No More Learning

_ 10_s. _ in France,
and maintain it at the same price of 4_l. _ in England. For every quarter
exported, England pays a tax of 10_s. _ For every quarter imported into
France, France gains only 5_s. _, so that the value of 5_s. _ per quarter
is absolutely lost to the world, by such a distribution of its funds as
to cause diminished production, probably not of corn, but of some other
object of necessity or enjoyment.

Mr. Buchanan appears to have seen the fallacy of Dr. Smith's arguments
respecting bounties, and on the last passage which I have quoted, very
judiciously remarks: "In asserting that nature has stamped a real value
on corn, which cannot be altered by merely altering its money price, Dr.
Smith confounds its value in use, with its value in exchange. A bushel
of wheat will not feed more people during scarcity than during plenty;
but a bushel of wheat will exchange for a greater quantity of luxuries
and conveniences when it is scarce, than when it is abundant; and the
landed proprietors, who have a surplus of food to dispose of, will
therefore, in times of scarcity, be richer men; they will exchange their
surplus for a greater value of other enjoyments, than when corn is in
greater plenty. It is vain to argue, therefore, that if the bounty
occasions a forced exportation of corn, it will not also occasion a real
rise of price. " The whole of Mr. Buchanan's arguments on this part of
the subject of bounties, appear to me to be perfectly clear and
satisfactory.

Mr. Buchanan however has not, I think, any more than Dr. Smith, or the
writer in the Edinburgh Review, correct opinions as to the influence of
a rise in the price of labour on manufactured commodities. From his
peculiar views, which I have elsewhere noticed, he thinks that the
price of labour has no connexion with the price of corn, and therefore
that the real value of corn might and would rise without affecting the
price of labour; but if labour were affected, he would maintain with
Adam Smith and the writer in the Edinburgh Review, that the price of
manufactured commodities would also rise; and then I do not see how he
would distinguish such a rise of corn, from a fall in the value of
money, or how he could come to any other conclusion than that of Dr.
Smith. In a note to page 276, vol. i. of the Wealth of Nations, Mr.
Buchanan observes, "but the price of corn does not regulate the money
price of all the other parts of the rude produce of land. It regulates
the price neither of metals, nor of various other useful substances,
such as coals, wood, stones, &c. ; _and as it does not regulate the price
of labour, it does not regulate the price of manufactures_; so that the
bounty, in so far as it raises the price of corn, is undoubtedly a real
benefit to the farmer. It is not on this ground, therefore, that its
policy must be argued. Its encouragement to agriculture, by raising the
price of corn, must be admitted; and the question then comes to be,
whether agriculture ought to be thus encouraged? "--It is then,
according to Mr. Buchanan, a real benefit to the farmer, because it does
not raise the price of labour; but if it did, it would raise the price
of all things in proportion, and then it would afford no particular
encouragement to agriculture.

It must, however, be conceded, that the tendency of a bounty on the
exportation of any commodity is to lower in a small degree the value of
money. Whatever facilitates exportation, tends to accumulate money in a
country; and on the contrary, whatever impedes exportation, tends to
diminish it. The general effect of taxation, by raising the prices of
the commodities taxed, tends to diminish exportation, and therefore to
check the influx of money; and on the same principle, a bounty
encourages the influx of money. This is more fully explained in the
general observations on taxation.

The injurious effects of the mercantile system have been fully exposed
by Dr. Smith; the whole aim of that system was to raise the price of
commodities, in the home market, by prohibiting foreign competition;
but this system was no more injurious to the agricultural classes than
to any other part of the community. By forcing capital into channels
where it would not otherwise flow, it diminished the whole amount of
commodities produced. The price, though permanently higher, was not
sustained by scarcity, but by difficulty of production; and therefore,
though the sellers of such commodities sold them for a higher price,
they did not sell them, after the requisite quantity of capital was
employed in producing them, at higher profits. [40]

The manufacturers themselves, as consumers, had to pay an additional
price for such commodities, and therefore it cannot be correctly said,
that "the enhancement of price occasioned by both, (corporation laws and
high duties on the importation of foreign commodities,) is every where
finally paid by the landlords, farmers, and labourers of the country. "

It is the more necessary, to make this remark, as in the present day the
authority of Adam Smith is quoted by country gentlemen for imposing
similar high duties on the importation of foreign corn. Because the cost
of production, and therefore the prices of various manufactured
commodities, are raised to the consumer by one error in legislation, the
country has been called upon, on the plea of justice, quietly to submit
to fresh exactions. Because we all pay an additional price for our
linen, muslin, and cottons, it is thought just that we should pay also
an additional price for our corn. Because, in the general distribution
of the labour of the world, we have prevented the greatest amount of
productions from being obtained by that labour in manufactured
commodities; we should further punish ourselves by diminishing the
productive powers of the general labour in the supply of raw produce. It
would be much wiser to acknowledge the errors which a mistaken policy
has induced us to adopt, and immediately to commence a gradual
recurrence to the sound principles of an universally free trade.

"I have already had occasion to remark," observes M. Say, "in speaking
of what is improperly called the balance of trade, that if it suits a
merchant better to export the precious metals to a foreign country than
any other goods, it is also the interest of the state that he should
export them, because the state only gains or loses through the channel
of its citizens; and in what concerns foreign trade, that which best
suits the individual, best suits also the state; therefore, by opposing
obstacles to the exportation which individuals would be inclined to
make of the precious metals, nothing more is done, than to force them to
substitute some other commodity less profitable to themselves, and to
the state. It must however be remarked, that I say only _in what
concerns foreign trade_; because the profits which merchants make by
their dealings with their countrymen, as well as those which are made in
the exclusive commerce with colonies, are not entirely gains for the
state. In the trade between individuals of the same country, there is no
other gain but the value of an utility produced; _Que la valeur d'une
utilité produite_. "[41] Vol. i. p. 401. I cannot see the distinction
here made between the profits of the home and foreign trade. The object
of all trade is to increase productions. If for the purchase of a pipe
of wine, I had it in my power to export bullion, which was bought with
the value of the produce of 100 days' labour, but Government, by
prohibiting the exportation of bullion, should oblige me to purchase my
wine with a commodity bought with the value of the produce of one
hundred and five days' labour, the produce of five days' labour is lost
to me, and, through me, to the state. But if these transactions took
place between individuals, in different provinces of the same country,
the same advantage would accrue both to the individual, and, through
him, to the country, if he were unfettered in his choice of the
commodities, with which he made his purchases; and the same
disadvantage, if he were obliged by Government to purchase with the
least beneficial commodity. If a manufacturer could work up with the
same capital, more iron where coals are plentiful, than he could where
coals are scarce, the country would be benefited by the difference. But
if coals were no where plentiful, and he imported iron, and could get
this additional quantity, by the manufacture of a commodity, with the
same capital and labour, he would in like manner benefit his country by
the additional quantity of iron. In the 6th Chap. of this work, I have
endeavoured to shew that all trade, whether foreign or domestic, is
beneficial, by increasing the quantity, and not by increasing the value
of productions. We shall have no greater value, whether we carry on the
most beneficial home and foreign trade, or in consequence of being
fettered by prohibitory laws, we are obliged to content ourselves with
the least advantageous. The rate of profits, and the value produced,
will be the same. The advantage always resolves itself into that which
M. Say appears to confine to the home trade; in both cases there is no
other gain but that of the value of an _utilité produite_.




CHAPTER XXI.

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 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. [42] 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 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 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 absolute profits also; 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, but the absolute profits of stock be
increased; 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 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_l. _ per annum from
the employer's revenue, or add 50_l. _ 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 XXII.

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_l. _, 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_l. _, unless the last 1,000_l. _ 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 1000_l. _ 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 everywhere 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 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. 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 less productive, 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, to produce the food required, and the
same number of men should be employed in producing it, 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 of 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.

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, as with the same quantity of corn it not
only gives him a command over a greater quantity of money, but over a
greater quantity of every commodity which money can purchase.




CHAPTER XXIII.

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.
Without affirming or denying, that the actual practice of Europe with
regard to their colonies is injurious to the mother countries, I may be
permitted to doubt 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_l. _ per quarter in this country, we saw, that with a
bounty of 10_s. _ per quarter, on exportation in England, corn would have
been reduced to 3_l. _ 10_s. _ in France. Now, if corn had previously been
at 3_l. _ 15_s. _ per quarter in France, the French consumers would have
been benefited by 5_s. _ per quarter on all imported corn; if the natural
price of corn in France were before 4_l. _, they would have gained the
whole bounty of 10_s. _ 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 in some cases 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 she 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 5000_l. _--she desires then to sell goods
somewhere by which she may get 5000_l. _ 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 5000_l. _ 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 5000_l. _ for their wine, and consequently 5000_l. _ 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 price of money is the same thing as the
decline in the price of commodities. To obtain 5000_l. _, 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 5000_l. _
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 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 will be in
the same proportion to the demand 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 neither 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, according to him, 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 XXIV.

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. "[43]

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. To
an individual, with a capital of 20,000_l. _, whose profits were 2000_l. _
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_l. _, or for 20,000_l. _, provided, in all cases,
his profits were not diminished below 2000_l. _ 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; 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, where
profits are in proportion to the capital, and not in proportion to the
quantity of labour employed. [44]

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 XXV.

ON CURRENCY AND BANKS.


It is not my intention to detain the reader by any long dissertation on
the subject of money. 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. [45]

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, 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 multiplied in proportion to its diminished value. [46]

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 effects,
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 order 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_l. _ 17_s. _ 10-1/2_d. _
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[47] 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.

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_l. _
per annum, it is a question of importance to the individuals of that
country, whether they must be taxed to pay this 70,000_l. _ 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_l. _ 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 amounts 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 their 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 rate 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 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 at 5 per cent. indeed, a rate fixed by law,
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.