last portion of capital, for
which no rent whatever is paid. If he had adverted to this principle,
he would have made no distinction between the law which regulates the
rent of mines and the rent of land.
'Whether a coal mine, for example,' he says, 'can afford any rent,
depends partly upon its fertility, and partly upon its situation. 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 labour, is greater or less than what can be brought by an
equal quantity from the greater part of other mines of the same kind.
Some coal mines, advantageously situated, cannot be wrought on account
of their barrenness. The produce does not pay the expense. They can
afford neither profit nor rent. There are some, of which the produce
is barely sufficient to pay the labour, and replace, together with its
ordinary profits, the stock employed in working them. They afford some
profit to the undertaker of the work, but no rent to the landlord.
They can be wrought advantageously by nobody but the landlord, who
being himself the undertaker of the work, gets the ordinary profit of
the capital which he employs in it. Many coal mines in Scotland are
wrought in this manner, and can be wrought 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 wrought on account of their situation. A quantity of mineral
sufficient to defray the expense of working, could be brought from the
mine by the ordinary, or even less than the ordinary quantity of
labour; but in an inland country, thinly inhabited, and without either
good roads or water-carriage, this quantity could not be sold.' The
whole principle of rent is here admirably and perspicuously explained,
but every word is as applicable to land as it is to mines; yet he
affirms that 'it is otherwise in estates above ground. The proportion,
both of their produce and of their rent, is in proportion to their
absolute, and not to their relative fertility. But, suppose that there
were no land which did not afford a rent; then, the amount of rent on
the worst land would be in proportion to the excess of the value of
the produce above the expenditure of capital and the ordinary profits
of stock: the same principle would govern the rent of land of a
somewhat better quality, or more favourably situated, and, therefore,
the rent of this land would exceed the rent of that inferior to it, by
the superior advantages which it possessed; the same might be said of
that of the third quality, and so on to the very best. Is it not,
then, as certain, that it is the relative fertility of the land, which
determines the portion of the produce, which shall be paid for the
rent of land, as it is that the relative fertility of mines,
determines the portion of their produce, which shall be paid for the
rent of mines?
After Adam Smith has declared that there are some mines which can
only be worked by the owners, as they will afford only sufficient to
defray the expense of working, together with the ordinary profits of
the capital employed, we should expect that he would admit that it was
these particular mines which regulated the price of the produce from
all mines. If the old mines are insufficient to supply the quantity of
coal required, the price of coal will rise, and will continue rising
till the owner of a new and inferior mine finds that he can obtain the
usual profits of stock by working his mine. If his mine be tolerably
fertile, the rise will not be great before it becomes his interest so
to employ his capital; but if it be not tolerably fertile, it is
evident that the price must continue to rise till it will afford him
the means of paying his expenses, and obtaining the ordinary profits
of stock. It appears, then, that it is always the least fertile mine
which regulates the price of coal. Adam Smith, however, is of a
different opinion: he observes, that 'the most fertile coal mine, too,
regulates the price of coals at all the other mines in its
neighbourhood. Both the proprietor and the undertaker of the work
find, the one that he can get a greater rent, the other, that he can
get a greater profit, by somewhat underselling all their neighbours.
Their neighbours 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 wrought only by the proprietor.' If the demand for coal should
be diminished, or if by new processes the quantity should be
increased, the price would fall, and some mines would be abandoned;
but in every case, the price must be sufficient to pay the expenses
and profit of that mine which is worked without being charged with
rent. It is, therefore, the least fertile mine which regulates price.
Indeed, it is so stated in another place by Adam Smith himself, for he
says, '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 stock 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 let it alone all together, the price of
coals must generally be nearly about this price.'
But the same circumstance, namely, the abundance and consequent
cheapness of coals, from whatever cause it may arise, which would make
it necessary to abandon those mines on which there was no rent, or a
very moderate one, would, if there were the same abundance, and
consequent cheapness of raw produce, render it necessary to abandon
the cultivation of those lands for which either no rent was paid, or a
very moderate one. If, for example, potatoes should become the general
and common food of the people, as rice is in some countries, one
fourth, or one half of the land now in cultivation, would probably be
immediately abandoned; for if, as Adam Smith says, 'an acre of
potatoes will produce six thousand weight of solid nourishment, three
times the quantity produced by the acre of wheat,' there could not be
for a considerable time such a multiplication of people, as to consume
the quantity that might be raised on the land before employed for the
cultivation of wheat; much land would consequently be abandoned, and
rent would fall; and it would not be till the population had been
doubled or trebled, that the same quantity of land could be in
cultivation, and the rent paid for it as high as before.
Neither would any greater proportion of the gross produce be paid
to the landlord, whether it consisted of potatoes, which would feed
three hundred people, or of wheat, which would feed only one hundred;
because, though the expenses of production would be very much
diminished if the labourer's wages were chiefly regulated by the price
of potatoes and not by the price of wheat, and though therefore the
proportion of the whole gross produce, after paying the labourers,
would be greatly increased, yet no part of that additional proportion
would go to rent, but the whole invariably to profits, - profits being
at all times raised as wages fall, and lowered as wages rise. Whether
wheat or potatoes were cultivated, rent would be governed by the same
principle - it would be always equal to the difference between the
quantities of produce obtained with equal capitals, either on the same
land or on land of different qualities; and, therefore, while lands of
the same quality were cultivated, and there was no alteration in their
relative fertility or advantages, rent would always bear the same
proportion to the gross produce.
Adam Smith, however, maintains that the proportion which falls to
the landlord would be increased by a diminished cost of production,
and, therefore, that he would receive a larger share as well as a
larger quantity, from an abundant than from a scanty produce. 'A rice
field,' he says, 'produces a much greater quantity of food than the
most fertile corn field. 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 labour, a much greater
surplus remains after maintaining all that labour. In those rice
countries, therefore, where rice is the common and favourite 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.'
Mr. Buchanan also remarks, that 'it is quite clear, that if any
other produce which the land yielded more abundantly than corn, were
to become the common food of the people, the rent of the landlord
would be improved in proportion to its greater abundance.'
If potatoes were to become the common food of the people, there
would be a long interval during which the landlords would suffer an
enormous deduction of rent. They would not probably receive nearly so
much of the sustenance of man as they now receive, while that
sustenance would fall to a third of its present value. But all
manufactured commodities, on which a part of the landlord's rent is
expended, would suffer no other fall than that which proceeded from
the fall in the raw material of which they were made, and which would
arise only from the greater fertility of the land, which might then be
devoted to its production.
When, from the progress of population, land of the same quality as
before should be taken into cultivation, the landlord would have not
only the same proportion of the produce as before, but that proportion
would also be of the same value as before. Rent then would be the same
as before; profits, however, would be much higher, because the price
of food, and consequently wages, would be much lower. High profits are
favourable to the accumulation of capital. The demand for labour would
further increase, and landlords would be permanently benefited by the
increased demand for land.
Indeed, the very same lands might be cultivated much higher, when
such an abundance of food could be produced from them, and
consequently they would, in the progress of society, admit of much
higher rents, and would sustain a much greater population than before.
This could not fail to be highly beneficial to landlords, and is
consistent with the principle which this enquiry, I think, will not
fail to establish; that all extraordinary profits are in their nature
but of limited duration, as the whole surplus produce of the soil,
after deducting from it only such moderate profits as are sufficient
to encourage accumulation, must finally rest with the landlord.
With so low a price of labour as such an abundant produce would
cause, not only would the lands already in cultivation yield a much
greater quantity of produce, but they would admit of a great
additional capital being employed on them, and a greater value to be
drawn from them, and, at the same time, lands of a very inferior
quality could be cultivated with high profits, to the great advantage
of landlords, as well as to the whole class of consumers. The machine
which produced the most important article of consumption would be
improved, and would be well paid for according as its services were
demanded. All the advantages would, in the first instance, be enjoyed
by labourers, capitalists, and consumers; but with the progress of
population, they would be gradually transferred to the proprietors of
the soil. Independently of these improvements, in which the community
have an immediate, and the landlords a remote interest, the interest
of the landlord is always opposed to that of the consumer and
manufacturer. Corn can be permanently at an advanced price, only
because additional labour is necessary to produce it; because its cost
of production is increased. The same cause invariably raises rent, it
is therefore for the interest of the landlord that the cost attending
the production of corn should be increased. This, however, is not the
interest of the consumer; to him it is desirable that corn should be
low relatively to money and commodities, for it is always with
commodities or money that corn is purchased. Neither is it the
interest of the manufacturer that corn should be at a high price, for
the high price of corn will occasion high wages, but will not raise
the price of his commodity. Not only, then, must more of his
commodity, or, which comes to the same thing, the value of more of his
commodity, be given in exchange for the corn which he himself
consumes, but more must be given, or the value of more, for wages to
his workmen, for which he will receive no remuneration. All classes,
therefore, except the landlords, will be injured by the increase in
the price of corn. The dealings between the landlord and the public
are not like dealings in trade, whereby both the seller and buyer may
equally be said to gain, but the loss is wholly on one side, and the
gain wholly on the other; and if corn could by importation be procured
cheaper, the loss in consequence of not importing is far greater on
one side, than the gain is on the other.
Adam Smith never makes any distinction between a low value of
money, and a high value of corn, and therefore infers, that the
interest of the landlord is not opposed to that of the rest of the
community. In the first case, money is low relatively to all
commodities; in the other, corn is high relatively to all. In the
first, corn and commodities continue at the same relative values; in
the second, corn is higher relatively to commodities as well as money.
The following observation of Adam Smith is applicable to a low
value of money, but it is totally inapplicable to a high value of
corn. 'If importation (of corn) was at all times free, our farmers and
country gentlemen would probably, one year with another, get less
money for their corn than they do at present, when importation is at
most times in effect prohibited; but the money which they got would be
of more value, would buy more goods of.all other kinds, and would
employ more labour. Their real wealth, their real revenue, therefore,
would be the same as at present, though it might be expressed by a
smaller quantity of silver; and they would neither be disabled nor
discouraged from cultivating corn as much as they do at present. On
the contrary, as the rise in the real value of silver, in consequence
of lowering the money price of corn, lowers somewhat the money price
of all other commodities, it gives the industry of the country where
it takes place, some advantage in all foreign markets, and thereby
tends to encourage and increase that industry. But the extent of the
home market for corn, must be in proportion to the general industry of
the country where it grows, or to the number of those who produce
something else, to give in exchange for corn. But in every country the
home market, as it is the nearest and most convenient, so is it
likewise the greatest and most important market for corn. That rise in
the real value of silver, therefore, which is the effect of lowering
the average money price of corn, tends to enlarge the greatest and
most important market for corn, and thereby to encourage, instead of
discouraging, its growth.'
A high or low money price of corn, arising from the abundance and
cheapness of gold and silver, is of no importance to the landlord, as
every sort of produce would be equally affected, just as Adam Smith
describes; but a relatively high price of corn is at all times greatly
beneficial to the landlord; for first, it gives him a greater quantity
of corn for rent; and, secondly, for every equal measure of corn he
will have a command, not only over a greater quantity of money, but
over a greater quantity of every commodity which money can purchase.
Chapter 25
On Colonial Trade
Adam Smith, in his observations on colonial trade, has shewn, most
satisfactorily, the advantages of a free trade, and the injustice
suffered by colonies, in being prevented by their mother countries,
from selling their produce at the dearest market, and buying their
manufactures and stores at the cheapest. He has shewn, that by
permitting every country freely to exchange the produce of its
industry when and where it pleases, the best distribution of the
labour of the world will be effected, and the greatest abundance of
the necessaries and enjoyments of human life will be secured.
He has attempted also to shew, that this freedom of commerce,
which undoubtedly promotes the interest of the whole, promotes also
that of each particular country; and that the narrow policy adopted in
the countries of Europe respecting their colonies, is not less
injurious to the mother countries themselves, than to the colonies
whose interests are sacrificed.
'The monopoly of the colony trade,' he says, 'like all the other
mean and malignant expedients of the mercantile system, depresses the
industry of all other countries, but chiefly that of the colonies,
without, in the least, increasing, but on the contrary diminishing,
that of the country in whose favour it is established.'
This part of his subject, however, is not treated in so clear and
convincing a manner as that in which he shews the injustice of this
system towards the colony.
It may, I think, be doubted whether a mother country may not
sometimes be benefited by the restraints to which she subjects her
colonial possessions. Who can doubt, for example, that if England were
the colony of France, the latter country would be benefited by a heavy
bounty paid by England on the exportation of corn, cloth, or any other
commodities? In examining the question of bounties, on the supposition
of corn being at £4 per quarter in this country, we saw, that with a
bounty of 10s. per quarter, on exportation in England, corn would have
been reduced to £3 10s. in France. Now, if corn had previously been at
£3 15s. per quarter in France, the French consumers would have been
benefited by 5s. per quarter on all imported corn; if the natural
price of corn in France were before £4, they would have gained the
whole bounty of 10s. per quarter. France would thus be benefited by
the loss sustained by England: she would not gain a part only of what
England lost, but the whole.
It may, however, be said, that a bounty on exportation is a
measure of internal policy, and could not easily be imposed by the
mother country. If it would suit the interests of Jamaica and Holland
to make an exchange of the commodities which they respectively
produce, without the intervention of England, it is quite certain,
that by their being prevented from so doing, the interests of Holland
and Jamaica would suffer; but if Jamaica is obliged to send her goods
to England, and there exchange them for Dutch goods, an English
capital, or English agency, will be employed in a trade in which it
would not otherwise be engaged. It is allured thither by a bounty, not
paid by England, but by Holland and Jamaica.
That the loss sustained, through a disadvantageous distribution of
labour in two countries, may be beneficial to one of them, while the
other is made to suffer more than the loss actually belonging to such
a distribution, has been stated by Adam Smith himself; which, if true,
will at once prove that a measure, which may be greatly hurtful to a
colony, may be partially beneficial to the mother country.
Speaking of treaties of commerce, he says, 'When a nation binds
itself by treaty, either to permit the entry of certain goods from one
foreign country which it prohibits from all others, or to exempt the
goods of one country from duties to which it subjects those of all
others, the country, or at least the merchants and manufacturers of
the country, whose commerce is so favoured, must necessarily derive
great advantage from the treaty. Those merchants and manufacturers
enjoy a sort of monopoly in the country, which is so indulgent to
them. That country becomes a market, both more extensive and more
advantageous for their goods; more extensive, because the goods of
other nations, being either excluded or subjected to heavier duties,
it takes off a greater quantity of them; more advantageous, because
the merchants of the favoured country, enjoying a sort of monopoly
there, will often sell their goods for a better price than if exposed
to the free competition of all other nations.'
Let the two nations, between which the commercial treaty is made,
be the mother country and her colony, and Adam Smith, it is evident,
admits, that a mother country may be benefited by oppressing her
colony. It may, however, be again remarked, that unless the monopoly
of the foreign market be in the hands of an exclusive company, no more
will be paid for commodities by foreign purchasers than by home
purchasers; the price which they will both pay will not differ greatly
from their natural price in the country where they are produced.
England, for example, will, under ordinary circumstances, always be
able to buy French goods, at the natural price of those goods in
France, and France would have an equal privilege of buying English
goods at their natural price in England. But at these prices, goods
would be bought without a treaty. Of what advantage or disadvantage
then is the treaty to either party?
The disadvantage of the treaty to the importing country would be
this: it would bind her to purchase a commodity, from England for
example, at the natural price of that commodity in England, when she
might perhaps have bought it at the much lower natural price of some
other country. It occasions then a disadvantageous distribution of the
general capital, which falls chiefly on the country bound by its
treaty to buy in the least productive market; but it gives no
advantage to the seller on account of any supposed monopoly, for he is
prevented by the competition of his own countrymen from selling his
goods above their natural price; at which he would sell them, whether
he exported them to France, Spain, or the West Indies, or sold them
for home consumption.
In what then does the advantage of the stipulation in the treaty
consist? It consists in this: these particular goods could not have
been made in England for exportation, but for the privilege which she
alone had of serving this particular market; for the competition of
that country, where the natural price was lower, would have deprived
her of all chance of selling those commodities. This, however, would
have been of little importance, if England were quite secure that he
could sell to the same amount any other goods which she might
fabricate, either in the French market, or with equal advantage in any
other. The object which England has in view, is, for example, to buy a
quantity of French wines of the value of £5,000 - she desires then to
sell goods somewhere by which she may get £5,000 for this purpose. If
France gives her a monopoly of the cloth market, she will readily
export cloth for this purpose; but if the trade is free, the
competition of other countries may prevent the natural price of cloth
in England from being sufficiently low to enable her to get £5,000 by
the sale of cloth, and to obtain the usual profits by such an
employment of her stock. The industry of England must be employed,
then, on some other commodity; but there may be none of her
productions which, at the existing value of money, she can afford to
sell at the natural price of other countries. What is the consequence?
The wine drinkers of England are still willing to give £5,000 for
their wine, and consequently £5,000 in money is exported to France for
that purpose. By this exportation of money its value is raised in
England, and lowered in other countries; and with it the natural price
of all commodities produced by British industry is also lowered. The
advance in the value of money is the same thing as the decline in the
price of commodities. To obtain £5,000, British commodities may now be
exported; for at their reduced natural price they may now enter into
competition with the goods of other countries. More goods are sold,
however, at the low prices to obtain the £5,000 required, which, when
obtained, will not procure the same quantity of wine; because, whilst
the diminution of money in England has lowered the natural price of
goods there, the increase of money in France has raised the natural
price of goods and wine in France. Less wine, then, will be imported
into England, in exchange for its commodities, when the trade is
perfectly free, than when she is peculiarly favoured by commercial
treaties. The rate of profits, however, will not have varied; money
will have altered in relative value in the two countries, and the
advantage gained by France will be the obtaining a greater quantity of
English, in exchange for a given quantity of French, goods, while the
loss sustained by England will consist in obtaining a smaller quantity
of French goods in exchange for a given quantity of those of England.
Foreign trade, then, whether fettered, encouraged, or free, will
always continue, whatever may be the comparative difficulty of
production in different countries; but it can only be regulated by
altering the natural price, not the natural value, at which
commodities can be produced in those countries, and that is effected
by altering the distribution of the precious metals. This explanation
confirms the opinion which I have elsewhere given, that there is not a
tax, a bounty, or a prohibition, on the importation or exportation of
commodities, which does not occasion a different distribution of the
precious metals, and which does not, therefore, every where alter both
the natural and the market price of commodities.
It is evident, then, that the trade with a colony may be so
regulated, that it shall at the same time be less beneficial to the
colony, and more beneficial to the mother country, than a perfectly
free trade. As it is disadvantageous to a single consumer to be
restricted in his dealings to one particular shop, so is it
disadvantageous for a nation of consumers to be obliged to purchase of
one particular country. If the shop or the country afforded the goods
required the cheapest, they would be secure of selling them without
any such exclusive privilege; and if they did not sell cheaper, the
general interest would require that they should not be encouraged to
continue a trade which they could not carry on at an equal advantage
with others. The shop, or the selling country, might lose by the
change of employments, but the general benefit is never so fully
secured, as by the most productive distribution of the general
capital; that is to say, by an universally free trade.
An increase in the cost of production of a commodity, if it be an
article of the first necessity, will not necessarily diminish its
consumption; for although the general power of the purchasers to
consume, is diminished by the rise of any one commodity, yet they may
relinquish the consumption of some other commodity whose cost of
production has not risen. In that case, the quantity supplied and the
quantity demanded, will be the same as before; the cost of production
only will have increased, and yet the price will rise, and must rise,
to place the profits of the producer of the enhanced commodity on a
level with the profits derived from other trades.
M. Say acknowledges that the cost of production is the foundation
of price, and yet in various parts of his book he maintains that price
is regulated by the proportion which demand bears to supply. The real
and ultimate regulator of the relative value of any two commodities,
is the cost of their production, and not the respective quantities
which may be produced, nor the competition amongst the purchasers.
According to Adam Smith, the colony trade, by being one in which
British capital only can be employed, has raised the rate of profits
of all other trades; and as, in his opinion, high profits, as well as
high wages, raise the prices of commodities, the monopoly of the
colony trade has been, he thinks, injurious to the mother country; as
it has diminished her power of selling manufactured commodities as
cheap as other countries. He says, that 'in consequence of the
monopoly, the increase of the colony trade has not so much occasioned
an addition to the trade which Great Britain had before, as a total
change in its direction. Secondly, this monopoly has necessarily
contributed to keep up the rate of profit in all the different
branches of British trade, higher than it naturally would have been,
had all nations been allowed a free trade to the British colonies.',
But whatever raises in any country the ordinary rate of profit higher
than it otherwise would be, necessarily subjects that country both to
an absolute, and to a relative disadvantage in every branch of trade
of which she has not the monopoly. It subjects her to an absolute
disadvantage, because in such branches of trade, her merchants cannot
get this greater profit without selling dearer than they otherwise
would do, both the goods of foreign countries which they import into
their own, and the goods of their own country which they export to
foreign countries. Their own country must both buy dearer and sell
dearer; must both buy less and sell less; must both enjoy less and
produce less than she otherwise would do.'
'Our merchants frequently complain of the high wages of British
labour as the cause of their manufactures being undersold in foreign
markets; but they are silent about the high profits of stock. They
complain of the extravagant gain of other people, but they say nothing
of their own. The high profits of British stock, however, may
contribute towards raising the price of British manufacture in many
cases as much, and in some perhaps more, than the high wages of
British labour.'
I allow that the monopoly of the colony trade will change, and
often prejudicially, the direction of capital; but from what I have
already said on the subject of profits, it will be seen that any
change from one foreign trade to another, or from home to foreign
trade, cannot, in my opinion, affect the rate of profits. The injury
suffered will be what I have just described; there will be a worse
distribution of the general capital and industry, and, therefore, less
will be produced. The natural price of commodities will be raised,
and, therefore, though the consumer will be able to purchase to the
same money value, he will obtain a less quantity of commodities. It
will be seen too, that if it even had the effect of raising profits,
it would not occasion the least alteration in prices; prices being
regulated neither by wages nor profits.
And does not Adam Smith agree in this opinion, when he says, that
'the prices of commodities, or the value of gold and silver as
compared with commodities, depends upon the proportion between the
quantity of labour which is necessary in order to bring a certain
quantity of gold and silver to market, and that which is necessary to
bring thither a certain quantity of any other sort of goods?' That
quantity will not be affected, whether profits be high or low, or
wages low or high. How then can prices be raised by high profits?
Chapter 26
On Gross and Net Revenue
Adam Smith constantly magnifies the advantages which a country
derives from a large gross, rather than a large net income. 'In
proportion as a greater share of the capital of a country is employed
in agriculture,' he says, 'the greater will be the quantity of
productive labour which it puts into motion within the country; as
will likewise be the value which its employment adds to the annual
produce of the land and labour of the society. After agriculture, the
capital employed in manufactures puts into motion the greatest
quantity of productive labour, and adds the greatest value to the
annual produce. That which is employed in the trade of exportation has
the least effect of any of the three.'(58*)
Granting, for a moment, that this were true; what would be the
advantage resulting to a country from the employment of a great
quantity of productive labour, if, whether it employed that quantity
or a smaller, its net rent and profits together would be the same. The
whole produce of the land and labour of every country is divided into
three portions: of these, one portion is devoted to wages, another to
profits, and the other to rent. It is from the two last portions only,
that any deductions can be made for taxes, or for savings; the former,
if moderate, constituting always the necessary expenses of
production.(59*) To an individual with a capital of £20,000, whose
profits were £2,000 per annum, it would be a matter quite indifferent
whether his capital would employ a hundred or a thousand men, whether
the commodity produced sold for £10,000, or for £20,000, provided, in
all cases, his profits were not diminished below £2,000. Is not the
real interest of the nation similar? Provided its net real income, its
rent and profits be the same, it is of no importance whether the
nation consists of ten or of twelve millions of inhabitants. Its power
of supporting fleets and armies, and all species of unproductive
labour, must be in proportion to its net, and not in proportion to its
gross income. If five millions of men could produce as much food and
clothing as was necessary for ten millions, food and clothing for five
millions would be the net revenue. Would it be of any advantage to the
country, that to produce this same net revenue, seven millions of men
should be required, that is to say, that seven millions should be
employed to produce food and clothing sufficient for twelve millions?
The food and clothing of five millions would be still the net revenue.
The employing a greater number of men would enable us neither to add a
man to our army and navy, nor to contribute one guinea more in taxes.
It is not on the grounds of any supposed advantage accruing from a
large population, or of the happiness that may be enjoyed by a greater
number of human beings, that Adam Smith supports the preference of
that employment of capital, which gives motion to the greatest
quantity of industry, but expressly on the ground of its increasing
the power of the country(60*) for he says, that 'the riches, and, so
far as power depends upon riches, the power of every country must
always be in proportion to the value of its annual produce, the fund
from which all taxes must ultimately be paid.' It must however be
obvious, that the power of paying taxes, is in proportion to the net,
and not in proportion to the gross, revenue.
In the distribution of employments amongst all countries, the
capital of poorer nations will be naturally employed in those
pursuits, wherein a great quantity of labour is supported at home,
because in such countries the food and necessaries for an increasing
population can be most easily procured. In rich countries, on the
contrary, where food is dear, capital will naturally flow, when trade
is free, into those occupations wherein the least quantity of labour
is required to be maintained at home: such as the carrying trade, the
distant foreign trade, and trades where expensive machinery is
required; to trades where profits are in proportion to the capital,
and not in proportion to the quantity of labour employed.(61*)
Although I admit, that from the nature of rent, a given capital
employed in agriculture, on any but the land last cultivated, puts in
motion a greater quantity of labour than an equal capital employed in
manufactures and trade, yet I cannot admit that there is any
difference in the quantity of labour employed by a capital engaged in
the home trade, and an equal capital engaged in the foreign trade.
'The capital which sends Scots manufactures to London, and brings
back English corn and manufactures to Edinburgh,' says Adam Smith,
'necessarily replaces, by every such operation, two British capitals
which had both been employed in the agriculture or manufactures of
Great Britain.
'The capital employed in purchasing foreign goods for home
consumption, when this purchase is made with the produce of domestic
industry, replaces, too, by every such operation, two distinct
capitals; but one of them only is employed in supporting domestic
industry. The capital which sends British goods to Portugal, and
brings back Portuguese goods to Great Britain, replaces, by every such
operation, only one British capital, the other is a Portuguese one.
Though the returns, therefore, of the foreign trade of consumption
should be as quick as the home trade, the capital employed in it will
give but one half the encouragement to the industry or productive
labour of the country.'
This argument appears to me to be fallacious; for though two
capitals, one Portuguese and one English, be employed, as Dr. Smith
supposes, still a capital will be employed in the foreign trade,
double of what would be employed in the home trade. Suppose that
Scotland employs a capital of a thousand pounds in making linen, which
she exchanges for the produce of a similar capital employed in making
silks in England, two thousand pounds, and a proportional quantity of
labour will be employed by the two countries. Suppose now, that
England discovers, that she can import more linen from Germany, for
the silks which she before exported to Scotland, and that Scotland
discovers that she can obtain more silks from France in return for her
linen, than she before obtained from England, - will not England and
Scotland immediately cease trading with each other, and will not the
home trade of consumption be changed for a foreign trade of
consumption? But although two additional capitals will enter into this
trade, the capital of Germany and that of France, will not the same
amount of Scotch and of English capital continue to be employed, and
will it not give motion to the same quantity of industry as when it
was engaged in the home trade?
Chapter 27
On Currency and Banks
So much has already been written on currency, that of those who
give their attention to such subjects, none but the prejudiced are
ignorant of its true principles. I shall, therefore, take only a brief
survey of some of the general laws which regulate its quantity and
value.
Gold and silver, like all other commodities, are valuable only in
proportion to the quantity of labour necessary to produce them, and
bring them to market. Gold is about fifteen times dearer than silver,
not because there is a greater demand for it, nor because the supply
of silver is fifteen times greater than that of gold, but solely
because fifteen times the quantity of labour is necessary to procure a
given quantity of it.
The quantity of money that can be employed in a country must
depend on its value: if gold alone were employed for the circulation
of commodities, a quantity would be required, one fifteenth only of
what would be necessary, if silver were made use of for the same
purpose.
A circulation can never be so abundant as to overflow; for by
diminishing its value, in the same proportion you will increase its
quantity, and by increasing its value, diminish its quantity.
While the State coins money, and charges no seignorage, money will
be of the same value as any other piece of the same metal of equal
weight and fineness; but if the State charges a seignorage for
coinage, the coined piece of money will generally exceed the value of
the uncoined piece of metal by the whole seignorage charged, because
it will require a greater quantity of labour, or, which is the same
thing, the value of the produce of a greater quantity of labour, to
procure it.
While the State alone coins, there can be no limit to this charge
of seignorage; for by limiting the quantity of coin, it can be raised
to any conceivable value.
It is on this principle that paper money circulates: the whole
charge for paper money may be considered as seignorage. Though it has
no intrinsic value, yet, by limiting its quantity, its value in
exchange is as great as an equal denomination of coin, or of bullion
in that coin. On the same principle, too, namely, by a limitation of
its quantity, a debased coin would circulate at the value it should
bear, if it were of the legal weight and fineness, and not at the
value of the quantity of metal which it actually contained. In the
history of the British coinage, we find, accordingly, that the
currency was never depreciated in the same proportion that it was
debased; the reason of which was, that it never was increased in
quantity, in proportion to its diminished intrinsic value.(62*)
There is no point more important in issuing paper money, than to
be fully impressed with the effects which follow from the principle of
limitation of quantity. It will scarcely be believed fifty years
hence, that Bank directors and ministers gravely contended in our
times, both in parliament, and before committees of parliament, that
the issues of notes by the Bank of England, unchecked by any power in
the holders of such notes, to demand in exchange either specie, or
bullion, had not, nor could have any effect on the prices of
commodities, bullion, or foreign exchanges.
After the establishment of Banks, the State has not the sole power
of coining or issuing money. The currency may as effectually be
increased by paper as by coin; so that if a State were to debase its
money, and limit its quantity, it could not support its value, because
the Banks would have an equal power of adding to the whole quantity of
circulation.
On these principles, it will be seen that it is not necessary that
paper money should be payable in specie to secure its value; it is
only necessary that its quantity should be regulated according to the
value of the metal which is declared to be the standard. If the
standard were gold of a given weight and fineness, paper might be
increased with every fall in the value of gold, or, which is the same
thing in its effect, with every rise in the price of goods.
'By issuing too great a quantity of paper,' says Dr. Smith, 'of
which the excess was continually returning, in or der to be exchanged
for gold and silver, the Bank of England was, for many years together,
obliged to coin gold to the extent of between eight hundred thousand
pounds and a million a year, or at an average, about eight hundred and
fifty thousand pounds. For this great coinage, the Bank, in
consequence of the worn and degraded state into which the gold coin
had fallen a few years ago, was frequently obliged to purchase
bullion, at the high price of four pounds an ounce, which it soon
after issued in coin at £3 17s. 10 1/2d. an ounce, losing in this
manner between two and a half and three per cent upon the coinage of
so very large a sum. Though the Bank, therefore, paid no seignorage,
though the Government was properly at the expense of the coinage, this
liberality of Government did not prevent altogether the expense of the
Bank.'
On the principle above stated, it appears to me most clear, that
by not re-issuing the paper thus brought in, the value of the whole
currency, of the degraded as well as the new gold coin, would have
been raised, when all demands on the Bank would have ceased.
Mr Buchanan, however, is not of this opinion, for he says, 'that
the great expense to which the Bank was at this time exposed, was
occasioned, not, as Dr Smith seems to imagine, by any imprudent issue
of paper, but by the debased state of the currency, and the consequent
high price of bullion. The Bank, it will be observed, having no other
way of procuring guineas but by sending bullion to the Mint to be
coined, was always forced to issue new coined guineas, in exchange for
its returned notes; and when the currency was generally deficient in
weight, and the price of bullion high in proportion, it became
profitable to draw these heavy guineas from the Bank in exchange for
its paper; to convert them into bullion, and to sell them with a
profit for Bank paper, to be again returned to the Bank for a new
supply of guineas, which were again melted and sold. To this drain of
specie, the Bank must always be exposed while the currency is
deficient in weight, as both an easy and a certain profit then arises
from the constant interchange of paper for specie. It may be remarked,
however, that to whatever inconvenience and expense the Bank was then
exposed by the drain of its specie, it never was imagined necessary to
rescind the obligation to pay money for its notes.'
Mr Buchanan evidently thinks that the whole currency must,
necessarily, be brought down to the level of the value of the debased
pieces; but, surely, by a diminution of the quantity of the currency,
the whole that remains can be elevated to the value of the best
pieces.
Dr Smith appears to have forgotten his own principle, in his
argument on colony currency. Instead of ascribing the depreciation of
that paper to its too great abundance, he asks whether, allowing the
colony security to be perfectly good, a hundred pounds, payable
fifteen years hence, would be equally valuable with a hundred pounds
to be paid immediately? I answer yes, if it be not too abundant.
Experience, however, shews, that neither a State nor a Bank ever
have had the unrestricted power of issuing paper money, without
abusing that power: in all States, therefore, the issue of paper money
ought to be under some check and control; and none seems so proper for
that purpose, as that of subjecting the issuers of paper money to the
obligation of paying their notes, either in gold coin or bullion.
['To secure the public(63*) against any other variations in the
value of currency than those to which the standard itself is subject,
and, at the same time, to carry on the circulation with a medium the
least expensive, is to attain the most perfect state to which a
currency can be brought, and we should possess all these advantages by
subjecting the Bank to the delivery of uncoined gold or silver at the
Mint standard and price, in exchange for their notes, instead of the
delivery of guineas; by which means paper would never fall below the
value of bullion, without being followed by a reduction of its
quantity. To prevent the rise of paper above the value of bullion, the
Bank should be also obliged to give their paper in exchange for
standard gold at the price of £3 17s. per ounce. Not to give too much
trouble to the Bank, the quantity of gold to be demanded in exchange
for paper at the Mint price of £3 17s. 10 1/2d., or the quantity to be
sold to the Bank at £3 17s., should never be less than twenty ounces.
In other words, the Bank should be obliged to purchase any quantity of
gold that was offered them, not less than twenty ounces, at £3 17s.
(64*) per ounce, and to sell any quantity that might be demanded at £3
17s. 10 1/2d. While they have the power of regulating the quantity of
their paper, there is no possible inconvenience that could result to
them from such a regulation.
'The most perfect liberty should be given, at the same time to
export or import every description of bullion. These transactions in
bullion would be very few in number, if the Bank regulated their loans
and issues of paper by the criterion which I have so often mentioned,
namely, the price of standard bullion, without attending to the
absolute quantity of paper in circulation.
'The object which I have in view would be in a great measure
attained, if the Bank were obliged to deliver uncoined bullion, in
exchange for their notes, at the Mint price and standard; though they
were not under the necessity of purchasing any quantity of bullion
offered them at the prices to be fixed, particularly if the Mint were
to continue open to the public for the coinage of money: for that
regulation is merely suggested, to prevent the value of money from
varying from the value of bullion more than the trifling difference
between the prices at which the Bank should buy and sell, and which
would be an approximation to that uniformity in its value, which is
acknowledged to be so desirable.
'If the Bank capriciously limited the quantity of their paper,
they would raise its value; and gold might appear to fall below the
limits at which I propose the Bank should purchase. Gold, in that
case, might be carried to the Mint, and the money returned from
thence, being added to the circulation, would have the effect of
lowering its value, and making it again conform to the standard; but
it would neither be done so safely, so economically, nor so
expeditiously, as by the means which I have proposed; against which
the Bank can have no objection to offer, as it is for their interest
to furnish the circulation with paper, rather than oblige others to
furnish it with coin.
'Under such a system, and with a currency so regulated, the Bank
would never be liable to any embarrassments whatever, excepting on
those extraordinary occasions, when a general panic seizes the
country, and when every one is desirous of possessing the precious
metals as the most convenient mode of realizing or concealing his
property. Against such panics, Banks have no security, on any system;
from their very nature they are subject to them, as at no time can
there be in a Bank, or in a country, so much specie or bullion as the
monied individuals of such country have a right to demand. Should
every man withdraw his balance from his banker on the same day, many
times the quantity of Bank notes now in circulation would be
insufficient to answer such a demand. A panic of this kind was the
cause of the crisis in 1797; and not, as has been supposed, the large
advances which the Bank had then made to Government. Neither the Bank
nor Government were at that time to blame; it was the contagion of the
unfounded fears of the timid part of the community, which occasioned
the run on the Bank, and it would equally have taken place if they had
not made any advances to Government, and had possessed twice their
present capital. If the Bank had continued paying in cash, probably
the panic would have subsided before their coin had been exhausted.
'With the known opinion of the Bank directors, as to the rule for
issuing paper money, they may be said to have exercised their powers
without any great indiscretion. It is evident that they have followed
their own principle with extreme caution. In the present state of the
law, they have the power, without any control whatever, of increasing
or reducing the circulation in any degree they may think proper: a
power which should neither be intrusted to the State itself, nor to
any body in it; as there can be no security for the uniformity in the
value of the currency, when its augmentation or diminution depends
solely on the will of the issuers. That the Bank have the power of
reducing the circulation to the very narrowest limits will not be
denied, even by those who agree in opinion with the directors, that
they have not the power of adding indefinitely to its quantity. Though
I am fully assured, that it is both against the interest and the wish
of the Bank to exercise this power to the detriment of the public,
yet, when I contemplate the evil consequences which might ensue from a
sudden and great reduction of the circulation, as well as from a great
addition to it, I cannot but deprecate the facility with which the
State has armed the Bank with so formidable a prerogative.
'The inconvenience to which country banks were subjected before
the restriction on cash payments, must, at times, have been very
great. At all periods of alarm, or of expected alarm, they must have
been under the necessity of providing themselves with guineas, that
they might be prepared for every exigency which might occur. Guineas,
on these occasions, were obtained at the Bank in exchange for the
larger notes, and were conveyed by some confidential agent, at expense
and risk, to the country bank. After performing the offices to which
they were destined, they found their way again to London, and in all
probability were again lodged in the Bank, provided they had not
suffered such a loss of weight, as to reduce them below the legal
standard.
'If the plan now proposed, of paying Bank notes in bullion, be
adopted, it would be necessary either to extend the same privilege to
country banks, or to make Bank notes a legal tender, in which latter
case, there would be no alteration in the law respecting country
banks, as they would be required, precisely as they now are, to pay
their notes, when demanded, in Bank of England notes.
'The saving which would take place, from not submitting the
guineas to the loss of weight, from the friction which they must
undergo in their repeated journeys, as well as of the expences of
conveyance, would be considerable; but by far the greatest advantage
would result from the permanent supply of the country, as well as of
the London circulation, as far as the smaller payments are concerned,
being provided in the very cheap medium, paper, instead of the very
valuable medium, gold; thereby enabling the country to derive all the
profit which may be obtained by the productive employment of a capital
to that amount. We should surely not be justified in rejecting so
decided a benefit, unless some specific inconvenience could be pointed
out as likely to follow from adopting the cheaper medium.']
A currency is in its most perfect state when it consists wholly of
paper money, but of paper money of an equal value with the gold which
it professes to represent. The use of paper instead of gold,
substitutes the cheapest in place of the most expensive medium, and
enables the country, without loss to any individual, to exchange all
the gold which it before used for this purpose, for raw materials,
utensils, and food; by the use of which, both its wealth and its
enjoyments are increased.
In a national point of view, it is of no importance whether the
issuers of this well regulated paper money be the Government or a
bank, it will, on the whole, be equally productive of riches, whether
it be issued by one or by the other; but it is not so with respect to
the interest of individuals. In a country where the market rate of
interest is 7 per cent, and where the State requires for a particular
expense £70,000 per annum, it is a question of importance to the
individuals of that country, whether they must be taxed to pay this
£70,000 per annum, or whether they could raise it without taxes.
Suppose that a million of money should be required to fit out an
expedition. If the State issued a million of paper, and displaced a
million of coin, the expedition would be fitted out without any charge
to the people; but if a Bank issued a million of paper, and lent it to
Government at 7 per cent, thereby displacing a million of coin, the
country would be charged with a continual tax of £70,000 per annum:
the people would pay the tax, the Bank would receive it, and the
society would in either case be as wealthy as before; the expedition
would have been really fitted out by the improvement of our system, by
rendering capital of the value of a million productive in the form of
commodities, instead of letting it remain unproductive in the form of
coin; but the advantage would always be in favour of the issuers of
paper; and as the State represents the people, the people would have
saved the tax, if they, and not the Bank, had issued this million.
I have already observed, that if there were perfect security that
the power of issuing paper money would not be abused, it would be of
no importance with respect to the riches of the country collectively,
by whom it was issued; and I have now shewn that the public would have
a direct interest that the issuers should be the State, and not a
company of merchants or bankers. The danger, however, is, that this
power would be more likely to be abused, if in the hands of
Government, than if in the hands of a banking company. A company
would, it is said, be more under the control of law, and although it
might be their interest to extend their issues beyond the bounds of
discretion, they would be limited and checked by the power which
individuals would have of calling for bullion or specie. It is argued
that the same check would not be long respected, if Government had the
privilege of issuing money; that they would be too apt to consider
present convenience, rather than future security, and might,
therefore, on the alleged grounds of expediency, be too much inclined
to remove the checks, by which the amount of their issues was
controlled.
Under an arbitrary Government, this objection would have great
force; but, in a free country, with an enlightened legislature, the
power of issuing paper money, under the requisite checks of
convertibility at the will of the holder, might be safely lodged in
the hands of commissioners appointed for that special purpose, and
they might be made totally independent of the control of ministers.
The sinking fund is managed by commissioners, responsible only to
parliament, and the investment of the money entrusted to their charge,
proceeds with the utmost regularity; what reason can there be to doubt
that the issues of paper money might be regulated with equal fidelity,
if placed under similar management?
It may be said, that although the advantage accruing to the State,
and, therefore, to the public, from issuing paper money, is
sufficiently manifest, as it would exchange a portion of the national
debt, on which interest is paid by the public, into a debt bearing no
interest; yet it would be disadvantageous to commerce, as it would
preclude the merchants from borrowing money, and getting their bills
discounted, the method in which Bank paper is partly issued.
This, however, is to suppose that money could not be borrowed, if
the Bank did not lend it, and that the market rate of interest and
profit depends on the amount of the issues of money, and on the
channel through which it is issued. But as a country would have no
deficiency of cloth, of wine, or any other commodity, if they had the
means of paying for it, in the same manner neither would there be any
deficiency of money to be lent, if the borrowers offered good
security, and were willing to pay the market rate of interest for it.
In another part of this work, I have endeavoured to shew, that the
real value of a commodity is regulated, not by the accidental
advantages which may be enjoyed by some of its producers, but by the
real difficulties encountered by that producer who is least favoured.
It is so with respect to the interest for money; it is not regulated
by the rate at which the Bank will lend, whether it be 5, 4, or 3 per
cent, but by the rate of profits which can be made by the employment
of capital, and which is totally independent of the quantity, or of
the value of money. Whether a Bank lent one million, ten millions, or
a hundred millions, they would not permanently alter the market rate
of interest; they would alter only the value of the money which they
thus issued. In one case, 10 or 20 times more money might be required
to carry on the same business, than what might be required in the
other. The applications to the Bank for money, then, depend on the
comparison between the rate of profits that may be made by the
employment of it, and the rate at which they are willing to lend it.
If they charge less than the market rate of interest, there is no
amount of money which they might not lend, - if they charge more than
that rate, none but spendthrifts and prodigals would be found to
borrow of them. We accordingly find, that when the market rate of
interest exceeds the rate of 5 per cent at which the Bank uniformly
lend, the discount office is besieged with applicants for money; and,
on the contrary, when the market rate is even temporarily under 5 per
cent, the clerks of that office have no employment.
The reason, then, why for the last twenty years, the Bank is said
to have given so much aid to commerce, by assisting the merchants with
money, is, because they have, during that whole period, lent money
below the market rate of interest; below that rate at which the
merchants could have borrowed elsewhere; but, I confess, that to me
this seems rather an objection to their establishment, than an
argument in favour of it.
What should we say of an establishment which should regularly
supply half the clothiers with wool under the market price? Of what
benefit would it be to the community? It would not extend our trade,
because the wool would equally have been bought if they had charged
the market price for it. It would not lower the price of cloth to the
consumer, because the price, as I have said before, would be regulated
by the cost of its production to those who were the least favoured.
Its sole effect, then, would be, to swell the profits of a part of the
clothiers beyond the general and common rates of profits. The
establishment would be deprived of its fair profits, and another part
of the community would be in the same degree benefited. Now this is
precisely the effect of our banking establishments; a rate of interest
is fixed by the law below that at which it can be borrowed in the
market, and at this rate the Bank are required to lend, or not to lend
at all. From the nature of their establishment, they have large funds
which they can only dispose of in this way; and a part of the traders
of the country are unfairly, and, for the country, unprofitably
benefited, by being enabled to supply themselves with an instrument of
trade, at a less charge than those who must be influenced only by
market price.
The whole business, which the whole community can carry on,
depends on the quantity of its capital, that is, of its raw material,
machinery, food, vessels, &c. employed in production. After a well
regulated paper money is established, these can neither be increased
nor diminished by the operations of banking. If, then, the State were
to issue the paper money of the country, although it should never
discount a bill, or lend one shilling to the public, there would be no
alteration in the amount of trade; for we should have the same
quantity of raw materials, of machinery, food, and ships; and it is
probable, too, that the same amount of money might be lent, not always
at 5 per cent indeed, a rate fixed by law, when that might be under
the market rate, but at 6, 7, or 8 per cent, the result of the fair
competition in the market between the lenders and the borrowers.
Adam Smith speaks of the advantages derived by merchants from the
superiority of the Scotch mode of affording accommodation to trade,
over the English mode, by means of cash accounts. These cash accounts
are credits given by the Scotch banker to his customers, in addition
to the bills which he discounts for them; but, as the banker, in
proportion as he advances money, and sends it into circulation in one
way, is debarred from issuing so much in the other, it is difficult to
perceive in what the advantage consists. If the whole circulation will
bear only one million of paper, one million only will be circulated;
and it can be of no real importance either to the banker or merchant,
whether the whole be issued in discounting bills, or a part be so
issued, and the remainder be issued by means of these cash accounts.
It may perhaps be necessary to say a few words on the subject of
the two metals, gold and silver, which are employed in currency,
particularly as this question appears to perplex, in many people's
minds, the plain and simple principles of currency. 'In England,' says
Dr Smith, 'gold was not considered as 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 of it at such a valuation of the gold, as he and his debtor
could agree upon.'
In this state of things it is evident that a guinea might
sometimes pass for 22s. or more, and sometimes for 18s. or less,
depending entirely on the alteration in the relative market value of
gold and silver. All the variations, too, in the value of gold, as
well as in the value of silver, would be rated in the gold coin, - it
would appear as if silver was invariable, and as if gold only was
subject to rise and fall. Thus, although a guinea passed for 22s.
instead of 18s., gold might not have varied in value; the variation
might have been wholly confined to the silver, and therefore 22s.
might have been of no more value than 18s. were before. And, on the
contrary, the whole variation might have been in the gold: a guinea,
which was worth 18s., might have risen to the value of 22s.
If now we suppose this silver currency to be debased by clipping,
and also increased in quantity, a guinea might pass for 30s.; for the
silver in 30s. of such debased money might be of no more value than
the gold in one guinea. By restoring the silver currency to its Mint
value, silver money would rise: but it would appear as if gold fell,
for a guinea would probably be of no more value than 21 of such good
shillings.
If now gold be also made a legal tender, and every debtor be at
liberty to discharge a debt by the payment of 420 shillings, or twenty
guineas for every £21 that he owes, he will pay in one or the other
according as he can most cheaply discharge his debt. If with five
quarters of wheat he can procure as much gold bullion as the Mint will
coin into twenty guineas, and for the same wheat as much silver
bullion as the Mint will coin for him into 430 shillings, he will
prefer paying in silver, because he would be a gainer of ten shillings
by so paying his debt. But if, on the contrary, he could obtain with
this wheat as much gold as would be coined into twenty guineas and a
half, and as much silver only as would coin into 420 shillings, he
would naturally prefer paying his debt in gold. If the quantity of
gold which he could procure could be coined only into twenty guineas,
and the quantity of silver into 420 shillings, it would be a matter of
perfect indifference to him in which money, silver or gold, it was
that he paid his debt. It is not then a matter of chance; it is not
because gold is better fitted for carrying on the circulation of a
rich country, that gold is ever preferred for the purpose of paying
debts; but, simply, because it is the interest of the debtor so to pay
them.
During a long period previous to 1797, the year of the restriction
on the Bank payments in coin, gold was so cheap, compared with silver,
that it suited the Bank of England, and all other debtors, to purchase
gold in the market, and not silver, for the purpose of carrying it to
the Mint to be coined, as they could in that coined metal more cheaply
discharge their debts. The silver currency was, during a great part of
this period, very much debased; but it existed in a degree of
scarcity, and, therefore, on the principle which I have before
explained, it never sunk in its current value. Though so debased, it
was still the interest of debtors to pay in the gold coin. If, indeed,
the quantity of this debased silver coin had been enormously great, or
if the Mint had issued such debased pieces, it might have been the
interest of debtors to pay in this debased money; but its quantity was
limited, and it sustained its value, and, therefore, gold was in
practice the real standard of currency.
That it was so, is nowhere denied; but it has been contended, that
it was made so by the law, which declared that silver should not be a
legal tender for any debt exceeding £25, unless by weight, according
to the Mint standard.
But this law did not prevent any debtor from paying his debt,
however large its amount, in silver currency fresh from the Mint; that
the debtor did not pay in this metal, was not a matter of chance, nor
a matter of compulsion, but wholly the effect of choice; it did not
suit him to take silver to the Mint, it did suit him to take gold
thither. It is probable, that if the quantity of this debased silver
in circulation had been enormously great, and also a legal tender,
that a guinea would have been again worth thirty shillings; but it
would have been the debased shilling that would have fallen in value,
and not the guinea that had risen.
It appears, then, that whilst each of the two metals was equally a
legal tender for debts of any amount, we were subject to a constant
change in the principal standard measure of value. It would sometimes
be gold, sometimes silver, depending entirely on the variations in the
relative value of the two metals; and at such times the metal, which
was not the standard, would be melted, and withdrawn from circulation,
as its value would be greater in bullion than in coin. This was an
inconvenience, which it was highly desirable should be remedied; but
so slow is the progress of improvement, that although it had been
unanswerably demonstrated by Mr Locke, and had been noticed by all
writers on the subject of money since his day, a better system was
never adopted till the session of Parliament, 1816, when it was
enacted that gold only should be a legal tender for any sum exceeding
forty shillings.
Dr Smith does not appear to have been quite aware of the effect of
employing two metals as currency, and both a legal tender for debts of
any amount; for he says, that, in reality, during the continuance of
any one regulated proportion between the respective values of the
different metals in coin, the value of the most precious metal
regulates the value of the whole coin.' Because gold was in his day
the medium in which it suited debtors to pay their debts, he thought
that it had some inherent quality by which it did then, and always
would regulate the value of silver coin.
On the reformation of the gold coin in 1774, a new guinea fresh
from the Mint, would exchange for only twenty-one debased shillings;
but in the reign of King William, when the silver coin was in
precisely the same condition, a guinea also new and fresh from the
Mint would exchange for thirty shillings. On this Mr Buchanan
observes, 'here, then, is a most singular fact, of which the common
theories of currency offer no account; the guinea exchanging at one
time for thirty shillings, its intrinsic worth in a debased silver
currency, and afterwards the same guinea exchanged for only twenty-one
of those debased shillings. It is clear that some great change must
have intervened in the state of the currency between these two
different periods, of which Dr Smith's hypothesis offers no
explanation.'
It appears to me, that the difficulty may be very simply solved,
by referring this different state of the value of the guinea at the
two periods mentioned, to the different quantities of debased silver
currency in circulation. In King William's reign gold was not a legal
tender; it passed only at a conventional value. All the large payments
were probably made in silver, particularly as paper currency, and the
operations of banking, were then little understood. The quantity of
this debased silver money exceeded the quantity of silver money, which
would have been maintained in circulation, if nothing but undebased
money had been in use; and, consequently, it was depreciated as well
as debased. But in the succeeding period when gold was a legal tender,
when Bank notes also were used in effecting payments, the quantity of
debased silver money did not exceed the quantity of silver coin fresh
from the Mint, which would have circulated if there had been no
debased silver money; hence, though the money was debased, it was not
depreciated. Mr Buchanan's explanation is somewhat different; he
thinks that a subsidiary currency is not liable to depreciation, but
that the main currency is. In King William's reign silver was the main
currency, and hence was liable to depreciation. In 1774 it was a
subsidiary currency, and, therefore, maintained its value.
Depreciation, however, does not depend on a currency being the
subsidiary of the main currency, it depends wholly on its being in
excess of quantity (65*)
To a moderate seignorage on the coinage of money there cannot be
much objection, particularly on that currency which is to effect the
smaller payments. Money is generally enhanced in value to the full
amount of the seignorage, and, therefore, it is a tax which in no way
affects those who pay it, while the quantity of money is not in
excess. It must, however, be remarked, that in a country where a paper
currency is established, although the issuers of such paper should be
liable to pay it in specie on the demand of the holder, still, both
their notes and the coin might be depreciated to the full amount of
the seignorage on that coin, which is alone the legal tender, before
the check, which limits the circulation of paper, would operate. If
the seignorage of gold coin were 5 per cent for instance, the
currency, by an abundant issue of Bank-notes, might be really
depreciated 5 per cent before it would be the interest of the holders
to demand coin for the purpose of melting it into bullion; a
depreciation to which we should never be exposed, if either there was
no seignorage on the gold coin; or, if a seignorage were allowed, the
holders of Bank-notes might demand bullion, and not coin, in exchange
for them, at the Mint price of £3 17s. 10 1/2d. Unless, then, the Bank
should be obliged to pay their notes in bullion or coin, at the will
of the holder, the late law which allows a seignorage of 6 per cent,
or fourpence per oz., on the silver coin, but which directs that gold
shall be coined by the Mint without any charge whatever, is perhaps
the most proper, as it will most effectually prevent any unnecessary
variation of the currency.
Chapter 28
On the Comparative Value of gold, Corn, and Labour, in Rich and Poor
Countries
'Gold and silver, like all other commodities,' says Adam Smith,
'naturally seek the market where the best price is given for them; and
the best price is commonly given for every thing in the country which
can best afford it. Labour, it must be remembered, is the ultimate
price which is paid for every thing; and in countries where labour is
equally well rewarded, the money price of labour will be in proportion
to that of the subsistence of the labourer. But gold and silver will
naturally exchange for a greater quantity of substance in a rich than
in a poor country; in a country which abounds with subsistence, than
in one which is but indifferently supplied with it.'
But corn is a commodity, as well as gold, silver, and other
things; if all commodities, therefore, have a high exchangeable value
in a rich country, corn must not be excepted; and hence we might
correctly say, that corn exchanged for a great deal of money, because
it was dear, and that money, too, exchanged for a great deal of corn,
because that also was dear; which is to assert that corn is dear and
cheap at the same time. No point in political economy can be better
established, than that a rich country is prevented from increasing in
population, in the same ratio as a poor country, by the progressive
difficulty of providing food. That difficulty must necessarily raise
the relative price of food, and give encouragement to its importation.
How then can money, or gold and silver, exchange for more corn in
rich, than in poor countries? It is only in rich countries, where corn
is dear, that landholders induce the legislature to prohibit the
importation of corn. Who ever heard of a law to prevent the
importation of raw produce in America or Poland? - Nature has
effectually precluded its importation by the comparative facility of
its production in those countries.
How, then, can it be true, that 'if you except corn, and such
other vegetables, as are raised altogether by human industry, all
other sorts of rude produce - cattle, poultry, game of all kinds, the
useful fossils and minerals of the earth, &c., naturally grow dearer
as the society advances.' Why should corn and vegetables alone be
excepted? Dr Smith's error throughout his whole work, lies in
supposing that the value of corn is constant; that though the value of
all other things may, the value of corn never can be raised. Corn,
according to him, is always of the same value because it will always
feed the same number of people. In the same manner it might be said,
that cloth is always of the same value, because it will always make
the same number of coats. What can value have to do with the power of
feeding and clothing?
Corn, like every other commodity, has in every country its natural
price, viz. that price which is necessary to its production, and
without which it could not be cultivated: it is this price which
governs its market price, and which determines the expediency of
exporting it to foreign countries. If the importation of corn were
prohibited in England, its natural price might rise to £6 per quarter
in England, whilst it was only at half that price in France. If at
this time, the prohibition of importation were removed, corn would
fall in the English market, not to a price between £6 and £3, but
ultimately and permanently to the natural price of France, the price
at which it could be furnished to the English market, and afford the
usual and ordinary profits of stock in France; and it would remain at
this price, whether England consumed a hundred thousand, or a million
of quarters. If the demand of England were for the latter quantity, it
is probable that, owing to the necessity under which France would be,
of having recourse to land of a worse quality, to furnish this large
supply, the natural price would rise in France; and this would of
course affect also the price of corn in England. All that I contend
for is, that it is the natural price of commodities in the exporting
country, which ultimately regulates the prices at which they shall be
sold, if they are not the objects of monopoly, in the importing
country.
But Dr Smith, who has so ably supported the doctrine of the
natural price of commodities ultimately regulating their market price,
has supposed a case in which he thinks that the market price would not
be regulated either by the natural price of the exporting or of the
importing country. 'Diminish the real opulence either of Holland, or
the territory of Genoa,' he says, 'while the number of their
inhabitants remains the same; diminish their power of supplying
themselves from distant countries, and the price of corn, instead of
sinking with that diminution in the quantity of their silver which
must necessarily accompany this declension, either as its cause or as
its effect, will rise to the price of a famine.'
To me it appears, that the very reverse would take place: the
diminished power of the Dutch or Genoese to purchase generally, might
depress the price of corn for a time below its natural price in the
country from which it was exported, as well as in the countries in
which it was imported; but it is quite impossible that it could ever
raise it above that price. It is only by increasing the opulence of
the Dutch or Genoese, that you could increase the demand, and raise
the price of corn above its former price; and that would take place
only for a very limited time, unless new difficulties should arise in
obtaining the supply.
Dr Smith further observes on this subject: 'When we are in want of
necessaries, we must part with all superfluities, of which the value,
as it rises in times of opulence and prosperity, so it sinks in times
of poverty and distress.' This is undoubtedly true; but he continues,
'it is otherwise with necessaries. Their real price, the quantity of
labour which they can purchase or command, rises in times of poverty
and distress, and sinks in times of opulence and prosperity, which are
always times of great abundance, for they could not otherwise be times
of opulence and prosperity. Corn is a necessary, silver is only a
superfluity.'
Two propositions are here advanced, which have no connexion with
each other; one, that under the circumstances supposed, corn would
command more labour, which is not disputed; the other, that corn would
sell at a higher money price, that it would exchange for more silver;
this I contend to be erroneous. It might be true, if corn were at the
same time scarce - if the usual supply had not been furnished. But in
this case it is abundant; it is not pretended that a less quantity
than usual is imported, or that more is required. To purchase corn,
the Dutch or Genoese want money, and to obtain this money, they are
obliged to sell their superfluities. It is the market value and price
of these superfluities which falls, and money appears to rise as
compared with them. But this will not tend to increase the demand for
corn, nor to lower the value of money, the only two causes which can
raise the price of corn. Money, from a want of credit, and from other
causes, may be in great demand, and consequently dear, comparatively
with corn; but on no just principle can it be maintained, that under
such circumstances money would be cheap, and therefore, that the price
of corn would rise.
When we speak of the high or low value of gold, silver, or any
other commodity in different countries, we should always mention some
medium in which we are estimating them, or no idea can be attached to
the proposition. Thus, when gold is said to be dearer in England than
in Spain, if no commodity is mentioned, what notion does the assertion
convey? If corn, olives, oil, wine, and wool, be at a cheaper price in
Spain than in England; estimated in those commodities, gold is dearer
in Spain. If, again, hardware, sugar, cloth, &c. be at a lower price
in England than in Spain, then, estimated in those commodities, gold
is dearer in England. Thus gold appears dearer or cheaper in Spain, as
the fancy of the observer may fix on the medium by which he estimates
its value. Adam Smith, having stamped corn and labour as an universal
measure of value, would naturally estimate the comparative value of
gold by the quantity of those two objects for which it would exchange:
and, accordingly, when he speaks of the comparative value of gold in
two countries, I understand him to mean its value estimated in corn
and labour.
But we have seen, that, estimated in corn, gold may be of very
different value in two countries. I have endeavoured to shew that it
will be low in rich countries, and high in poor countries; Adam Smith
is of a different opinion: he thinks that the value of gold, estimated
in corn, is highest in rich countries. But without further examining
which of these opinions is correct, either of them is sufficient to
shew, that gold will not necessarily be lower in those countries which
are in possession of the mines, though this is a proposition
maintained by Adam Smith. Suppose England to be possessed of the
mines, and Adam Smith's opinion, that gold is of the greatest value in
rich countries, to be correct: although gold would naturally flow from
England to all other countries in exchange for their goods, it would
not follow that gold was necessarily lower in England, as compared
with corn and labour, than in those countries. In anOther place,
however, Adam Smith speaks of the precious metals being necessarily
lower in Spain and Portugal, than in other parts of Europe, because
those countries happen to be almost the exclusive possessors of the
mines which produce them. 'Poland, where the feudal system still
continues to take place, is at this day as beggarly a country as it
was before the discovery of America. The money price of corn, however,
has risen; THE REAL VALUE OF THE PRECIOUS METALS HAS FALLEN in Poland,
in the same manner as in other parts of Europe. Their quantity,
therefore, must have increased there as in other places, and nearly in
the same proportion to the annual produce of the land and labour. This
increase of the quantity of those metals, however, has not, it seems,
increased that annual produce; has neither improved the manufactures
and agriculture of the country, nor mended the circumstances of its
inhabitants. Spain and Portugal, the countries which possess the
mines, are, after Poland, perhaps, the two most beggarly countries in
Europe. The value of the precious metals, however, must be lower in
Spain and Portugal than in any other parts of Europe, loaded, not only
with a freight and insurance, but with the expense of smuggling, their
exportation being either prohibited, or subjected to a duty. In
proportion to the annual produce of the land and labour, therefore,
their quantity must be greater in those countries than in any other
part of Europe.. those countries, however, are poorer than the greater
part of Europe. Though the feudal system has been abolished in Spain
and Portugal, it has not been succeeded by a much better.'
Dr Smith's argument appears to me to be this: Gold, when estimated
in corn, is cheaper in Spain than in other countries, and the proof of
this is, not that corn is given by other countries to Spain for gold,
but that cloth, sugar, hardware, are by those countries given in
exchange for that metal.
Chapter 29
Taxes Paid by the Producer
Mons. Say greatly magnifies the inconveniences which result if a
tax on a manufactured commodity is levied at an early, rather than at
a late period of its manufacture. The manufacturers, he observes,
through whose hands the commodity may successively pass, must employ
greater funds in consequence of having to advance the tax, which is
often attended with considerable difficulty to a manufacturer of very
limited capital and credit. To this observation no objection can be
made.
Another inconvenience on which he dwells is, that in consequence
of the advance of the tax, the profits on the advance also must be
charged to the consumer, and that this additional tax is one from
which the treasury derives no advantage.
In this latter objection I cannot agree with M. Say. The State, we
will suppose, wants to raise immediately £1,000 and levies it on a
manufacturer, who will not, for a twelvemonth, be able to charge it to
the consumer on his finished commodity. In consequence of such delay,
he is obliged to charge for his commodity an additional price, not
only of £1,000, the amount of the tax, but probably of £1,100, £100
being for interest on the £1,000 advanced. But in return for this
additional £100 paid by the Consumer, he has a real benefit, inasmuch
as his payment of the tax which Government required immediately, and
which he must finally pay, has been postponed for a year; an
opportunity, therefore, has been afforded to him of lending to the
manufacturer, who had occasion for it, the £1,000 at 10 per cent, or
at any other rate of interest which might be agreed upon. Eleven
hundred pounds payable at the end of one year, when money is at 10 per
cent interest, is of no more value than £1,000 to be paid immediately.
If Government delayed receiving the tax for one year till the
manufacture of the commodity was completed, it would, perhaps, be
obliged to issue an Exchequer bill bearing interest, and it would pay
as much for interest as the consumer would save in price, excepting,
indeed, that portion of the price which the manufacturer might be
enabled in consequence of the tax, to add to his own real gains. If
for the interest of the Exchequer bill, Government would have paid 5
per cent, a tax of £50 is saved by not issuing it. If the manufacturer
borrowed the additional capital at 5 per cent, and charged the
cOnsumer 10 per cent, he also will have gained 5 per cent on his
advance over and above his usual profits, so that the manufacturer and
Government together gain, or save, precisely the sum which the
consumer pays.
M. Simonde, in his excellent work, De la Richesse Commerciale,
following the same line of argument as M. Say, has calculated that a
tax of 4,000 francs, paid originally by a manufacturer, whose profits
were at the moderate rate of 10 per cent, would, if the commodity
manufactured, only passed through the hands of five different persons,
be raised to the consumer to the sum of 6,734 francs. This calculation
proceeds on the supposition, that he who first advanced the tax, would
receive from the next manufacturer 4,400 francs, and he again from the
next, 4,840 francs; so that at each step 10 per cent on its value
would be added to it. This is to suppose that the value of the tax
would be accumulating at compound interest; not at the rate of 10 per
cent per annum, but at an absolute rate of 10 per cent at every step
of its progress. This opinion of M. de Simonde would be correct, if
five years elapsed between the first advance of the tax, and the sale
of the taxed commodity to the consumer; but if one year only elapsed,
a remuneration of 400 francs, instead of 2,734, would give a profit at
the rate of 10 per cent per annum, to all who had contributed to the
advance of the tax, whether the commodity had passed through the hands
of five manufacturers or fifty.
Chapter 30
On the Influence of Demand and Supply on Prices
It is the cost of production which must ultimately regulate the
price of commodities, and not, as has been often said, the proportion
between the supply and demand: the proportion between supply and
demand may, indeed,for a time, affect the market value of a commodity,
until it is supplied in greater or less abundance, according as the
demand may have increased or diminished; but this effect will be only
of temporary duration.
Diminish the cost of production of hats, and their price will
ultimately fall to their new natural price, although the demand should
be doubled, trebled, or quadrupled. Diminish the cost of subsistence
of men, by diminishing the natural price of the food and clothing, by
which life is sustained, and wages will ultimately fall,
notwithstanding that the demand for labourers may very greatly
increase.
The opinion that the price of commodities depends solely on the
proportion of supply to demand, or demand to supply, has become almost
an axiom in political economy, and has been the source of much error
in that science. It is this opinion which has made Mr Buchanan
maintain that wages are not influenced by a rise or fall in the price
of provisions, but solely by the demand and supply of labour; and that
a tax on the wages of labour would not raise wages, because it would
not alter the proportion of the demand of labourers to the supply.
The demand for a commodity cannot be said to increase, if no
additional quantity of it be purchased or consumed; and yet, under
such circumstances, its money value may rise. Thus, if the value of
money were to fall, the price of every commodity would rise, for each
of the competitors would be willing to spend more money than before on
its purchase; but though its price rose 10 or 20 per cent if no more
were bought than before, it would not, I apprehend, be admissible to
say, that the variation in the price of the commodity was caused by
the increased demand for it. Its natural price, its money cost of
production, would be really altered by the altered value of money; and
without any increase of demand, the price of the commodity would be
naturally adjusted to that new value.
'We have seen,' says M. Say, 'that the cost of production
determines the lowest price to which things can fall: the price below
which they cannot remain for any length of time, because production
would then be either entirely stopped or diminished.' Vol. ii. p. 26.
He afterwards says, that the demand for gold having increased in a
still greater proportion than the supply, since the discovery of the
mines, 'its price in goods, instead of falling in the proportion of
ten to one, fell only in the proportion of four to one;' that is to
say, instead of falling in proportion as its natural price had fallen,
fell in proportion as the supply exceeded the demand.(66*) - 'The
value of every commodity rises always in a direct ratio to the demand,
and in an inverse ratio to the supply.'
The same opinion is expressed by the Earl of Lauderdale.
'With respect to the variations in value, of which every thing
valuable is susceptible, if we could for a moment suppose that any
substance possessed intrinsic and fixed value, so as to render an
assumed quantity of it constantly, under all circumstances, of an
equal value, then the degree of value of all things, ascertained by
such a fixed standard, would vary according to the proportion betwixt
the quantity of them, and the demand for them, and every commodity
would, of course, be subject to a variation in its value, from four
different circumstances:
1. 'It would be subject to an increase of its value, from a
diminution of its quantity.
2. 'To a diminution of its value, from an augmentation of its
quantity.
3. 'It might suffer an augmentation in its value, from the
circumstance of an increased demand.
4. 'Its value might be diminished by a failure of demand.
'As it will, however, clearly appear that no commodity can possess
fixed and intrinsic value, so as to qualify it for a measure of the
value of other commodities, mankind are induced to select, as a
practical measure of value, that which appears the least liable to any
of these four sources of variations, which are the sole causes of
alteration of value.
'When, in common language, therefore, we express the value of any
commodity, it may vary at one period from what it is at another, in
consequence of eight different contingencies:
1. 'From the four circumstances above stated, in relation to the
commodity of which we mean to express the value.
2. 'From the same four circumstances, in relation to the commodity
we have adopted as a measure of value.'(67*)
This is true of monopolized commodities, and indeed of the market
price of all other commodities for a limited period. If the demand for
hats should be doubled, the price would immediately rise, but that
rise would be only temporary, unless the cost of production of hats,
or their natural price, were raised. If the natural price of bread
should fall 50 per cent from some great discovery in the science of
agriculture, the demand would not greatly increase, for no man would
desire more than would satisfy his wants, and as the demand would not
increase, neither would the supply; for a commodity is not supplied
merely because it can be produced, but because there is a demand for
it. Here, then, we have a case where the supply and demand have
scarcely varied, or if they have increased, they have increased in the
same proportion; and yet the price of bread will have fallen 50 per
cent at a time, too, when the value of money had continued invariable.
Commodities which are monopolized, either by an individual, or by
a company, vary according to the law which Lord Lauderdale has laid
down: they fall in proportion as the sellers augment their quantity,
and rise in proportion to the eagerness of the buyers to purchase
them; their price has no necessary connexion with their natural value:
but the prices of commodities, which are subject to competition, and
whose quantity may be increased in any moderate degree, will
ultimately depend, not on the state of demand and supply, but on the
increased or diminished cost of their production.
Chapter 31
On Machinery
In the present chapter I shall enter into some enquiry respecting
the influence of machinery on the interests of the different classes
of society, a subject of great importance, and one which appears never
to have been investigated in a manner to lead to any certain or
satisfactory results. It is more incumbent on me to declare my opinion
on this question, because they have, on further reflection, undergone
a considerable change; and although I am not aware that I have ever
published any thing respecting machinery which it is necessary for me
to retract, yet I have in other ways given my support to doctrines
which I now think erroneous; it, therefore, becomes a duty in me to
submit my present views to examination, with my reasons for
entertaining them.
Ever since I first turned my attention to questions of political
economy, I have been of opinion, that such an application of machinery
to any branch of production, as should have the effect of saving
labour, was a general good, accompanied only with that portion of
inconvenience which in most cases attends the removal of capital and
labour from one employment to another. It appeared to me, that
provided the landlords had the same money rents, they would be
benefited by the reduction in the prices of some of the commodities on
which those rents were expanded, and which reduction of price could
not fail to be the consequence of the employment of machinery. The
capitalist, I thought, was eventually benefited precisely in the same
manner. He, indeed, who made the discovery of the machine, or who
first usefully applied it, would enjoy an additional advantage, by
making great profits for a time; but, in proportion as the machine
came into general use, the price of the commodity produced, would,
from the effects of competition, sink to its cost of production, when
the capitalist would get the same money profits as before, and he
would only participate in the general advantage, as a consumer, by
being enabled, with the same money revenue, to command an additional
quantity of comforts and enjoyments. The class of labourers also, I
thought, was equally benefited by the use of machinery, as they would
have the means of buying more commodities with the same money wages,
and I thought that no reduction of wages would take place, because the
capitalist would have the power of demanding and employing the same
quantity of labour as before, although he might be under the necessity
of employing it in the production of a new, or at any rate of a
different commodity. If, by improved machinery, with the employment of
the same quantity of labour, the quantity of stockings could be
quadrupled, and the demand for stockings were only doubled, some
labourers would necessarily be discharged from the stocking trade; but
as the capital which employed them was still in being, and as it was
the interest of those who had it to employ it productively, it
appeared to me that it would be employed on the production of some
other commodity, useful to the society, for which there could not fail
to be a demand; for I was, and am, deeply impressed with the truth of
the observation of Adam Smith, that 'the desire for food is limited in
every man, by the narrow capacity of the human stomach, but the desire
of the conveniences, and ornaments of building, dress, equipage and
household furniture, seems to have no limit or certain boundary.' As,
then, it appeared to me that there would be the same demand for labour
as before, and that wages would be no lower, I thought that the
labouring class would, equally with the other classes, participate in
the advantage, from the general cheapness of commodities arising from
the use of machinery.
These were my opinions, and they continue unaltered, as far as
regards the landlord and the capitalist; but I am convinced, that the
substitution of machinery for human labour, is often very injurious to
the interests of the class of labourers.
My mistake arose from the supposition, that whenever the net
income of a society increased, its gross income would also increase; I
now, however, see reason to be satisfied that the one fund, from which
landlords and capitalists derive their revenue, may increase, while
the other, that upon which the labouring class mainly depend, may
diminish, and therefore it follows, if I am right, that the same cause
which may increase the net revenue of the country, may at the same
time render the population redundant, and deteriorate the condition of
the labourer.
A capitalist we will suppose employs a capital of the value of
£20,000 and that he carries on the joint business of a farmer, and a
manufacturer of necessities. We will further suppose, that £7,000 of
this capital is invested in fixed capital, viz. in buildings,
implements, &c. &c. and that the remaining £13,000 is employed as
circulating capital in the support of labour. Let us suppose, too,
that profits are 10 per cent, and consequently that the capitalist's
capital is every year put into its original state of efficiency, and
yields a profit of £2,000.
Each year the capitalist begins his operations, by having food and
necessaries in his possession of the value of £13,000, all of which he
sells in the course of the year to his own workmen for that sum of
money, and, during the same period, he pays them the like amount of
money for wages: at the end of the year they replace in his possession
food and necessaries of the value of £15,000, £2,000 of which he
consumes himself, or disposes of as may best suit his pleasure and
gratification. As far as these products are concerned, the gross
produce for that year is £15,000, and the net produce £2,000. Suppose
now, that the following year the capitalist employs half his men in
constructing a machine, and the other half in producing food and
necessaries as usual. During that year he would pay the sum of £13,000
in wages as usual, and would sell food and necessaries to the same
amount to his workmen; but what would be the case the following year?
While the machine was being made, only one-half of the usual
quantity of food and necessaries would be obtained, and they would be
only one-half the value of the quantity which was produced before. The
machine would be worth £7,500, and the food and necessaries £7,500,
and, therefore, the capital of the capitalist would be as great as
before; for he would have besides these two values, his fixed capital
worth £7,000, making in the whole £20,000 capital, and £2,000 profit.
After deducting this latter sum for his own expenses, he would have a
no greater circulating capital than £5,500 with which to carry on his
subsequent operations; and, therefore, his means of employing labour,
would be reduced in the proportion of £13,000 to £5,500, and,
consequently, all the labour which was before employed by £7,500,
would become redundant.
The reduced quantity of labour which the capitalist can employ,
must, indeed, with the assistance of the machine, and after deductions
for its repairs, produce a value equal to £7,500, it must replace the
circulating capital with a profit of £2,000 on the whole capital; but
if this be done, if the net income be not diminished, of what
importance is it to the capitalist, whether the gross income be of the
value of £3,000, of £10,000, or of £15,000?
In this case, then, although the net produce will not be
diminished in value, although its power of purchasing commodities may
be greatly increased, the gross produce will have fallen from a value
of £15,000 to a value of £7,500, and as the power of supporting a
population, and employing labour, depends always on the gross produce
of a nation, and not on its net produce, there will necessarily be a
diminution in the demand for labour, population will become redundant,
and the situation of the labouring classes will be that of distress
and poverty.
As, however, the power of saving from revenue to add to capital,
must depend on the efficiency of the net revenue, to satisfy the wants
of the capitalist, it could not fail to follow from the reduction in
the price of commodities consequent on the introduction of machinery,
that with the same wants he would have increased means of saving -
increased facility of transferring revenue into capital. But with
every increase of capital he would employ more labourers; and,
therefore, a portion of the people thrown out of work in the first
instance, would be subsequently employed; and if the increased
production, in consequence of the employment of the machine, was so
great as to afford, in the shape of net produce, as great a quantity
of food and necessaries as existed before in the form of gross
produce, there would be the same ability to employ the whole
population, and, therefore, there would not necessarily be any
redundancy of people.
All I wish to prove, is, that the discovery and use of machinery
may be attended with a diminution of gross produce; and whenever that
is the case, it will be injurious to the labouring class, as some of
their number will be thrown out of employment, and population will
become redundant, compared with the funds which are to employ it.
The case which I have supposed, is the most simple that I could
select; but it would make no difference in the result, if we supposed
that the machinery was applied to the trade of any manufacturer, -
that of a clothier, for example, or of a cotton manufacturer. If in
the trade of a clothier, less cloth would be produced after the
introduction of machinery; for a part of that quantity which is
disposed of for the purpose of paying a large body of workmen, would
not be required by their employer. In consequence of using the
machine, it would be necessary for him to reproduce a value, only
equal to the value consumed, together with the profits on the whole
capital. £7,500 might do this as effectually as £15,000 did before,
the case differing in no respect from the former instance. It may be
said, however, that the demand for cloth would be as great as before,
and it may be asked from whence would this supply come? But by whom
would the cloth be demanded? By the farmers and the other producers of
necessaries, who employed their capitals in producing these
necessaries as a means of obtaining cloth: they gave corn and
necessaries to the clothier for cloth, and he bestow ed them on his
workmen for the cloth which their work afforded him.
This trade would now cease; the clothier would not want the food
and clothing, having fewer men to employ and having less cloth to
dispose of. The farmers and others, who only produced necessaries as
means to an end, could no longer obtain cloth by such an application
of their capitals, and, therefore, they would either themselves employ
their capitals in producing cloth, or would lend them to others, in
order that the commodity really wanted might be furnished; and that
for which no one had the means of paying, or for which there was no
demand, might cease to be produced. This, then, leads us to the same
result; the demand for labour would diminish, and the commodities
necessary to the support of labour would not be produced in the same
abundance.
If these views be correct, it follows, 1st: That the discovery,
and useful application of machinery, always leads to the increase of
the net produce of the country, although it may not, and will not,
after an inconsiderable interval, increase the value of that net
produce.
2dly. That an increase of the net produce of a country is
compatible with a diminution of the gross produce, and that the
motives for employing machinery are always sufficient to insure its
employment, if it will increase the net produce, although it may, and
frequently must, diminish both the quantity of the gross produce, and
its value.
3dly. That the opinion entertained by the labouring class, that
the employment of machinery is frequently detrimental to their
interests, is not founded on prejudice and error, but is conformable
to the correct principles of political economy.
4thly. That if the improved means of production, in consequence of
the use of machinery, should increase the net produce of a country in
a degree so great as not to diminish the gross produce, (I mean always
quantity of commodities and not value,) then the situation of all
classes will be improved. The landlord and capitalist will benefit,
not by an increase of rent and profit, but by the advantages resulting
from the expenditure of the same rent, and profit, on commodities,
very considerably reduced in value, while the situation of the
labouring classes will also be considerably improved; 1st, from the
increased demand for menial servants; 2dly, from the stimulus to
savings from revenue, which such an abundant net produce will afford;
and 3dly, from the low price of all articles of consumption on which
their wages will be expended.
Independently of the consideration of the discovery and use of
machinery, to which our attention has been just directed, the
labouring class have no small interest in the manner in which the net
income of the country is expended, although it should, in all cases,
be expended for the gratification and enjoyments of those who are
fairly entitled to it.
If a landlord, or a capitalist, expends his revenue in the manner
of an ancient baron, in the support of a great number of retainers, or
menial servants, he will give employment to much more labour, than if
he expended it on fine clothes, or costly furniture; on carriages, on
horses, or in the purchase of any other luxuries.
In both cases the net revenue would be the same, and so would be
the gross revenue, but the former would be realised in different
commodities. If my revenue were £10,000, the same quantity nearly of
productive labour would be employed, whether I realised it in fine
clothes and costly furniture, &c. &c. or in a quantity of food and
clothing of the same value. If, however, I realised my revenue in the
first set of commodities, no more labour would be consequently
employed: - I should enjoy my furniture and my clothes, and there
would be an end of them; but if I realised my revenue in food and
clothing, and my desire was to employ menial servants, all those whom
I could so employ with my revenue of £10,000, or with the food and
clothing which it would purchase, would be to be added to the former
demand for labourers, and this addition would take place only because
I chose this mode of expending my revenue. As the labourers, then, are
interested in the demand for labour, they must naturally desire that
as much of the revenue as possible should be diverted from expenditure
on luxuries, to be expended in the support of menial servants.
In the same manner, a country engaged in war, and which is under
the necessity of maintaining large fleets and armies, employs a great
many more men than will be employed when the war terminates, and the
annual expenses which it brings with it, cease.
If I were not called upon for a tax of £500 during the war, and
which is expended on men in the situations of soldiers and sailors, I
might probably expend that portion of my income on furniture, clothes,
books, &c. &c. and whether it was expended in the one way or in the
other, there would be the same quantity of labour employed in
production; for the food and clothing of the soldier and sailor would
require the same amount of industry to produce it as the more
luxurious commodities; but in the case of the war, there would be the
additional demand for men as soldiers and sailors; and, consequently,
a war which is supported out of the revenue, and not from the capital
of a country, is favourable to the increase of population.
At the termination of the war, when part of my revenue reverts to
me, and is employed as before in the purchase of wine, furniture, or
other luxuries, the population which it before supported, and which
the war called into existence, will become redundant, and by its
effect on the rest of the population, and its competition with it for
employment, will sink the value of wages, and very materially
deteriorate the condition of the labouring classes.
There is one other case that should be noticed of the possibility
of an increase in the amount of the net revenue of a country, and even
of its gross revenue, with a diminution of demand for labour, and that
is, when the labour of horses i