MBA Glossary

Nanosolar Case (B2B Marketing)

Organizational Behavior Course Overview

Resources for Entrepreneurs in Cambridge

Here is a list of Cambridge incubators, funding groups and centers for supporting new ventures.

According to a lecture that I heard this week, 44% of companies in the UK were started in incubators, and these companies received 63% of all funding. This suggests that investors prefer companies that are started in incubators and linked to "clusters" or even "virtual-clusters".  Legal costs can be a compelling reason to join a supportive incubator where legal costs are included (often for free). Legal costs for Bio-science companies runs around 300,000 Pounds/Month per country! A common EU patent regime, in legislation now, may reduce the IP legal services cost.

The first Cambridge cluster grew out of Trinity College in the 1960's, shortly after Stanford had successfully pioneered one. Today, few pharma-investors rarely fund infrastructure in any way -- they prefer funding individual "projects".

• Babraham
• Cambridge Angels (aprox. 40 Angels)
• Cambridge Capital Group (CCG) (aprox. 40 Angels)
• Center for Entrepreneurial Learning (Cfel)
• Ideaspace

Crossing the Chasm

I came across this table of critical questions in the Judge Business School Ignite literature. (Programme Manual p 14). I've modified the table to be more compact.

These are listed as "chasm crossing factors" which can enable a high-tech business to transition from selling to primarily "early adopters" to the "early majority".

Sources: GA Moore (1991) Crossing the Chasm, University of Cambridge: Judge Business School

1. Target Customer:
1. Do they have the resources to buy?
2. Is the product/service an economic benefit to them?
3. What is the most effective sales channel? (Distribution)
2. Competition
1. Does another company have a solution already?
2. How do competitors profit?
3. Partners
1. Who do you partner with to present a total solution to your customers?
2. Suppliers

Pascal Lamy Talk

Pascal Lamy, WTO Director General, visited the Business school before speaking on the Eurozone crisis. Here are some topics from his talks:

• Ricardian Principle (Competitive Advantage)
• Schumpeterian Principle (Creative Destruction)
• Economic liberalization requires the reallocation of productive factors which is invariably "painful" -- but no pain, no gain
• Value Added Concept: Importing is good if it leads to higher value exporting
• 2012 World Trade Report being published in July
• Article 20 allows wide degree of latitude for factors such as national security (implications for technology export restrictions)

MBA Salary Statistics

• Harvard: http://www.hbs.edu/recruiting/mba/data-and-statistics/employment-statistics.html
• MIT Sloan: http://mitsloan.mit.edu/cdo/class11.php
• Stanford: http://www.gsb.stanford.edu/mba/career_opportunities/positions_compensation.html
• University of Pennsylvania:  http://www.wharton.upenn.edu/mba/your-career/fulltime-employment.cfm 

Industries which hire HBS Graduates

Production Forecasting

• MTS: Make to Stock: Fully produce products and stock them in a warehouse.
• Highly, demand forecast dependent
• MTO: Make to Order: Produce only when order is received.
• Generates wait time to consumer.
• ATO: Assemble to Order: Pre-assembly stock held.
• Some customization possible 

InBev Anheuser Busch Acquisition

Source: http://images.businessweek.com/ss/09/10/1001_worlds_best_companies_2009/8.htm

Effect of Merger on Branding. Source: InBev Investor Presentation

Merger, Acquisition, Alliance and JV Timeline:

1987: Interbrew= Artois  (Stella Artois)+ Piedboeuf (Leffe Blond)

1993: AB Purchases 50% stake in Mexico’s Grupo Modelo

1994 & 1996: Interbrew formed Chinese JVs

1995: AB acquires China’s Wuhan brewery

1995: removal of trade barriers in South America

2000: Ambev= Brazil’s Brahma + Brazil’s Antarctica

2000-2003: Ambev acquires companies in Uruguay, Paraguay, Argentina, Peru and Central America

2000: Interbrew acquires UK Whitbread Beer Co.

2000: Interbrew acquires UK’s Bass

2001: Interbrew acquires Germany’s Becks (Premium Beer)

2004: AB acquires China’s Harbin

2004: InBev = Belgium’s Interbrew + Brazil’s Ambev

2005: Brito becomes InBev’s CEO

2006: AB purchases Rolling Rock brand from InBev

2008: Heineken-Carlsberg  acquires Scottish & Newcastle (S&N)

2008: MillerCoors = SABMiller + US Molson Coors

2008: ABInBev= US AB + Belgium’s InBev

AB-InBev Merger:

• http://www.ft.com/cms/s/0/8b4b2236-58d0-11dd-a093-000077b07658.html#axzz1qhlcGs5R 
• http://www.ab-inbev.com/pdf/Final_Investor_Presentation.pdf 
• http://www.ab-inbev.com/pdf/Dresdner_conference_2008.pdf 
• http://www.livemint.com/2008/05/25213104/Beer-giant-InBev-mulls-bid-for.html?atype=tp 
• http://yahoo.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHTML1?ID=6023288&SessionID=RRKjHC9nzz_Irl7

Global Beer Marketshare:

• http://iom.vse.cz/wp-content/uploads/2008/03/Global-Beer_2006.pdf

AmBev Culture CEO Brito:

• http://online.wsj.com/article/SB121192137562523757.html 
• http://www.youtube.com/watch?v=OSnWnqq23JU 
• http://www.youtube.com/watch?v=dUoD6C31zJc

Beer Industry White Paper:

• http://www.deloitte.com/au/edf9c90b0d1fb110VgnVCM100000ba42f00aRCRD.htm
• http://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/Documents/White%20Paper_Beer%281%29%281%29.pdf

Beer distribution in the US:

• http://www.nbwa.org/about/what-is-a-beer-distributor

SABMiller:

• http://www.sabmiller.com/files/reports/ar2007/sab_ims/pdfs/global_beer_market.pdf

2007 Beer Sales by Country:

•  http://daniel-workman.suite101.com/inbev-global-beer-sales-by-country-a59582

InterBrand Branding Site:

• http://www.interbrand.com/en/best-global-brands/best-global-brands-2008/best-global-brands-2008.aspx

Diego:

• http://www.diageo.com/Lists/Resources/Attachments/41/Prelims2008IRFINAL.pdf

Mergers: Upjohn-Pharmacia Questions

1. Evaluate the strategic reasoning behind the proposed deal. Evaluate the
financial performance of both companies. Will the deal address the
challenges faced by Upjohn?


Upjohn has a R&D problem. This merger will not directly address this, but will add complementary resources to investigate new treatments and drugs. In particular, Pharmacia's cancer treatment drugs and growth hormone products can overlap with Upjohn's transplant/cancer and steroids departments. The combined R&D capability of the merged entity can better compete against larger rivals.

There are also geographic synergies. Upjohn is weak in Europe--Pharmacia's strongest market. By expanding sales activities into new areas, the combined entity can better capitalize on the increasing expense of developing new drugs and treatments.

2. Interpret the stock market reaction to the deal and the magnitude of the
expected benefits. Are these realistic?


Leading up the deal the stock price of both companies increased steadily, but not excessively. (37-$39 for Upjohn and 23-$25 for Pharmacia) The increase was greater than the S&P 500 over a corresponding period.

3. Can you think of alternative strategies? Evaluate these.
Joint ventures may prove less costly to implement and allow the firms to selectively combine activities in order to achieve mutual cost savings. This is particularly important in R&D and global marketing.

4. If you were a shareholder of Upjohn, would you support this merger?
No. There are better alternatives than a full-on merger. A JV should be investigated first, and if that goes well, a merger should be considered.

Mergers: Upjohn-Phamacia

1. 9-197-034
2. 1995 August: US Upjohn + Sweden's Pharmacia
1. tax-free exchange of shares
1. 248M Upjohn
2. 255M Phamacia
2. "bigger is better" notion: combined sales of $7B
3. Pharmaceutical Industry:
1. importance of worldwide marketing
2. consolidation
3. decreasing profitability due to social backlash against high prices
4. spends 19% of sales on R&D
4. Upjohn: 
1. 20K per employee revenue
2. faced strategic problems
3. patent expiration
4. few products "in the pipeline"
5. weak foreign sales (2/3 world market)
6. weak in Europe
7. Segments
1. anti-inflammatory/analgesic
2. central nervous system
3. critical care
4. infectious disease
5. metabolic
6. reproductive/women's health
7. steroids
8. transplant/cancer
5. Pharmacia:
1. strong in Europe
2. skilled in merging with other companies

PM: Leadership Style Essay

The Best Leadership Style for a Project Manager

By Eric Holmes

Project Managers (hereafter PMs) must define project goals, define resources such as cost, quality and time, and manage the most effective use of resources to obtain project goals. People are the most important resources at a PM’s disposal, and how a PM manages his team is crucial. Leadership has been defined as the “process of social influence”, (Chemers, 1997: p5). A distinction can be made between a leader and a manager (Daft, 1999: p35). A manager derives power from his position while a leader derives power from social influence which invariably demands effective communication with stakeholders and employees. There are many situations where a PM won’t have positional authority over his team members, for example in a matrix organization. In the absence of direct authority, a PM will need to use leadership skills to influence team members and accomplish project goals. This begs the question: “What leadership style is most effective for a PM?” This essay will discuss different leadership theories from a project management perspective, and conclude that a situation-based leadership style is the most effective.

Many researchers have described effective theories of leadership. Trait Based approaches were described by Locke (1991) and Daft (1999) who listed essential characteristics of leadership including self-confidence, honesty, and the will to succeed. Self-confidence and a strong will are important for PMs because of the limited time that a PM will have to build rapport with his team. If a PM lacks confidence in himself, it may be difficult to convince other project stakeholders of a project’s worth. A PM’s drive is a crucial tool to enable him to bind the loyalties of his workers and move forward to complete key project tasks.

Another category of leadership theory describes Behavioral approaches. The idea here is that leadership behaviors can be learned and practiced in opposed to traits which are inherent to an individual. Autocratic leadership behavior is characterized by an extremely directive leader who dictates to subordinates, allowing for very little autonomy or individual empowerment. This style may be effective in the case of training new military recruits, who cannot be expected to have the knowledge or willingness to engage in warfare, but for a PM, team-members will often be experts in their fields, and using an autocratic style would fail to utilize their expertise. Democratic leadership behavior is based on team consensus. For a PM, this style may be ineffective because individual team contributors often lack a sense of common purpose, and obtaining consensus can be time consuming and inefficient. Additionally, there are many circumstances when a team-member must act against his personal wishes to serve the project. Without the oversight of a PM to enforce project commitment, individuals will often serve their own interests or, in a matrix organization, the interests of their functional group before those of the project.

A contingency based leadership style has been adopted by many organizations, and asserts that leadership styles should be varied depending on the situation. Situational Leadership Theory, a leading contingency theory developed by Paul Hersey in the late 1970s, is the most effective and easiest framework to apply to Project Management.

Situational Leadership Theory (hereafter SLT) considers two roles, that of a leader and follower (Hersey, 1977). The theory asserts that the follower’s willingness and ability must be fully understood by the leader before an appropriate leadership style can be adopted. Hersey asserts that “Follower readiness”, is crucial to a leader’s success, and defines four categories, labeled R1 to R4, which characterize this follower attribute. The four follower readiness levels are shown in Appendix 1.1. In the SLT framework, the leader must first identify what level of readiness his follower has and adopt one of four corresponding leadership styles, known as “Supportive behaviors”, labeled S1 to S4. For example, the best approach for an R4 employee (willing and able employee) would be to use a S4 delegating leadership style in which the leader allows considerable autonomy to complete the task. SLT is essentially an observation about communication between leaders and followers. The communication framework that it establishes is useful for a PM. Communication between a PM and his team is a reciprocal process, and the PM must understand what level of willingness and skill each of his team members possesses before choosing a certain leadership and communication strategy.

The SLT framework must be adjusted somewhat to meet the needs of PMs. PMs employing a S4 delegating style should be aware that this style is not appropriate for sub-contractors, whose interests may not coincide with project goals. Here an S2 selling style is more effective because it provides some autonomy while closely monitoring progress. For most project stakeholders, PM’s will use either the S2 selling or S3 participating leadership styles because these promote communication and the free sharing of information in both directions. These styles can allow the PM to get a better understanding of project risk. There is a limit to the degree of communication that a PM will have time for. If a PM must choose between coaching a worker and delaying the project, the project goals must be put first. A PM must effectively balance the project needs and the needs of his team, particularly on long projects when worker fatigue may endanger project safety or present other key risks. A PM may employ the situational leadership framework outside of his team, “managing up” to obtain crucial resources for his team, or “managing sideways” to interact with stakeholders on equal footing. The PM must be an adequate seller to generate and maintain interest among stakeholders. SLT makes assumptions about the value of follower ability over willingness. Referring to Appendix 1.1, a follower is considered R3, or moderately able to direct themselves, by being able but not willing. In practice however, a PM may encounter highly skilled workers who are encumbered by an overriding negative attitude about a project. This risk is not considered within the SLT framework. In fact, SLT simplifies the situation to be simply the state of readiness of a follower. In reality the situation includes many other factors, some of them external to the project such as political or economic climate. Despite the above limitations, SLT recognizes the importance of communication with stakeholders. By creating an easy to apply framework, the situational leadership model gives PMs a place to start when planning their leadership strategy.

Leadership styles have been discussed with an emphasis on applying SLT to the field of project management. The SLT framework is the most useful leadership theory for a PM. PMs are busy and must quickly derive a practical benefit from any academic theory. Applying the SLT to their daily work can lead to more effective communication, a reduction in misunderstandings, and therefore more effective project leadership. Effective management of the PM’s most crucial resource, namely people, will help the project’s goals to be realized.

Mergers: Schneider Group takeover of Square D

Schneider- Square D

1) Prepare for the Schneider management a SWOT analysis of the proposed Square D acquisition, i.e., what are the strategic advantages and disadvantages of the transaction.


Assumptions: FF = 5.08USD


Advantages:
Good strategic and operational fit
French Franc strong relative to the USD


Disadvantages:
Disapproval of SQD management (Hostile Bid)
SQD HQ located in DE, USA (higher regulatory requirements for hostile takeover)
Overpriced deal environment (French firms overpaying)


Schneider SWOT Analysis


Strengths

• Strong brand reputation supported by strong R&D (4% of revenue), QA
• Customer goodwill
• Strategy Refocused on Electrical Distribution, Electrical Power Industry
• Subsidiary Modicon leads NA market in industrial control category
• Strong profit, revenue increase from 1987-1990 (185% profit increase with 70% revenue increase)

Weaknesses

• Current overall North American Market position
• Size of NA operations compared to competitors

Opportunities

• SQD acquisition, albeit fighting against SQD management
• SQD operations are a good strategic fit with SG

Threats

• Powerful competition in NA market
• loss of access to NA market due to competition

2a) Evaluate the financial health of both companies including a decomposition of ROE for the
years of data available.

SQD is less levered than SG. While SG is the larger company in terms of sales and Market Cap., SQD is the more profitable.

ROE breakdown
			Net Inc.	*	Sales	*	Assets
	ROE	=	Sales		Assets		Shareholder's Equity
Units: Millions FF,USD
	SG
	Net Inc. (FF)	Net Inc. (USD)	Sales (FF)	Sales (USD)	NPP	Assets (FF)	Assets (USD)	Aturn	SH Equity	SH Equity (USD)	Fleverage	ROE
1987	324	1724	29294	155844	1.1%	49719	264505	59%	2754	14651	18.1	12%
1988	560	3394	40493	245388	1.4%	63991	387785	63%	4192	25404	15.3	13%
1989	877	5069	45127	260834	1.9%	45946	265568	98%	6741	38963	6.8	13%
1990	924	4703	49884	253910	1.9%	49578	252352	101%	7505	38200	6.6	12%
	SQG
	Net Inc. (FF)	Net Inc. (USD)	Sales (FF)	Sales (USD)	NPP	Assets (FF)	Assets (USD)	Aturn	SH Equity	SH Equity (USD)	Fleverage	ROE
1987		110		1484	7.4%		1193	124%		680	1.8	16%
1988		119		1657	7.2%		1336	124%		636	2.1	19%
1989		102		1631	6.2%		1382	118%		556	2.5	18%
1990		115		1653	6.9%		1460	113%		604	2.4	19%

b) Determine a range of possible values for Square D based on observed premiums,
comparables, Gordon model (DDM) and discounted cash flows. Clearly indicate all your
assumptions.

c) Discuss the structure of the deal, financing issues and exchange rate issues related to the
deal.


_________________________________________________________________
Errata:
Typos in Schneider case:
p.6 first line: recording annual sales of 50 billion (not million)
p. 14 Groupe Schneider balance sheets
‘Current liabilities and current portion of long-term debt’ should be ‘Short-term debt and
current portion of long-term debt’
1988 Current total assets 50,831 (not 50, 381)
1988 Total liabilities 57,755 (not 57, 775)
1990 Total current liabilities 25,548 (not 22,548)
p. 15 Groupe Schneider Statement of income
1990 Minority interest -441 (not -141)
p.16 Square D balance sheets
‘Current liabilities and current portion of long-term debt’ should be ‘Short-term debt and
current portion of long-term debt’
p.20 item 9 replace ‘annual gross cash flow margin represents 16% of the sales figure’ by
EBITDA

JDSU Case Questions

2012 Merger Course: Paul André, PhD, CA
ACCOUNTING FOR ACQUISITIONS AT JDS UNIPHASE

Case Facts/Assumptions:
Assume the deal was completed on December 31 2000 and the following breakdown of ‘Tangible net assets’:
Current assets $586.4m
Property, plant and equipment $131.8m
Current liabilities $101m.

JDSU had around 1,000 million shares outstanding before the deal of which 11.2% were held by directors and officers

1. How did the 2001 acquisition of SDL impact JDSU financial statements?
(see facts/assumptions above)

• Gained a complimentary technology: faster data transmission over fiber-optic networks
• Satisfy customer demand for faster broadband
• USD $39.2B theoretical boost in Intangible Assets (Goodwill). 
• Purchase made with 333.8M shares of JDSU. Total outstanding shares swell to 1.338 Billion (34% increase in outstanding shares) ->Owner's equity temporarily boosted by 34%

Discuss the choice of accounting method.

• "purchase method"
• amortize goodwill on a straight-line basis over five years
• $300M in bonus compensation classified as SG&A

Draw the deal and discuss why the purchase/acquisition method was chosen.

• deferred tax
• very low cash transaction ($200,000) compared to offer price >$50 Billion
• timed to benefit from inflated share price

Discuss the purchase price allocation including valuation techniques for intangibles, the treatment of In process research and development IPR&D and the transaction costs.

• Most of the purchase price was accounted for by the black hole of "Goodwill"

2. The staggering losses announced in July 2001 relate primarily to the write-downs of
goodwill. JDSU determined the amount of the goodwill write-down based on the fall in
its own stock price. What do you think of this procedure? Also consider why JDSU is
taking the write-downs now. What is the effect of taking the write-downs sooner rather
than later? Is there a potential downside? How will the write-down impact JDSU’s
financial statement?

3. Did JDSU go wrong with respect to the SDL acquisition? Did management abuse the
equity capital of JDSU? Did management fail to act in the best interest of shareholders?
Should management be held accountable? Comment.

Bonus question:
The deal was done before the recent changes in the rules with respect to accounting for
mergers and acquisitions (SFAS 141, 142 in 2001 and IFRS 3 in 2004). How would these
changes have affected the choice of method, the purchase price allocation, the financial
statement impact and the subsequent write-down of goodwill? What do you think of the
changes to the accounting for business combinations?

Mergers: JDS Uniphase 9B01B031

1. The "JDS" is short for Jones, Duck and Straus/Sinclair.
2. Engaged in acquisitions in the early 2000's in "all-stock" transactions.
3. It paid for overpriced acquisitions with its own overpriced stock
4. What did it actually lose? It wasn't all cash (only $6B or so)
5. In 2001, its stock price plummeted to less than $13 share from $130/share
6. Lesson: don't conduct acquisitions during a bubble - but how do you know when a bubble will burst? (you don't)
7. 1999 June: Uniphase merges with JDS FITEL Inc. -> JDSU
8. 2000 Feb.: JDSU acquired OCLI lens coating for $2.7B
9. 2000 June: JDSU acquires E-TEK fiber optics manufacturing for $17.5B
10. 2000 July: JDSU announces SDL acquisition (its primary competitor) 
11. 2001 Feb: JDSU completes SDL acquisition
12. 2001 June: Fiscal Year ends. $51B in losses reported, mostly do to Goodwill "writedowns" or revaluations. This does nothing to cash. So what is it? Shareholder's equity evaporated. Shareholder's rights to future cash flows disappeared.

Adam Smith: Wealth of Nations (Book 2)

BOOK II. OF THE NATURE, ACCUMULATION, AND EMPLOYMENT OF STOCK.
By Adam Smith
Source: http://www.gutenberg.org/cache/epub/3300/pg3300.txt

INTRODUCTION.

In that rude state of society, in which there is no division of labour,
in which exchanges are seldom made, and in which every man provides
every thing for himself, it is not necessary that any stock should be
accumulated, or stored up before-hand, in order to carry on the business
of the society. Every man endeavours to supply, by his own industry, his
own occasional wants, as they occur. When he is hungry, he goes to the
forest to hunt; when his coat is worn out, he clothes himself with the
skin of the first large animal he kills: and when his hut begins to go
to ruin, he repairs it, as well as he can, with the trees and the turf
that are nearest it.

But when the division of labour has once been thoroughly introduced, the
produce of a man's own labour can supply but a very small part of his
occasional wants. The far greater part of them are supplied by the
produce of other men's labour, which he purchases with the produce, or,
what is the same thing, with the price of the produce, of his own. But
this purchase cannot be made till such time as the produce of his
own labour has not only been completed, but sold. A stock of goods of
different kinds, therefore, must be stored up somewhere, sufficient
to maintain him, and to supply him with the materials and tools of his
work, till such time at least as both these events can be brought about.
A weaver cannot apply himself entirely to his peculiar business, unless
there is before-hand stored up somewhere, either in his own possession,
or in that of some other person, a stock sufficient to maintain him, and
to supply him with the materials and tools of his work, till he has not
only completed, but sold his web. This accumulation must evidently
be previous to his applying his industry for so long a time to such a
peculiar business.

As the accumulation of stock must, in the nature of things, be previous
to the division of labour, so labour can be more and more subdivided in
proportion only as stock is previously more and more accumulated. The
quantity of materials which the same number of people can work up,
increases in a great proportion as labour comes to be more and more
subdivided; and as the operations of each workman are gradually reduced
to a greater degree of simplicity, a variety of new machines come to
be invented for facilitating and abridging those operations. As the
division of labour advances, therefore, in order to give constant
employment to an equal number of workmen, an equal stock of provisions,
and a greater stock of materials and tools than what would have been
necessary in a ruder state of things, must be accumulated before-hand.
But the number of workmen in every branch of business generally
increases with the division of labour in that branch; or rather it is
the increase of their number which enables them to class and subdivide
themselves in this manner.

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

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

In the following book, I have endeavoured to explain the nature of
stock, the effects of its accumulation into capital of different kinds,
and the effects of the different employments of those capitals. This
book is divided into five chapters. In the first chapter, I have
endeavoured to shew what are the different parts or branches into which
the stock, either of an individual, or of a great society, naturally
divides itself. In the second, I have endeavoured to explain the nature
and operation of money, considered as a particular branch of the general
stock of the society. The stock which is accumulated into a capital, may
either be employed by the person to whom it belongs, or it may be
lent to some other person. In the third and fourth chapters, I have
endeavoured to examine the manner in which it operates in both these
situations. The fifth and last chapter treats of the different effects
which the different employments of capital immediately produce upon the
quantity, both of national industry, and of the annual produce of land
and labour.



CHAPTER I. OF THE DIVISION OF STOCK.

When the stock which a man possesses is no more than sufficient to
maintain him for a few days or a few weeks, he seldom thinks of
deriving any revenue from it. He consumes it as sparingly as he can,
and endeavours, by his labour, to acquire something which may supply its
place before it be consumed altogether. His revenue is, in this case,
derived from his labour only. This is the state of the greater part of
the labouring poor in all countries.

But when he possesses stock sufficient to maintain him for months or
years, he naturally endeavours to derive a revenue from the greater
part of it, reserving only so much for his immediate consumption as
may maintain him till this revenue begins to come in. His whole stock,
therefore, is distinguished into two parts. That part which he expects
is to afford him this revenue is called his capital. The other is that
which supplies his immediate consumption, and which consists either,
first, in that portion of his whole stock which was originally reserved
for this purpose; or, secondly, in his revenue, from whatever source
derived, as it gradually comes in; or, thirdly, in such things as had
been purchased by either of these in former years, and which are not yet
entirely consumed, such as a stock of clothes, household furniture, and
the like. In one or other, or all of these three articles, consists the
stock which men commonly reserve for their own immediate consumption.

There are two different ways in which a capital may be employed so as to
yield a revenue or profit to its employer.

First, it maybe employed in raising, manufacturing, or purchasing goods,
and selling them again with a profit. The capital employed in this
manner yields no revenue or profit to its employer, while it either
remains in his possession, or continues in the same shape. The goods
of the merchant yield him no revenue or profit till he sells them for
money, and the money yields him as little till it is again exchanged
for goods. His capital is continually going from him in one shape,
and returning to him in another; and it is only by means of such
circulation, or successive changes, that it can yield him any profit.
Such capitals, therefore, may very properly be called circulating
capitals.

Secondly, it may be employed in the improvement of land, in the purchase
of useful machines and instruments of trade, or in such like things as
yield a revenue or profit without changing masters, or circulating any
further. Such capitals, therefore, may very properly be called fixed
capitals.

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

The capital of a merchant, for example, is altogether a circulating
capital. He has occasion for no machines or instruments of trade, unless
his shop or warehouse be considered as such.

Some part of the capital of every master artificer or manufacturer must
be fixed in the instruments of his trade. This part, however, is very
small in some, and very great in others, A master tailor requires no
other instruments of trade but a parcel of needles. Those of the master
shoemaker are a little, though but a very little, more expensive. Those
of the weaver rise a good deal above those of the shoemaker. The far
greater part of the capital of all such master artificers, however,
is circulated either in the wages of their workmen, or in the price of
their materials, and repaid, with a profit, by the price of the work.

In other works a much greater fixed capital is required. In a great
iron-work, for example, the furnace for melting the ore, the forge, the
slit-mill, are instruments of trade which cannot be erected without
a very great expense. In coal works, and mines of every kind, the
machinery necessary, both for drawing out the water, and for other
purposes, is frequently still more expensive.

That part of the capital of the farmer which is employed in the
instruments of agriculture is a fixed, that which is employed in
the wages and maintenance of his labouring servants is a circulating
capital. He makes a profit of the one by keeping it in his own
possession, and of the other by parting with it. The price or value of
his labouring cattle is a fixed capital, in the same manner as that
of the instruments of husbandry; their maintenance is a circulating
capital, in the same manner as that of the labouring servants. The
farmer makes his profit by keeping the labouring cattle, and by parting
with their maintenance. Both the price and the maintenance of the cattle
which are bought in and fattened, not for labour, but for sale, are a
circulating capital. The farmer makes his profit by parting with them.
A flock of sheep or a herd of cattle, that, in a breeding country,
is brought in neither for labour nor for sale, but in order to make a
profit by their wool, by their milk, and by their increase, is a fixed
capital. The profit is made by keeping them. Their maintenance is a
circulating capital. The profit is made by parting with it; and it comes
back with both its own profit and the profit upon the whole price of the
cattle, in the price of the wool, the milk, and the increase. The whole
value of the seed, too, is properly a fixed capital. Though it goes
backwards and forwards between the ground and the granary, it never
changes masters, and therefore does not properly circulate. The farmer
makes his profit, not by its sale, but by its increase.

The general stock of any country or society is the same with that of
all its inhabitants or members; and, therefore, naturally divides itself
into the same three portions, each of which has a distinct function or
office.

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

The second of the three portions into which the general stock of
the society divides itself, is the fixed capital; of which the
characteristic is, that it affords a revenue or profit without
circulating or changing masters. It consists chiefly of the four
following articles.

First, of all useful machines and instruments of trade, which facilitate
and abridge labour.

Secondly, of all those profitable buildings which are the means of
procuring a revenue, not only to the proprietor who lets them for a
rent, but to the person who possesses them, and pays that rent for them;
such as shops, warehouses, work-houses, farm-houses, with all their
necessary buildings, stables, granaries, etc. These are very different
from mere dwelling-houses. They are a sort of instruments of trade, and
may be considered in the same light.

Thirdly, of the improvements of land, of what has been profitably laid
out in clearing, draining, inclosing, manuring, and reducing it into the
condition most proper for tillage and culture. An improved farm may
very justly be regarded in the same light as those useful machines
which facilitate and abridge labour, and by means of which an equal
circulating capital can afford a much greater revenue to its employer.
An improved farm is equally advantageous and more durable than any of
those machines, frequently requiring no other repairs than the most
profitable application of the farmer's capital employed in cultivating
it.

Fourthly, of the acquired and useful abilities of all the inhabitants
and members of the society. The acquisition of such talents, by
the maintenance of the acquirer during his education, study, or
apprenticeship, always costs a real expense, which is a capital fixed
and realized, as it were, in his person. Those talents, as they make a
part of his fortune, so do they likewise that of the society to which
he belongs. The improved dexterity of a workman may be considered in
the same light as a machine or instrument of trade which facilitates and
abridges labour, and which, though it costs a certain expense, repays
that expense with a profit.

The third and last of the three portions into which the general stock
of the society naturally divides itself, is the circulating capital,
of which the characteristic is, that it affords a revenue only by
circulating or changing masters. It is composed likewise of four parts.

First, of the money, by means of which all the other three are
circulated and distributed to their proper consumers.

Secondly, of the stock of provisions which are in the possession of the
butcher, the grazier, the farmer, the corn-merchant, the brewer, etc.
and from the sale of which they expect to derive a profit.

Thirdly, of the materials, whether altogether rude, or more or less
manufactured, of clothes, furniture, and building which are not yet made
up into any of those three shapes, but which remain in the hands of
the growers, the manufacturers, the mercers, and drapers, the
timber-merchants, the carpenters and joiners, the brick-makers, etc.

Fourthly, and lastly, of the work which is made up and completed, but
which is still in the hands of the merchant and manufacturer, and not
yet disposed of or distributed to the proper consumers; such as the
finished work which we frequently find ready made in the shops of
the smith, the cabinet-maker, the goldsmith, the jeweller, the
china-merchant, etc. The circulating capital consists, in this manner,
of the provisions, materials, and finished work of all kinds that are
in the hands of their respective dealers, and of the money that is
necessary for circulating and distributing them to those who are finally
to use or to consume them.

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

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

No fixed capital can yield any revenue but by means of a circulating
capital. The most useful machines and instruments of trade will produce
nothing, without the circulating capital, which affords the materials
they are employed upon, and the maintenance of the workmen who
employ them. Land, however improved, will yield no revenue without a
circulating capital, which maintains the labourers who cultivate and
collect its produce.

To maintain and augment the stock which maybe reserved for immediate
consumption, is the sole end and purpose both of the fixed and
circulating capitals. It is this stock which feeds, clothes, and lodges
the people. Their riches or poverty depend upon the abundant or sparing
supplies which those two capitals can afford to the stock reserved for
immediate consumption.

So great a part of the circulating capital being continually withdrawn
from it, in order to be placed in the other two branches of the general
stock of the society, it must in its turn require continual supplies
without which it would soon cease to exist. These supplies are
principally drawn from three sources; the produce of land, of mines,
and of fisheries. These afford continual supplies of provisions and
materials, of which part is afterwards wrought up into finished work
and by which are replaced the provisions, materials, and finished work,
continually withdrawn from the circulating capital. From mines, too, is
drawn what is necessary for maintaining and augmenting that part of it
which consists in money. For though, in the ordinary course of business,
this part is not, like the other three, necessarily withdrawn from it,
in order to be placed in the other two branches of the general stock of
the society, it must, however, like all other things, be wasted and
worn out at last, and sometimes, too, be either lost or sent abroad,
and must, therefore, require continual, though no doubt much smaller
supplies.

Lands, mines, and fisheries, require all both a fixed and circulating
capital to cultivate them; and their produce replaces, with a profit not
only those capitals, but all the others in the society. Thus the farmer
annually replaces to the manufacturer the provisions which he had
consumed, and the materials which he had wrought up the year before; and
the manufacturer replaces to the farmer the finished work which he had
wasted and worn out in the same time. This is the real exchange that
is annually made between those two orders of people, though it seldom
happens that the rude produce of the one, and the manufactured produce
of the other, are directly bartered for one another; because it seldom
happens that the farmer sells his corn and his cattle, his flax and his
wool, to the very same person of whom he chuses to purchase the
clothes, furniture, and instruments of trade, which he wants. He sells,
therefore, his rude produce for money, with which he can purchase,
wherever it is to be had, the manufactured produce he has occasion for.
Land even replaces, in part at least, the capitals with which fisheries
and mines are cultivated. It is the produce of land which draws the fish
from the waters; and it is the produce of the surface of the earth which
extracts the minerals from its bowels.

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

In all countries where there is a tolerable security, every man of
common understanding will endeavour to employ whatever stock he can
command, in procuring either present enjoyment or future profit. If it
is employed in procuring present enjoyment, it is a stock reserved for
immediate consumption. If it is employed in procuring future profit, it
must procure this profit either by staying with him, or by going from
him. In the one case it is a fixed, in the other it is a circulating
capital. A man must be perfectly crazy, who, where there is a tolerable
security, does not employ all the stock which he commands, whether it
be his own, or borrowed of other people, in some one or other of those
three ways.

In those unfortunate countries, indeed, where men are continually afraid
of the violence of their superiors, they frequently bury or conceal a
great part of their stock, in order to have it always at hand to carry
with them to some place of safety, in case of their being threatened
with any of those disasters to which they consider themselves at all
times exposed. This is said to be a common practice in Turkey, in
Indostan, and, I believe, in most other governments of Asia. It seems to
have been a common practice among our ancestors during the violence of
the feudal government. Treasure-trove was, in these times, considered
as no contemptible part of the revenue of the greatest sovereigns in
Europe. It consisted in such treasure as was found concealed in the
earth, and to which no particular person could prove any right. This was
regarded, in those times, as so important an object, that it was always
considered as belonging to the sovereign, and neither to the finder nor
to the proprietor of the land, unless the right to it had been conveyed
to the latter by an express clause in his charter. It was put upon the
same footing with gold and silver mines, which, without a special clause
in the charter, were never supposed to be comprehended in the general
grant of the lands, though mines of lead, copper, tin, and coal were, as
things of smaller consequence.




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

It has been shown in the First Book, that the price of the greater part
of commodities resolves itself into three parts, of which one pays the
wages of the labour, another the profits of the stock, and a third the
rent of the land which had been employed in producing and bringing them
to market: that there are, indeed, some commodities of which the price
is made up of two of those parts only, the wages of labour, and the
profits of stock; and a very few in which it consists altogether in one,
the wages of labour; but that the price of every commodity necessarily
resolves itself into some one or other, or all, of those three parts;
every part of it which goes neither to rent nor to wages, being
necessarily profit to some body.

Since this is the case, it has been observed, with regard to every
particular commodity, taken separately, it must be so with regard to all
the commodities which compose the whole annual produce of the land
and labour of every country, taken complexly. The whole price or
exchangeable value of that annual produce must resolve itself into the
same three parts, and be parcelled out among the different inhabitants
of the country, either as the wages of their labour, the profits of
their stock, or the rent of their land.

But though the whole value of the annual produce of the land and labour
of every country, is thus divided among, and constitutes a revenue to,
its different inhabitants; yet, as in the rent of a private estate, we
distinguish between the gross rent and the neat rent, so may we likewise
in the revenue of all the inhabitants of a great country.

The gross rent of a private estate comprehends whatever is paid by
the farmer; the neat rent, what remains free to the landlord, after
deducting the expense of management, of repairs, and all other necessary
charges; or what, without hurting his estate, he can afford to place
in his stock reserved for immediate consumption, or to spend upon his
table, equipage, the ornaments of his house and furniture, his private
enjoyments and amusements. His real wealth is in proportion, not to his
gross, but to his neat rent.

The gross revenue of all the inhabitants of a great country comprehends
the whole annual produce of their land and labour; the neat revenue,
what remains free to them, after deducting the expense of maintaining
first, their fixed, and, secondly, their circulating capital, or what,
without encroaching upon their capital, they can place in their stock
reserved for immediate consumption, or spend upon their subsistence,
conveniencies, and amusements. Their real wealth, too, is in proportion,
not to their gross, but to their neat revenue.

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

The intention of the fixed capital is to increase the productive powers
of labour, or to enable the same number of labourers to perform a much
greater quantity of work. In a farm where all the necessary buildings,
fences, drains, communications, etc. are in the most perfect good order,
the same number of labourers and labouring cattle will raise a much
greater produce, than in one of equal extent and equally good ground,
but not furnished with equal conveniencies. In manufactures, the same
number of hands, assisted with the best machinery, will work up a much
greater quantity of goods than with more imperfect instruments of trade.
The expense which is properly laid out upon a fixed capital of any kind,
is always repaid with great profit, and increases the annual produce by
a much greater value than that of the support which such improvements
require. This support, however, still requires a certain portion of that
produce. A certain quantity of materials, and the labour of a certain
number of workmen, both of which might have been immediately employed
to augment the food, clothing, and lodging, the subsistence and
conveniencies of the society, are thus diverted to another employment,
highly advantageous indeed, but still different from this one. It is
upon this account that all such improvements in mechanics, as enable the
same number of workmen to perform an equal quantity of work with cheaper
and simpler machinery than had been usual before, are always regarded as
advantageous to every society. A certain quantity of materials, and the
labour of a certain number of workmen, which had before been employed
in supporting a more complex and expensive machinery, can afterwards
be applied to augment the quantity of work which that or any other
machinery is useful only for performing. The undertaker of some great
manufactory, who employs a thousand a-year in the maintenance of his
machinery, if he can reduce this expense to five hundred, will naturally
employ the other five hundred in purchasing an additional quantity of
materials, to be wrought up by an additional number of workmen. The
quantity of that work, therefore, which his machinery was useful
only for performing, will naturally be augmented, and with it all the
advantage and conveniency which the society can derive from that work.

The expense of maintaining the fixed capital in a great country, may
very properly be compared to that of repairs in a private estate.
The expense of repairs may frequently be necessary for supporting the
produce of the estate, and consequently both the gross and the neat rent
of the landlord. When by a more proper direction, however, it can be
diminished without occasioning any diminution of produce, the gross rent
remains at least the same as before, and the neat rent is necessarily
augmented.

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

The circulating capital of a society is in this respect different from
that of an individual. That of an individual is totally excluded from
making any part of his neat revenue, which must consist altogether in
his profits. But though the circulating capital of every individual
makes a part of that of the society to which he belongs, it is not upon
that account totally excluded from making a part likewise of their neat
revenue. Though the whole goods in a merchant's shop must by no means be
placed in his own stock reserved for immediate consumption, they may in
that of other people, who, from a revenue derived from other funds, may
regularly replace their value to him, together with its profits, without
occasioning any diminution either of his capital or of theirs.

Money, therefore, is the only part of the circulating capital of a
society, of which the maintenance can occasion any diminution in their
neat revenue.

The fixed capital, and that part of the circulating capital which
consists in money, so far as they affect the revenue of the society,
bear a very great resemblance to one another.

First, as those machines and instruments of trade, etc. require a
certain expense, first to erect them, and afterwards to support
them, both which expenses, though they make a part of the gross, are
deductions from the neat revenue of the society; so the stock of money
which circulates in any country must require a certain expense, first
to collect it, and afterwards to support it; both which expenses, though
they make a part of the gross, are, in the same manner, deductions from
the neat revenue of the society. A certain quantity of very valuable
materials, gold and silver, and of very curious labour, instead
of augmenting the stock reserved for immediate consumption, the
subsistence, conveniencies, and amusements of individuals, is employed
in supporting that great but expensive instrument of commerce, by
means of which every individual in the society has his subsistence,
conveniencies, and amusements, regularly distributed to him in their
proper proportions.

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

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

When we talk of any particular sum of money, we sometimes mean nothing
but the metal pieces of which it is composed, and sometimes we include
in our meaning some obscure reference to the goods which can be had in
exchange for it, or to the power of purchasing which the possession of
it conveys. Thus, when we say that the circulating money of England has
been computed at eighteen millions, we mean only to express the amount
of the metal pieces, which some writers have computed, or rather have
supposed, to circulate in that country. But when we say that a man is
worth fifty or a hundred pounds a-year, we mean commonly to express, not
only the amount of the metal pieces which are annually paid to him, but
the value of the goods which he can annually purchase or consume; we
mean commonly to ascertain what is or ought to be his way of living, or
the quantity and quality of the necessaries and conveniencies of life in
which he can with propriety indulge himself.

When, by any particular sum of money, we mean not only to express the
amount of the metal pieces of which it is composed, but to include in
its signification some obscure reference to the goods which can be
had in exchange for them, the wealth or revenue which it in this case
denotes, is equal only to one of the two values which are thus intimated
somewhat ambiguously by the same word, and to the latter more properly
than to the former, to the money's worth more properly than to the
money.

Thus, if a guinea be the weekly pension of a particular person, he
can in the course of the week purchase with it a certain quantity
of subsistence, conveniencies, and amusements. In proportion as this
quantity is great or small, so are his real riches, his real weekly
revenue. His weekly revenue is certainly not equal both to the guinea
and to what can be purchased with it, but only to one or other of those
two equal values, and to the latter more properly than to the former, to
the guinea's worth rather than to the guinea.

If the pension of such a person was paid to him, not in gold, but in
a weekly bill for a guinea, his revenue surely would not so properly
consist in the piece of paper, as in what he could get for it. A guinea
may be considered as a bill for a certain quantity of necessaries and
conveniencies upon all the tradesmen in the neighbourhood. The revenue of
the person to whom it is paid, does not so properly consist in the piece
of gold, as in what he can get for it, or in what he can exchange it
for. If it could be exchanged for nothing, it would, like a bill upon a
bankrupt, be of no more value than the most useless piece of paper.

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

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

But if this is sufficiently evident, even with regard to an individual,
it is still more so with regard to a society. The amount of the metal
pieces which are annually paid to an individual, is often precisely
equal to his revenue, and is upon that account the shortest and best
expression of its value. But the amount of the metal pieces which
circulate in a society, can never be equal to the revenue of all its
members. As the same guinea which pays the weekly pension of one man
to-day, may pay that of another to-morrow, and that of a third the day
thereafter, the amount of the metal pieces which annually circulate
in any country, must always be of much less value than the whole money
pensions annually paid with them. But the power of purchasing, or the
goods which can successively be bought with the whole of those money
pensions, as they are successively paid, must always be precisely of the
same value with those pensions; as must likewise be the revenue of the
different persons to whom they are paid. That revenue, therefore, cannot
consist in those metal pieces, of which the amount is so much inferior
to its value, but in the power of purchasing, in the goods which can
successively be bought with them as they circulate from hand to hand.

Money, therefore, the great wheel of circulation, the great instrument
of commerce, like all other instruments of trade, though it makes a
part, and a very valuable part, of the capital, makes no part of the
revenue of the society to which it belongs; and though the metal pieces
of which it is composed, in the course of their annual circulation,
distribute to every man the revenue which properly belongs to him, they
make themselves no part of that revenue.

Thirdly, and lastly, the machines and instruments of trade, etc. which
compose the fixed capital, bear this further resemblance to that part of
the circulating capital which consists in money; that as every saving
in the expense of erecting and supporting those machines, which does
not diminish the introductive powers of labour, is an improvement of
the neat revenue of the society; so every saving in the expense of
collecting and supporting that part of the circulating capital which
consists in money is an improvement of exactly the same kind.

It is sufficiently obvious, and it has partly, too, been explained
already, in what manner every saving in the expense of supporting the
fixed capital is an improvement of the neat revenue of the society. The
whole capital of the undertaker of every work is necessarily divided
between his fixed and his circulating capital. While his whole capital
remains the same, the smaller the one part, the greater must necessarily
be the other. It is the circulating capital which furnishes the
materials and wages of labour, and puts industry into motion. Every
saving, therefore, in the expense of maintaining the fixed capital,
which does not diminish the productive powers of labour, must increase
the fund which puts industry into motion, and consequently the annual
produce of land and labour, the real revenue of every society.

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

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

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

A particular banker lends among his customers his own promissory notes,
to the extent, we shall suppose, of a hundred thousand pounds. As those
notes serve all the purposes of money, his debtors pay him the same
interest as if he had lent them so much money. This interest is the
source of his gain. Though some of those notes are continually coming
back upon him for payment, part of them continue to circulate for months
and years together. Though he has generally in circulation, therefore,
notes to the extent of a hundred thousand pounds, twenty thousand
pounds in gold and silver may, frequently, be a sufficient provision
for answering occasional demands. By this operation, therefore, twenty
thousand pounds in gold and silver perform all the functions which a
hundred thousand could otherwise have performed. The same exchanges may
be made, the same quantity of consumable goods may be circulated and
distributed to their proper consumers, by means of his promissory notes,
to the value of a hundred thousand pounds, as by an equal value of gold
and silver money. Eighty thousand pounds of gold and silver, therefore,
can in this manner be spared from the circulation of the country; and if
different operations of the the same kind should, at the same time, be
carried on by many different banks and bankers, the whole circulation
may thus be conducted with a fifth part only of the gold and silver
which would otherwise have been requisite.

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

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

If they employ it in purchasing goods in one foreign country, in order
to supply the consumption of another, or in what is called the carrying
trade, whatever profit they make will be in addition to the neat revenue
of their own country. It is like a new fund, created for carrying on a
new trade; domestic business being now transacted by paper, and the gold
and silver being converted into a fund for this new trade.

If they employ it in purchasing foreign goods for home consumption, they
may either, first, purchase such goods as are likely to be consumed by
idle people, who produce nothing, such as foreign wines, foreign silks,
etc.; or, secondly, they may purchase an additional stock of materials,
tools, and provisions, in order to maintain and employ an additional
number of industrious people, who reproduce, with a profit, the value of
their annual consumption.

So far as it is employed in the first way, it promotes prodigality,
increases expense and consumption, without increasing production, or
establishing any permanent fund for supporting that expense, and is in
every respect hurtful to the society.

So far as it is employed in the second way, it promotes industry;
and though it increases the consumption of the society, it provides a
permanent fund for supporting that consumption; the people who consume
reproducing, with a profit, the whole value of their annual consumption.
The gross revenue of the society, the annual produce of their land
and labour, is increased by the whole value which the labour of those
workmen adds to the materials upon which they are employed, and their
neat revenue by what remains of this value, after deducting what is
necessary for supporting the tools and instruments of their trade.

That the greater part of the gold and silver which being forced abroad
by those operations of banking, is employed in purchasing foreign goods
for home consumption, is, and must be, employed in purchasing those
of this second kind, seems not only probable, but almost unavoidable.
Though some particular men may sometimes increase their expense very
considerably, though their revenue does not increase at all, we maybe
assured that no class or order of men ever does so; because, though the
principles of common prudence do not always govern the conduct of every
individual, they always influence that of the majority of every class or
order. But the revenue of idle people, considered as a class or order,
cannot, in the smallest degree, be increased by those operations of
banking. Their expense in general, therefore, cannot be much increased
by them, though that of a few individuals among them may, and in reality
sometimes is. The demand of idle people, therefore, for foreign goods,
being the same, or very nearly the same as before, a very small part of
the money which, being forced abroad by those operations of banking, is
employed in purchasing foreign goods for home consumption, is likely to
be employed in purchasing those for their use. The greater part of it
will naturally be destined for the employment of industry, and not for
the maintenance of idleness.

When we compute the quantity of industry which the circulating capital
of any society can employ, we must always have regard to those parts of
it only which consist in provisions, materials, and finished work; the
other, which consists in money, and which serves only to circulate those
three, must always be deducted. In order to put industry into motion,
three things are requisite; materials to work upon, tools to work with,
and the wages or recompence for the sake of which the work is done.
Money is neither a material to work upon, nor a tool to work with; and
though the wages of the workman are commonly paid to him in money, his
real revenue, like that of all other men, consists, not in the money,
but in the money's worth; not in the metal pieces, but in what can be
got for them.

The quantity of industry which any capital can employ, must evidently be
equal to the number of workmen whom it can supply with materials, tools,
and a maintenance suitable to the nature of the work. Money may be
requisite for purchasing the materials and tools of the work, as well as
the maintenance of the workmen; but the quantity of industry which the
whole capital can employ, is certainly not equal both to the money
which purchases, and to the materials, tools, and maintenance, which are
purchased with it, but only to one or other of those two values, and to
the latter more properly than to the former.

When paper is substituted in the room of gold and silver money, the
quantity of the materials, tools, and maintenance, which the whole
circulating capital can supply, may be increased by the whole value of
gold and silver which used to be employed in purchasing them. The whole
value of the great wheel of circulation and distribution is added to
the goods which are circulated and distributed by means of it. The
operation, in some measure, resembles that of the undertaker of some
great work, who, in consequence of some improvement in mechanics, takes
down his old machinery, and adds the difference between its price and
that of the new to his circulating capital, to the fund from which he
furnishes materials and wages to his workmen.

What is the proportion which the circulating money of any country bears
to the whole value of the annual produce circulated by means of it, it
is perhaps impossible to determine. It has been computed by different
authors at a fifth, at a tenth, at a twentieth, and at a thirtieth, part
of that value. But how small soever the proportion which the circulating
money may bear to the whole value of the annual produce, as but a part,
and frequently but a small part, of that produce, is ever destined for
the maintenance of industry, it must always bear a very considerable
proportion to that part. When, therefore, by the substitution of paper,
the gold and silver necessary for circulation is reduced to, perhaps, a
fifth part of the former quantity, if the value of only the greater part
of the other four-fifths be added to the funds which are destined for
the maintenance of industry, it must make a very considerable addition
to the quantity of that industry, and, consequently, to the value of the
annual produce of land and labour.

An operation of this kind has, within these five-and-twenty or thirty
years, been performed in Scotland, by the erection of new banking
companies in almost every considerable town, and even in some country
villages. The effects of it have been precisely those above described.
The business of the country is almost entirely carried on by means of
the paper of those different banking companies, with which purchases
and payments of all kinds are commonly made. Silver very seldom appears,
except in the change of a twenty shilling bank note, and gold still
seldomer. But though the conduct of all those different companies
has not been unexceptionable, and has accordingly required an act of
parliament to regulate it, the country, notwithstanding, has evidently
derived great benefit from their trade. I have heard it asserted, that
the trade of the city of Glasgow doubled in about fifteen years after
the first erection of the banks there; and that the trade of Scotland
has more than quadrupled since the first erection of the two public
banks at Edinburgh; of which the one, called the Bank of Scotland, was
established by act of parliament in 1695, and the other, called the
Royal Bank, by royal charter in 1727. Whether the trade, either of
Scotland in general, or of the city of Glasgow in particular, has really
increased in so great a proportion, during so short a period, I do not
pretend to know. If either of them has increased in this proportion,
it seems to be an effect too great to be accounted for by the sole
operation of this cause. That the trade and industry of Scotland,
however, have increased very considerably during this period, and that
the banks have contributed a good deal to this increase, cannot be
doubted.

The value of the silver money which circulated in Scotland before the
Union in 1707, and which, immediately after it, was brought into the
Bank of Scotland, in order to be recoined, amounted to £411,117: 10: 9
sterling. No account has been got of the gold coin; but it appears from
the ancient accounts of the mint of Scotland, that the value of the gold
annually coined somewhat exceeded that of the silver. There were a
good many people, too, upon this occasion, who, from a diffidence of
repayment, did not bring their silver into the Bank of Scotland; and
there was, besides, some English coin, which was not called in. The
whole value of the gold and silver, therefore, which circulated in
Scotland before the Union, cannot be estimated at less than a million
sterling. It seems to have constituted almost the whole circulation of
that country; for though the circulation of the Bank of Scotland, which
had then no rival, was considerable, it seems to have made but a very
small part of the whole. In the present times, the whole circulation of
Scotland cannot be estimated at less than two millions, of which that
part which consists in gold and silver, most probably, does not amount
to half a million. But though the circulating gold and silver of
Scotland have suffered so great a diminution during this period, its
real riches and prosperity do not appear to have suffered any. Its
agriculture, manufactures, and trade, on the contrary, the annual
produce of its land and labour, have evidently been augmented.

It is chiefly by discounting bills of exchange, that is, by advancing
money upon them before they are due, that the greater part of banks and
bankers issue their promissory notes. They deduct always, upon whatever
sum they advance, the legal interest till the bill shall become due. The
payment of the bill, when it becomes due, replaces to the bank the value
of what had been advanced, together with a clear profit of the interest.
The banker, who advances to the merchant whose bill he discounts, not
gold and silver, but his own promissory notes, has the advantage of
being able to discount to a greater amount by the whole value of
his promissory notes, which he finds, by experience, are commonly in
circulation. He is thereby enabled to make his clear gain of interest on
so much a larger sum.

The commerce of Scotland, which at present is not very great, was
still more inconsiderable when the two first banking companies were
established; and those companies would have had but little trade, had
they confined their business to the discounting of bills of exchange.
They invented, therefore, another method of issuing their promissory
notes; by granting what they call cash accounts, that is, by giving
credit, to the extent of a certain sum (two or three thousand pounds for
example), to any individual who could procure two persons of undoubted
credit and good landed estate to become surety for him, that whatever
money should be advanced to him, within the sum for which the credit
had been given, should be repaid upon demand, together with the legal
interest. Credits of this kind are, I believe, commonly granted by banks
and bankers in all different parts of the world. But the easy terms upon
which the Scotch banking companies accept of repayment are, so far as I
know, peculiar to them, and have perhaps been the principal cause,
both of the great trade of those companies, and of the benefit which the
country has received from it.

Whoever has a credit of this kind with one of those companies, and
borrows a thousand pounds upon it, for example, may repay this
sum piece-meal, by twenty and thirty pounds at a time, the company
discounting a proportionable part of the interest of the great sum, from
the day on which each of those small sums is paid in, till the whole be
in this manner repaid. All merchants, therefore, and almost all men of
business, find it convenient to keep such cash accounts with them,
and are thereby interested to promote the trade of those companies, by
readily receiving their notes in all payments, and by encouraging all
those with whom they have any influence to do the same. The banks, when
their customers apply to them for money, generally advance it to them
in their own promissory notes. These the merchants pay away to the
manufacturers for goods, the manufacturers to the farmers for materials
and provisions, the farmers to their landlords for rent; the landlords
repay them to the merchants for the conveniencies and luxuries with
which they supply them, and the merchants again return them to the
banks, in order to balance their cash accounts, or to replace what they
my have borrowed of them; and thus almost the whole money business of
the country is transacted by means of them. Hence the great trade of
those companies.

By means of those cash accounts, every merchant can, without imprudence,
carry on a greater trade than he otherwise could do. If there are two
merchants, one in London and the other in Edinburgh, who employ equal
stocks in the same branch of trade, the Edinburgh merchant can, without
imprudence, carry on a greater trade, and give employment to a greater
number of people, than the London merchant. The London merchant must
always keep by him a considerable sum of money, either in his own
coffers, or in those of his banker, who gives him no interest for it, in
order to answer the demands continually coming upon him for payment of
the goods which he purchases upon credit. Let the ordinary amount of
this sum be supposed five hundred pounds; the value of the goods in his
warehouse must always be less, by five hundred pounds, than it would
have been, had he not been obliged to keep such a sum unemployed. Let us
suppose that he generally disposes of his whole stock upon hand, or of
goods to the value of his whole stock upon hand, once in the year. By
being obliged to keep so great a sum unemployed, he must sell in a year
five hundred pounds worth less goods than he might otherwise have done.
His annual profits must be less by all that he could have made by the
sale of five hundred pounds worth more goods; and the number of people
employed in preparing his goods for the market must be less by all those
that five hundred pounds more stock could have employed. The merchant
in Edinburgh, on the other hand, keeps no money unemployed for answering
such occasional demands. When they actually come upon him, he satisfies
them from his cash account with the bank, and gradually replaces the
sum borrowed with the money or paper which comes in from the occasional
sales of his goods. With the same stock, therefore, he can, without
imprudence, have at all times in his warehouse a larger quantity of
goods than the London merchant; and can thereby both make a greater
profit himself, and give constant employment to a greater number of
industrious people who prepare those goods for the market. Hence the
great benefit which the country has derived from this trade.

The facility of discounting bills of exchange, it may be thought,
indeed, gives the English merchants a conveniency equivalent to the cash
accounts of the Scotch merchants. But the Scotch merchants, it must
be remembered, can discount their bills of exchange as easily as the
English merchants; and have, besides, the additional conveniency of
their cash accounts.

The whole paper money of every kind which can easily circulate in any
country, never can exceed the value of the gold and silver, of which
it supplies the place, or which (the commerce being supposed the same)
would circulate there, if there was no paper money. If twenty shilling
notes, for example, are the lowest paper money current in Scotland, the
whole of that currency which can easily circulate there, cannot exceed
the sum of gold and silver which would be necessary for transacting
the annual exchanges of twenty shillings value and upwards usually
transacted within that country. Should the circulating paper at any
time exceed that sum, as the excess could neither be sent abroad nor be
employed in the circulation of the country, it must immediately return
upon the banks, to be exchanged for gold and silver. Many people would
immediately perceive that they had more of this paper than was necessary
for transacting their business at home; and as they could not send it
abroad, they would immediately demand payment for it from the banks.
When this superfluous paper was converted into gold and silver, they
could easily find a use for it, by sending it abroad; but they
could find none while it remained in the shape of paper. There would
immediately, therefore, be a run upon the banks to the whole extent
of this superfluous paper, and if they showed any difficulty or
backwardness in payment, to a much greater extent; the alarm which this
would occasion necessarily increasing the run.

Over and above the expenses which are common to every branch of trade,
such as the expense of house-rent, the wages of servants, clerks,
accountants, etc. the expenses peculiar to a bank consist chiefly in two
articles: first, in the expense of keeping at all times in its coffers,
for answering the occasional demands of the holders of its notes, a
large sum of money, of which it loses the interest; and, secondly, in
the expense of replenishing those coffers as fast as they are emptied by
answering such occasional demands.

A banking company which issues more paper than can be employed in the
circulation of the country, and of which the excess is continually
returning upon them for payment, ought to increase the quantity of gold
and silver which they keep at all times in their coffers, not only in
proportion to this excessive increase of their circulation, but in a
much greater proportion; their notes returning upon them much faster
than in proportion to the excess of their quantity. Such a company,
therefore, ought to increase the first article of their expense, not
only in proportion to this forced increase of their business, but in a
much greater proportion.

The coffers of such a company, too, though they ought to be filled much
fuller, yet must empty themselves much faster than if their business was
confined within more reasonable bounds, and must require not only a more
violent, but a more constant and uninterrupted exertion of expense, in
order to replenish them, The coin, too, which is thus continually drawn
in such large quantities from their coffers, cannot be employed in the
circulation of the country. It comes in place of a paper which is over
and above what can be employed in that circulation, and is, therefore,
over and above what can be employed in it too. But as that coin will
not be allowed to lie idle, it must, in one shape or another, be sent
abroad, in order to find that profitable employment which it cannot find
at home; and this continual exportation of gold and silver, by enhancing
the difficulty, must necessarily enhance still farther the expense of
the bank, in finding new gold and silver in order to replenish those
coffers, which empty themselves so very rapidly. Such a company,
therefore, must in proportion to this forced increase of their business,
increase the second article of their expense still more than the first.

Let us suppose that all the paper of a particular bank, which the
circulation of the country can easily absorb and employ, amounts exactly
to forty thousand pounds, and that, for answering occasional demands,
this bank is obliged to keep at all times in its coffers ten thousand
pounds in gold and silver. Should this bank attempt to circulate
forty-four thousand pounds, the four thousand pounds which are over and
above what the circulation can easily absorb and employ, will return
upon it almost as fast as they are issued. For answering occasional
demands, therefore, this bank ought to keep at all times in its coffers,
not eleven thousand pounds only, but fourteen thousand pounds. It will
thus gain nothing by the interest of the four thousand pounds excessive
circulation; and it will lose the whole expense of continually
collecting four thousand pounds in gold and silver, which will be
continually going out of its coffers as fast as they are brought into
them.

Had every particular banking company always understood and attended
to its own particular interest, the circulation never could have been
overstocked with paper money. But every particular banking company has
not always understood or attended to its own particular interest, and
the circulation has frequently been overstocked with paper money.

By issuing too great a quantity of paper, 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 (inconsequence of the worn and degraded
state into which the gold coin had fallen a few years ago) was
frequently obliged to purchase gold bullion at the high price of four
pounds an ounce, which it soon after issued in coin at £3:17:10 1/2 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
this coinage, this liberality of government did not prevent altogether
the expense of the bank.

The Scotch banks, in consequence of an excess of the same kind, were all
obliged to employ constantly agents at London to collect money for them,
at an expense which was seldom below one and a half or two per cent.
This money was sent down by the waggon, and insured by the carriers at
an additional expense of three quarters per cent. or fifteen shillings
on the hundred pounds. Those agents were not always able to replenish
the coffers of their employers so fast as they were emptied. In this
case, the resource of the banks was, to draw upon their correspondents
in London bills of exchange, to the extent of the sum which they wanted.
When those correspondents afterwards drew upon them for the payment
of this sum, together with the interest and commission, some of those
banks, from the distress into which their excessive circulation had
thrown them, had sometimes no other means of satisfying this draught,
but by drawing a second set of bills, either upon the same, or upon some
other correspondents in London; and the same sum, or rather bills for
the same sum, would in this manner make sometimes more than two or three
journeys; the debtor bank paying always the interest and commission
upon the whole accumulated sum. Even those Scotch banks which never
distinguished themselves by their extreme imprudence, were sometimes
obliged to employ this ruinous resource.

The gold coin which was paid out, either by the Bank of England or by
the Scotch banks, in exchange for that part of their paper which was
over and above what could be employed in the circulation of the
country, being likewise over and above what could be employed in that
circulation, was sometimes sent abroad in the shape of coin, sometimes
melted down and sent abroad in the shape of bullion, and sometimes
melted down and sold to the Bank of England at the high price of four
pounds an ounce. It was the newest, the heaviest, and the best pieces
only, which were carefully picked out of the whole coin, and either sent
abroad or melted down. At home, and while they remained in the shape of
coin, those heavy pieces were of no more value than the light; but they
were of more value abroad, or when melted down into bullion at home. The
Bank of England, notwithstanding their great annual coinage, found, to
their astonishment, that there was every year the same scarcity of coin
as there had been the year before; and that, notwithstanding the great
quantity of good and new coin which was every year issued from the bank,
the state of the coin, instead of growing better and better, became
every year worse and worse. Every year they found themselves under the
necessity of coining nearly the same quantity of gold as they had
coined the year before; and from the continual rise in the price of gold
bullion, in consequence of the continual wearing and clipping of the
coin, the expense of this great annual coinage became, every year,
greater and greater. The Bank of England, it is to be observed, by
supplying its own coffers with coin, is indirectly obliged to supply the
whole kingdom, into which coin is continually flowing from those coffers
in a great variety of ways. Whatever coin, therefore, was wanted to
support this excessive circulation both of Scotch and English paper
money, whatever vacuities this excessive circulation occasioned in the
necessary coin of the kingdom, the Bank of England was obliged to supply
them. The Scotch banks, no doubt, paid all of them very dearly for
their own imprudence and inattention: but the Bank of England paid
very dearly, not only for its own imprudence, but for the much greater
imprudence of almost all the Scotch banks.

The over-trading of some bold projectors in both parts of the united
kingdom, was the original cause of this excessive circulation of paper
money.

What a bank can with propriety advance to a merchant or undertaker of
any kind, is not either the whole capital with which he trades, or even
any considerable part of that capital; but that part of it only which he
would otherwise be obliged to keep by him unemployed and in ready money,
for answering occasional demands. If the paper money which the bank
advances never exceeds this value, it can never exceed the value of
the gold and silver which would necessarily circulate in the country
if there was no paper money; it can never exceed the quantity which the
circulation of the country can easily absorb and employ.

When a bank discounts to a merchant a real bill of exchange, drawn by a
real creditor upon a real debtor, and which, as soon as it becomes due,
is really paid by that debtor; it only advances to him a part of the
value which he would otherwise be obliged to keep by him unemployed and
in ready money, for answering occasional demands. The payment of the
bill, when it becomes due, replaces to the bank the value of what it had
advanced, together with the interest. The coffers of the bank, so far as
its dealings are confined to such customers, resemble a water-pond,
from which, though a stream is continually running out, yet another is
continually running in, fully equal to that which runs out; so that,
without any further care or attention, the pond keeps always equally, or
very near equally full. Little or no expense can ever be necessary for
replenishing the coffers of such a bank.

A merchant, without over-trading, may frequently have occasion for a
sum of ready money, even when he has no bills to discount. When a
bank, besides discounting his bills, advances him likewise, upon such
occasions, such sums upon his cash account, and accepts of a piece-meal
repayment, as the money comes in from the occasional sale of his goods,
upon the easy terms of the banking companies of Scotland; it dispenses
him entirely from the necessity of keeping any part of his stock by him
unemployed and in ready money for answering occasional demands. When
such demands actually come upon him, he can answer them sufficiently
from his cash account. The bank, however, in dealing with such
customers, ought to observe with great attention, whether, in the course
of some short period (of four, five, six, or eight months, for example),
the sum of the repayments which it commonly receives from them, is, or
is not, fully equal to that of the advances which it commonly makes
to them. If, within the course of such short periods, the sum of the
repayments from certain customers is, upon most occasions, fully equal
to that of the advances, it may safely continue to deal with such
customers. Though the stream which is in this case continually running
out from its coffers may be very large, that which is continually
running into them must be at least equally large, so that, without any
further care or attention, those coffers are likely to be always equally
or very near equally full, and scarce ever to require any extraordinary
expense to replenish them. If, on the contrary, the sum of the
repayments from certain other customers, falls commonly very much
short of the advances which it makes to them, it cannot with any safety
continue to deal with such customers, at least if they continue to deal
with it in this manner. The stream which is in this case continually
running out from its coffers, is necessarily much larger than that which
is continually running in; so that, unless they are replenished by
some great and continual effort of expense, those coffers must soon be
exhausted altogether.

The banking companies of Scotland, accordingly, were for a long time
very careful to require frequent and regular repayments from all their
customers, and did not care to deal with any person, whatever might be
his fortune or credit, who did not make, what they called, frequent and
regular operations with them. By this attention, besides saving almost
entirely the extraordinary expense of replenishing their coffers, they
gained two other very considerable advantages.

First, by this attention they were enabled to make some tolerable
judgment concerning the thriving or declining circumstances of their
debtors, without being obliged to look out for any other evidence
besides what their own books afforded them; men being, for the most
part, either regular or irregular in their repayments, according as
their circumstances are either thriving or declining. A private man who
lends out his money to perhaps half a dozen or a dozen of debtors, may,
either by himself or his agents, observe and inquire both constantly and
carefully into the conduct and situation of each of them. But a banking
company, which lends money to perhaps five hundred different people,
and of which the attention is continually occupied by objects of a very
different kind, can have no regular information concerning the conduct
and circumstances of the greater part of its debtors, beyond what its
own books afford it. In requiring frequent and regular repayments from
all their customers, the banking companies of Scotland had probably this
advantage in view.

Secondly, by this attention they secured themselves from the possibility
of issuing more paper money than what the circulation of the country
could easily absorb and employ. When they observed, that within moderate
periods of time, the repayments of a particular customer were, upon most
occasions, fully equal to the advances which they had made to him, they
might be assured that the paper money which they had advanced to him
had not, at any time, exceeded the quantity of gold and silver which
he would otherwise have been obliged to keep by him for answering
occasional demands; and that, consequently, the paper money, which they
had circulated by his means, had not at any time exceeded the quantity
of gold and silver which would have circulated in the country, had
there been no paper money. The frequency, regularity, and amount of
his repayments, would sufficiently demonstrate that the amount of their
advances had at no time exceeded that part of his capital which he would
otherwise have been obliged to keep by him unemployed, and in ready
money, for answering occasional demands; that is, for the purpose of
keeping the rest of his capital in constant employment. It is this
part of his capital only which, within moderate periods of time, is
continually returning to every dealer in the shape of money, whether
paper or coin, and continually going from him in the same shape. If the
advances of the bank had commonly exceeded this part of his capital, the
ordinary amount of his repayments could not, within moderate periods
of time, have equalled the ordinary amount of its advances. The stream
which, by means of his dealings, was continually running into the
coffers of the bank, could not have been equal to the stream which, by
means of the same dealings was continually running out. The advances of
the bank paper, by exceeding the quantity of gold and silver which, had
there been no such advances, he would have been obliged to keep by him
for answering occasional demands, might soon come to exceed the whole
quantity of gold and silver which ( the commerce being supposed the same
) would have circulated in the country, had there been no paper money;
and, consequently, to exceed the quantity which the circulation of the
country could easily absorb and employ; and the excess of this paper
money would immediately have returned upon the bank, in order to be
exchanged for gold and silver. This second advantage, though equally
real, was not, perhaps, so well understood by all the different banking
companies in Scotland as the first.

When, partly by the conveniency of discounting bills, and partly by that
of cash accounts, the creditable traders of any country can be
dispensed from the necessity of keeping any part of their stock by them
unemployed, and in ready money, for answering occasional demands, they
can reasonably expect no farther assistance from hanks and bankers,
who, when they have gone thus far, cannot, consistently with their own
interest and safety, go farther. A bank cannot, consistently with its
own interest, advance to a trader the whole, or even the greater part
of the circulating capital with which he trades; because, though that
capital is continually returning to him in the shape of money, and going
from him in the same shape, yet the whole of the returns is too distant
from the whole of the outgoings, and the sum of his repayments could not
equal the sum of his advances within such moderate periods of time
as suit the conveniency of a bank. Still less could a bank afford to
advance him any considerable part of his fixed capital; of the capital
which the undertaker of an iron forge, for example, employs in erecting
his forge and smelting-houses, his work-houses, and warehouses,
the dwelling-houses of his workmen, etc.; of the capital which the
undertaker of a mine employs in sinking his shafts, in erecting engines
for drawing out the water, in making roads and waggon-ways, etc.; of
the capital which the person who undertakes to improve land employs
in clearing, draining, inclosing, manuring, and ploughing waste and
uncultivated fields; in building farmhouses, with all their necessary
appendages of stables, granaries, etc. The returns of the fixed capital
are, in almost all cases, much slower than those of the circulating
capital: and such expenses, even when laid out with the greatest
prudence and judgment, very seldom return to the undertaker till after
a period of many years, a period by far too distant to suit the
conveniency of a bank. Traders and other undertakers may, no doubt with
great propriety, carry on a very considerable part of their projects
with borrowed money. In justice to their creditors, however, their own
capital ought in this case to be sufficient to insure, if I may say so,
the capital of those creditors; or to render it extremely improbable
that those creditors should incur any loss, even though the success
of the project should fall very much short of the expectation of the
projectors. Even with this precaution, too, the money which is borrowed,
and which it is meant should not be repaid till after a period of
several years, ought not to be borrowed of a bank, but ought to be
borrowed upon bond or mortgage, of such private people as propose
to live upon the interest of their money, without taking the trouble
themselves to employ the capital, and who are, upon that account,
willing to lend that capital to such people of good credit as are likely
to keep it for several years. A bank, indeed, which lends its money
without the expense of stamped paper, or of attorneys' fees for drawing
bonds and mortgages, and which accepts of repayment upon the easy
terms of the banking companies of Scotland, would, no doubt, be a very
convenient creditor to such traders and undertakers. But such traders
and undertakers would surely be most inconvenient debtors to such a
bank.

It is now more than five and twenty years since the paper money issued
by the different banking companies of Scotland was fully equal, or
rather was somewhat more than fully equal, to what the circulation of
the country could easily absorb and employ. Those companies, therefore,
had so long ago given all the assistance to the traders and other
undertakers of Scotland which it is possible for banks and bankers,
consistently with their own interest, to give. They had even done
somewhat more. They had over-traded a little, and had brought upon
themselves that loss, or at least that diminution of profit, which, in
this particular business, never fails to attend the smallest degree of
over-trading. Those traders and other undertakers, having got so much
assistance from banks and bankers, wished to get still more. The banks,
they seem to have thought, could extend their credits to whatever sum
might be wanted, without incurring any other expense besides that of
a few reams of paper. They complained of the contracted views and
dastardly spirit of the directors of those banks, which did not, they
said, extend their credits in proportion to the extension of the trade
of the country; meaning, no doubt, by the extension of that trade, the
extension of their own projects beyond what they could carry on either
with their own capital, or with what they had credit to borrow of
private people in the usual way of bond or mortgage. The banks, they
seem to have thought, were in honour bound to supply the deficiency, and
to provide them with all the capital which they wanted to trade with.
The banks, however, were of a different opinion; and upon their refusing
to extend their credits, some of those traders had recourse to an
expedient which, for a time, served their purpose, though at a much
greater expense, yet as effectually as the utmost extension of bank
credits could have done. This expedient was no other than the well known
shift of drawing and redrawing; the shift to which unfortunate traders
have sometimes recourse, when they are upon the brink of bankruptcy. The
practice of raising money in this manner had been long known in England;
and, during the course of the late war, when the high profits of trade
afforded a great temptation to over-trading, is said to have been
carried on to a very great extent. From England it was brought into
Scotland, where, in proportion to the very limited commerce, and to the
very moderate capital of the country, it was soon carried on to a much
greater extent than it ever had been in England.

The practice of drawing and redrawing is so well known to all men of
business, that it may, perhaps, be thought unnecessary to give any
account of it. But as this book may come into the hands of many people
who are not men of business, and as the effects of this practice upon
the banking trade are not, perhaps, generally understood, even by men of
business themselves, I shall endeavour to explain it as distinctly as I
can.

The customs of merchants, which were established when the barbarous laws
of Europe did not enforce the performance of their contracts, and which,
during the course of the two last centuries, have been adopted into the
laws of all European nations, have given such extraordinary privileges
to bills of exchange, that money is more readily advanced upon them
than upon any other species of obligation; especially when they are
made payable within so short a period as two or three months after their
date. If, when the bill becomes due, the acceptor does not pay it as
soon as it is presented, he becomes from that moment a bankrupt. The
bill is protested, and returns upon the drawer, who, if he does not
immediately pay it, becomes likewise a bankrupt. If, before it came to
the person who presents it to the acceptor for payment, it had passed
through the hands of several other persons, who had successively
advanced to one another the contents of it, either in money or goods,
and who, to express that each of them had in his turn received those
contents, had all of them in their order indorsed, that is, written
their names upon the back of the bill; each indorser becomes in his turn
liable to the owner of the bill for those contents, and, if he fails to
pay, he becomes too, from that moment, a bankrupt. Though the drawer,
acceptor, and indorsers of the bill, should all of them be persons
of doubtful credit; yet, still the shortness of the date gives some
security to the owner of the bill. Though all of them may be very likely
to become bankrupts, it is a chance if they all become so in so short
a time. The house is crazy, says a weary traveller to himself, and will
not stand very long; but it is a chance if it falls to-night, and I will
venture, therefore, to sleep in it to-night.

The trader A in Edinburgh, we shall suppose, draws a bill upon B in
London, payable two months after date. In reality B in London owes
nothing to A in Edinburgh; but he agrees to accept of A 's bill, upon
condition, that before the term of payment he shall redraw upon A in
Edinburgh for the same sum, together with the interest and a commission,
another bill, payable likewise two months after date. B accordingly,
before the expiration of the first two months, redraws this bill upon A
in Edinburgh; who, again before the expiration of the second two months,
draws a second bill upon B in London, payable likewise two months after
date; and before the expiration of the third two months, B in London
redraws upon A in Edinburgh another bill payable also two months after
date. This practice has sometimes gone on, not only for several months,
but for several years together, the bill always returning upon A in
Edinburgh with the accumulated interest and commission of all the former
bills. The interest was five per cent. in the year, and the commission
was never less than one half per cent. on each draught. This commission
being repeated more than six times in the year, whatever money A might
raise by this expedient might necessarily have cost him something more
than eight per cent. in the year and sometimes a great deal more, when
either the price of the commission happened to rise, or when he was
obliged to pay compound interest upon the interest and commission of
former bills. This practice was called raising money by circulation.

In a country where the ordinary profits of stock, in the greater part of
mercantile projects, are supposed to run between six and ten per cent.
it must have been a very fortunate speculation, of which the returns
could not only repay the enormous expense at which the money was thus
borrowed for carrying it on, but afford, besides, a good surplus profit
to the projector. Many vast and extensive projects, however, were
undertaken, and for several years carried on, without any other fund
to support them besides what was raised at this enormous expense. The
projectors, no doubt, had in their golden dreams the most distinct
vision of this great profit. Upon their awakening, however, either at
the end of their projects, or when they were no longer able to carry
them on, they very seldom, I believe, had the good fortune to find it.

{The method described in the text was by no means either the most common
or the most expensive one in which those adventurers sometimes raised
money by circulation. It frequently happened, that A in Edinburgh would
enable B in London to pay the first bill of exchange, by drawing, a few
days before it became due, a second bill at three months date upon the
same B in London. This bill, being payable to his own order, A sold in
Edinburgh at par; and with its contents purchased bills upon London,
payable at sight to the order of B, to whom he sent them by the post.
Towards the end of the late war, the exchange between Edinburgh and
London was frequently three per cent. against Edinburgh, and those bills
at sight must frequently have cost A that premium. This transaction,
therefore, being repeated at least four times in the year, and being
loaded with a commission of at least one half per cent. upon each
repetition, must at that period have cost A, at least, fourteen per
cent. in the year. At other times A would enable to discharge the first
bill of exchange, by drawing, a few days before it became due, a second
bill at two months date, not upon B, but upon some third person, C, for
example, in London. This other bill was made payable to the order of
B, who, upon its being accepted by C, discounted it with some banker in
London; and A enabled C to discharge it, by drawing, a few day's before
it became due, a third bill likewise at two months date, sometimes
upon his first correspondent B, and sometimes upon some fourth or fifth
person, D or E, for example. This third bill was made payable to the
order of C, who, as soon as it was accepted, discounted it in the same
manner with some banker in London. Such operations being repeated at
least six times in the year, and being loaded with a commission of at
least one half per cent. upon each repetition, together with the legal
interest of five per cent. this method of raising money, in the same
manner as that described in the text, must have cost A something more
than eight per cent. By saving, however, the exchange between Edinburgh
and London, it was less expensive than that mentioned in the foregoing
part of this note; but then it required an established credit with more
houses than one in London, an advantage which many of these adventurers
could not always find it easy to procure.}

The bills which A in Edinburgh drew upon B in London, he regularly
discounted two months before they were due, with some bank or banker in
Edinburgh; and the bills which B in London redrew upon A in Edinburgh,
he as regularly discounted, either with the Bank of England, or with
some other banker in London. Whatever was advanced upon such circulating
bills was in Edinburgh advanced in the paper of the Scotch banks; and in
London, when they were discounted at the Bank of England in the paper of
that bank. Though the bills upon which this paper had been advanced were
all of them repaid in their turn as soon as they became due, yet the
value which had been really advanced upon the first bill was never
really returned to the banks which advanced it; because, before each
bill became due, another bill was always drawn to somewhat a greater
amount than the bill which was soon to be paid: and the discounting of
this other bill was essentially necessary towards the payment of that
which was soon to be due. This payment, therefore, was altogether
fictitious. The stream which, by means of those circulating bills of
exchange, had once been made to run out from the coffers of the banks,
was never replaced by any stream which really ran into them.

The paper which was issued upon those circulating bills of exchange
amounted, upon many occasions, to the whole fund destined for carrying
on some vast and extensive project of agriculture, commerce, or
manufactures; and not merely to that part of it which, had there been
no paper money, the projector would have been obliged to keep by him
unemployed, and in ready money, for answering occasional demands. The
greater part of this paper was, consequently, over and above the value
of the gold and silver which would have circulated in the country, had
there been no paper money. It was over and above, therefore, what the
circulation of the country could easily absorb and employ, and upon that
account, immediately returned upon the banks, in order to be exchanged
for gold and silver, which they were to find as they could. It was a
capital which those projectors had very artfully contrived to draw from
those banks, not only without their knowledge or deliberate consent, but
for some time, perhaps, without their having the most distant suspicion
that they had really advanced it.

When two people, who are continually drawing and redrawing upon one
another, discount their bills always with the same banker, he must
immediately discover what they are about, and see clearly that they are
trading, not with any capital of their own, but with the capital which
he advances to them. But this discovery is not altogether so easy when
they discount their bills sometimes with one banker, and sometimes with
another, and when the two same persons do not constantly draw and redraw
upon one another, but occasionally run the round of a great circle of
projectors, who find it for their interest to assist one another in
this method of raising money and to render it, upon that account, as
difficult as possible to distinguish between a real and a fictitious
bill of exchange, between a bill drawn by a real creditor upon a real
debtor, and a bill for which there was properly no real creditor but the
bank which discounted it, nor any real debtor but the projector who made
use of the money. When a banker had even made this discovery, he
might sometimes make it too late, and might find that he had already
discounted the bills of those projectors to so great an extent, that,
by refusing to discount any more, he would necessarily make them all
bankrupts; and thus by ruining them, might perhaps ruin himself. For his
own interest and safety, therefore, he might find it necessary, in this
very perilous situation, to go on for some time, endeavouring, however,
to withdraw gradually, and, upon that account, making every day greater
and greater difficulties about discounting, in order to force these
projectors by degrees to have recourse, either to other bankers, or to
other methods of raising money: so as that he himself might, as soon as
possible, get out of the circle. The difficulties, accordingly, which
the Bank of England, which the principal bankers in London, and which
even the more prudent Scotch banks began, after a certain time, and when
all of them had already gone too far, to make about discounting, not
only alarmed, but enraged, in the highest degree, those projectors.
Their own distress, of which this prudent and necessary reserve of the
banks was, no doubt, the immediate occasion, they called the distress of
the country; and this distress of the country, they said, was altogether
owing to the ignorance, pusillanimity, and bad conduct of the
banks, which did not give a sufficiently liberal aid to the spirited
undertakings of those who exerted themselves in order to beautify,
improve, and enrich the country. It was the duty of the banks, they
seemed to think, to lend for as long a time, and to as great an extent,
as they might wish to borrow. The banks, however, by refusing in this
manner to give more credit to those to whom they had already given a
great deal too much, took the only method by which it was now possible
to save either their own credit, or the public credit of the country.

In the midst of this clamour and distress, a new bank was established
in Scotland, for the express purpose of relieving the distress of the
country. The design was generous; but the execution was imprudent, and
the nature and causes of the distress which it meant to relieve, were
not, perhaps, well understood. This bank was more liberal than any other
had ever been, both in granting cash-accounts, and in discounting bills
of exchange. With regard to the latter, it seems to have made scarce any
distinction between real and circulating bills, but to have discounted
all equally. It was the avowed principle of this bank to advance upon
any reasonable security, the whole capital which was to be employed in
those improvements of which the returns are the most slow and distant,
such as the improvements of land. To promote such improvements was even
said to be the chief of the public-spirited purposes for which it
was instituted. By its liberality in granting cash-accounts, and in
discounting bills of exchange, it, no doubt, issued great quantities of
its bank notes. But those bank notes being, the greater part of them,
over and above what the circulation of the country could easily absorb
and employ, returned upon it, in order to be exchanged for gold and
silver, as fast as they were issued. Its coffers were never well filled.
The capital which had been subscribed to this bank, at two different
subscriptions, amounted to one hundred and sixty thousand pounds, of
which eighty per cent. only was paid up. This sum ought to have
been paid in at several different instalments. A great part of the
proprietors, when they paid in their first instalment, opened a
cash-account with the bank; and the directors, thinking themselves
obliged to treat their own proprietors with the same liberality with
which they treated all other men, allowed many of them to borrow
upon this cash-account what they paid in upon all their subsequent
instalments. Such payments, therefore, only put into one coffer what had
the moment before been taken out of another. But had the coffers of
this bank been filled ever so well, its excessive circulation must have
emptied them faster than they could have been replenished by any other
expedient but the ruinous one of drawing upon London; and when the bill
became due, paying it, together with interest and commission, by another
draught upon the same place. Its coffers having been filled so very ill,
it is said to have been driven to this resource within a very few months
after it began to do business. The estates of the proprietors of this
bank were worth several millions, and, by their subscription to the
original bond or contract of the bank, were really pledged for answering
all its engagements. By means of the great credit which so great a
pledge necessarily gave it, it was, notwithstanding its too liberal
conduct, enabled to carry on business for more than two years. When
it was obliged to stop, it had in the circulation about two hundred
thousand pounds in bank notes. In order to support the circulation of
those notes, which were continually returning upon it as fast as they
were issued, it had been constantly in the practice of drawing bills
of exchange upon London, of which the number and value were continually
increasing, and, when it stopt, amounted to upwards of six hundred
thousand pounds. This bank, therefore, had, in little more than the
course of two years, advanced to different people upwards of eight
hundred thousand pounds at five per cent. Upon the two hundred thousand
pounds which it circulated in bank notes, this five per cent. might
perhaps be considered as a clear gain, without any other deduction
besides the expense of management. But upon upwards of six hundred
thousand pounds, for which it was continually drawing bills of exchange
upon London, it was paying, in the way of interest and commission,
upwards of eight per cent. and was consequently losing more than three
per cent. upon more than three fourths of all its dealings.

The operations of this bank seem to have produced effects quite opposite
to those which were intended by the particular persons who planned
and directed it. They seem to have intended to support the spirited
undertakings, for as such they considered them, which were at that time
carrying on in different parts of the country; and, at the same time,
by drawing the whole banking business to themselves, to supplant all the
other Scotch banks, particularly those established at Edinburgh, whose
backwardness in discounting bills of exchange had given some offence.
This bank, no doubt, gave some temporary relief to those projectors, and
enabled them to carry on their projects for about two years longer than
they could otherwise have done. But it thereby only enabled them to get
so much deeper into debt; so that, when ruin came, it fell so much the
heavier both upon them and upon their creditors. The operations of this
bank, therefore, instead of relieving, in reality aggravated in the
long-run the distress which those projectors had brought both upon
themselves and upon their country. It would have been much better for
themselves, their creditors, and their country, had the greater part of
them been obliged to stop two years sooner than they actually did. The
temporary relief, however, which this bank afforded to those projectors,
proved a real and permanent relief to the other Scotch banks. All the
dealers in circulating bills of exchange, which those other banks had
become so backward in discounting, had recourse to this new bank, where
they were received with open arms. Those other banks, therefore, were
enabled to get very easily out of that fatal circle, from which they
could not otherwise have disengaged themselves without incurring a
considerable loss, and perhaps, too, even some degree of discredit.

In the long-run, therefore, the operations of this bank increased the
real distress of the country, which it meant to relieve; and effectually
relieved, from a very great distress, those rivals whom it meant to
supplant.

At the first setting out of this bank, it was the opinion of some
people, that how fast soever its coffers might be emptied, it might
easily replenish them, by raising money upon the securities of those to
whom it had advanced its paper. Experience, I believe, soon convinced
them that this method of raising money was by much too slow to answer
their purpose; and that coffers which originally were so ill filled, and
which emptied themselves so very fast, could be replenished by no other
expedient but the ruinous one of drawing bills upon London, and when
they became due, paying them by other draughts on the same place, with
accumulated interest and commission. But though they had been able by
this method to raise money as fast as they wanted it, yet, instead of
making a profit, they must have suffered a loss of every such operation;
so that in the long-run they must have ruined themselves as a mercantile
company, though perhaps not so soon as by the more expensive practice
of drawing and redrawing. They could still have made nothing by the
interest of the paper, which, being over and above what the circulation
of the country could absorb and employ, returned upon them in order to
be exchanged for gold and silver, as fast as they issued it; and for
the payment of which they were themselves continually obliged to
borrow money. On the contrary, the whole expense of this borrowing,
of employing agents to look out for people who had money to lend,
of negotiating with those people, and of drawing the proper bond or
assignment, must have fallen upon them, and have been so much clear loss
upon the balance of their accounts. The project of replenishing their
coffers in this manner may be compared to that of a man who had a
water-pond from which a stream was continually running out, and into
which no stream was continually running, but who proposed to keep it
always equally full, by employing a number of people to go continually
with buckets to a well at some miles distance, in order to bring water
to replenish it.

But though this operation had proved not only practicable, but
profitable to the bank, as a mercantile company; yet the country could
have derived no benefit front it, but, on the contrary, must have
suffered a very considerable loss by it. This operation could not
augment, in the smallest degree, the quantity of money to be lent. It
could only have erected this bank into a sort of general loan office for
the whole country. Those who wanted to borrow must have applied to this
bank, instead of applying to the private persons who had lent it their
money. But a bank which lends money, perhaps to five hundred different
people, the greater part of whom its directors can know very little
about, is not likely to be more judicious in the choice of its debtors
than a private person who lends out his money among a few people whom
he knows, and in whose sober and frugal conduct he thinks he has good
reason to confide. The debtors of such a bank as that whose conduct I
have been giving some account of were likely, the greater part of them,
to be chimerical projectors, the drawers and redrawers of circulating
bills of exchange, who would employ the money in extravagant
undertakings, which, with all the assistance that could be given them,
they would probably never be able to complete, and which, if they should
be completed, would never repay the expense which they had really cost,
would never afford a fund capable of maintaining a quantity of labour
equal to that which had been employed about them. The sober and frugal
debtors of private persons, on the contrary, would be more likely to
employ the money borrowed in sober undertakings which were proportioned
to their capitals, and which, though they might have less of the grand
and the marvellous, would have more of the solid and the profitable;
which would repay with a large profit whatever had been laid out upon
them, and which would thus afford a fund capable of maintaining a much
greater quantity of labour than that which had been employed about them.
The success of this operation, therefore, without increasing in the
smallest degree the capital of the country, would only have transferred
a great part of it from prudent and profitable to imprudent and
unprofitable undertakings.

That the industry of Scotland languished for want of money to employ
it, was the opinion of the famous Mr Law. By establishing a bank of a
particular kind, which he seems to have imagined might issue paper
to the amount of the whole value of all the lands in the country, he
proposed to remedy this want of money. The parliament of Scotland, when
he first proposed his project, did not think proper to adopt it. It was
afterwards adopted, with some variations, by the Duke of Orleans, at
that time regent of France. The idea of the possibility of multiplying
paper money to almost any extent was the real foundation of what is
called the Mississippi scheme, the most extravagant project, both
of banking and stock-jobbing, that perhaps the world ever saw. The
different operations of this scheme are explained so fully, so clearly,
and with so much order and distinctness, by Mr Du Verney, in his
Examination of the Political Reflections upon commerce and finances of
Mr Du Tot, that I shall not give any account of them. The principles
upon which it was founded are explained by Mr Law himself, in a
discourse concerning money and trade, which he published in Scotland
when he first proposed his project. The splendid but visionary
ideas which are set forth in that and some other works upon the same
principles, still continue to make an impression upon many people, and
have, perhaps, in part, contributed to that excess of banking, which has
of late been complained of, both in Scotland and in other places.

The Bank of England is the greatest bank of circulation in Europe. It
was incorporated, in pursuance of an act of parliament, by a charter
under the great seal, dated the 27th of July 1694. It at that time
advanced to government the sum of £1,200,000 for an annuity of £100,000,
or for £ 96,000 a-year, interest at the rate of eight per cent. and
£4,000 year for the expense of management. The credit of the new
government, established by the Revolution, we may believe, must have
been very low, when it was obliged to borrow at so high an interest.

In 1697, the bank was allowed to enlarge its capital stock, by an
ingraftment of £1,001,171:10s. Its whole capital stock, therefore,
amounted at this time to £2,201,171: 10s. This ingraftment is said to
have been for the support of public credit. In 1696, tallies had been
at forty, and fifty, and sixty, per cent. discount, and bank notes at
twenty per cent. {James Postlethwaite's History of the Public Revenue,
p.301.} During the great re-coinage of the silver, which was going on at
this time, the bank had thought proper to discontinue the payment of its
notes, which necessarily occasioned their discredit.

In pursuance of the 7th Anne, c. 7, the bank advanced and paid into
the exchequer the sum of £400,000; making in all the sum of £1,600,000,
which it had advanced upon its original annuity of £96,000 interest,
and £4,000 for expense of management. In 1708, therefore, the credit of
government was as good as that of private persons, since it could borrow
at six per cent. interest, the common legal and market rate of those
times. In pursuance of the same act, the bank cancelled exchequer bills
to the amount of £ 1,775,027: 17s: 10½d. at six per cent. interest, and
was at the same time allowed to take in subscriptions for doubling
its capital. In 1703, therefore, the capital of the bank amounted
to £4,402,343; and it had advanced to government the sum of
£3,375,027:17:10½d.

By a call of fifteen per cent. in 1709, there was paid in, and made
stock, £ 656,204:1:9d.; and by another of ten per cent. in 1710,
£501,448:12:11d. In consequence of those two calls, therefore, the bank
capital amounted to £ 5,559,995:14:8d.

In pursuance of the 3rd George I. c.8, the bank delivered up two
millions of exchequer Bills to be cancelled. It had at this time,
therefore, advanced to government £5,375,027:17 10d. In pursuance of the
8th George I. c.21, the bank purchased of the South-sea company,
stock to the amount of £4,000,000: and in 1722, in consequence of
the subscriptions which it had taken in for enabling it to make this
purchase, its capital stock was increased by £ 3,400,000. At this time,
therefore, the bank had advanced to the public £ 9,375,027 17s. 10½d.;
and its capital stock amounted only to £ 8,959,995:14:8d. It was upon
this occasion that the sum which the bank had advanced to the public,
and for which it received interest, began first to exceed its capital
stock, or the sum for which it paid a dividend to the proprietors of
bank stock; or, in other words, that the bank began to have an undivided
capital, over and above its divided one. It has continued to have an
undivided capital of the same kind ever since. In 1746, the bank had,
upon different occasions, advanced to the public £11,686,800, and its
divided capital had been raised by different calls and subscriptions to
£ 10,780,000. The state of those two sums has continued to be the same
ever since. In pursuance of the 4th of George III. c.25, the bank agreed
to pay to government for the renewal of its charter £110,000, without
interest or re-payment. This sum, therefore did not increase either of
those two other sums.

The dividend of the bank has varied according to the variations in the
rate of the interest which it has, at different times, received for
the money it had advanced to the public, as well as according to other
circumstances. This rate of interest has gradually been reduced from
eight to three per cent. For some years past, the bank dividend has been
at five and a half per cent.

The stability of the bank of England is equal to that of the British
government. All that it has advanced to the public must be lost before
its creditors can sustain any loss. No other banking company in England
can be established by act of parliament, or can consist of more than six
members. It acts, not only as an ordinary bank, but as a great engine of
state. It receives and pays the greater part of the annuities which are
due to the creditors of the public; it circulates exchequer bills; and
it advances to government the annual amount of the land and malt taxes,
which are frequently not paid up till some years thereafter. In these
different operations, its duty to the public may sometimes have obliged
it, without any fault of its directors, to overstock the circulation
with paper money. It likewise discounts merchants' bills, and has,
upon several different occasions, supported the credit of the principal
houses, not only of England, but of Hamburgh and Holland. Upon one
occasion, in 1763, it is said to have advanced for this purpose, in
one week, about £1,600,000, a great part of it in bullion. I do not,
however, pretend to warrant either the greatness of the sum, or the
shortness of the time. Upon other occasions, this great company has been
reduced to the necessity of paying in sixpences.

It is not by augmenting the capital of the country, but by rendering a
greater part of that capital active and productive than would otherwise
be so, that the most judicious operations of banking can increase the
industry of the country. That part of his capital which a dealer is
obliged to keep by him unemployed and in ready money, for answering
occasional demands, is so much dead stock, which, so long as it remains
in this situation, produces nothing, either to him or to his country.
The judicious operations of banking enable him to convert this dead
stock into active and productive stock; into materials to work upon;
into tools to work with; and into provisions and subsistence to work
for; into stock which produces something both to himself and to his
country. The gold and silver money which circulates in any country,
and by means of which, the produce of its land and labour is annually
circulated and distributed to the proper consumers, is, in the same
manner as the ready money of the dealer, all dead stock. It is a very
valuable part of the capital of the country, which produces nothing to
the country. The judicious operations of banking, by substituting paper
in the room of a great part of this gold and silver, enable the country
to convert a great part of this dead stock into active and productive
stock; into stock which produces something to the country. The gold
and silver money which circulates in any country may very properly be
compared to a highway, which, while it circulates and carries to market
all the grass and corn of the country, produces itself not a single pile
of either. The judicious operations of banking, by providing, if I may
be allowed so violent a metaphor, a sort of waggon-way through the air,
enable the country to convert, as it were, a great part of its highways
into good pastures, and corn fields, and thereby to increase, very
considerably, the annual produce of its land and labour. The commerce
and industry of the country, however, it must be acknowledged, though
they may be somewhat augmented, cannot be altogether so secure, when
they are thus, as it were, suspended upon the Daedalian wings of paper
money, as when they travel about upon the solid ground of gold and
silver. Over and above the accidents to which they are exposed from the
unskilfulness of the conductors of this paper money, they are liable to
several others, from which no prudence or skill of those conductors can
guard them.

An unsuccessful war, for example, in which the enemy got possession
of the capital, and consequently of that treasure which supported the
credit of the paper money, would occasion a much greater confusion in a
country where the whole circulation was carried on by paper, than in
one where the greater part of it was carried on by gold and silver. The
usual instrument of commerce having lost its value, no exchanges could
be made but either by barter or upon credit. All taxes having been
usually paid in paper money, the prince would not have wherewithal
either to pay his troops, or to furnish his magazines; and the state of
the country would be much more irretrievable than if the greater part of
its circulation had consisted in gold and silver. A prince, anxious to
maintain his dominions at all times in the state in which he can most
easily defend them, ought upon this account to guard not only against
that excessive multiplication of paper money which ruins the very banks
which issue it, but even against that multiplication of it which enables
them to fill the greater part of the circulation of the country with it.

The circulation of every country may be considered as divided into two
different branches; the circulation of the dealers with one another, and
the circulation between the dealers and the consumers. Though the same
pieces of money, whether paper or metal, may be employed sometimes
in the one circulation and sometimes in the other; yet as both are
constantly going on at the same time, each requires a certain stock of
money, of one kind or another, to carry it on. The value of the goods
circulated between the different dealers never can exceed the value
of those circulated between the dealers and the consumers; whatever
is bought by the dealers being ultimately destined to be sold to the
consumers. The circulation between the dealers, as it is carried on by
wholesale, requires generally a pretty large sum for every particular
transaction. That between the dealers and the consumers, on the
contrary, as it is generally carried on by retail, frequently requires
but very small ones, a shilling, or even a halfpenny, being often
sufficient. But small sums circulate much faster than large ones. A
shilling changes masters more frequently than a guinea, and a halfpenny
more frequently than a shilling. Though the annual purchases of all the
consumers, therefore, are at least equal in value to those of all the
dealers, they can generally be transacted with a much smaller quantity
of money; the same pieces, by a more rapid circulation, serving as the
instrument of many more purchases of the one kind than of the other.

Paper money may be so regulated as either to confine itself very much
to the circulation between the different dealers, or to extend itself
likewise to a great part of that between the dealers and the consumers.
Where no bank notes are circulated under £10 value, as in London, paper
money confines itself very much to the circulation between the dealers.
When a ten pound bank note comes into the hands of a consumer, he is
generally obliged to change it at the first shop where he has occasion
to purchase five shillings worth of goods; so that it often returns into
the hands of a dealer before the consumer has spent the fortieth part of
the money. Where bank notes are issued for so small sums as 20s. as
in Scotland, paper money extends itself to a considerable part of the
circulation between dealers and consumers. Before the Act of parliament
which put a stop to the circulation of ten and five shilling notes, it
filled a still greater part of that circulation. In the currencies
of North America, paper was commonly issued for so small a sum as a
shilling, and filled almost the whole of that circulation. In some paper
currencies of Yorkshire, it was issued even for so small a sum as a
sixpence.

Where the issuing of bank notes for such very small sums is allowed, and
commonly practised, many mean people are both enabled and encouraged to
become bankers. A person whose promissory note for £5, or even for 20s.
would be rejected by every body, will get it to be received without
scruple when it is issued for so small a sum as a sixpence. But the
frequent bankruptcies to which such beggarly bankers must be liable, may
occasion a very considerable inconveniency, and sometimes even a very
great calamity, to many poor people who had received their notes in
payment.

It were better, perhaps, that no bank notes were issued in any part of
the kingdom for a smaller sum than £5. Paper money would then, probably,
confine itself, in every part of the kingdom, to the circulation between
the different dealers, as much as it does at present in London, where
no bank notes are issued under £10 value; £5 being, in most part of the
kingdom, a sum which, though it will purchase, perhaps, little more
than half the quantity of goods, is as much considered, and is as seldom
spent all at once, as £10 are amidst the profuse expense of London.

Where paper money, it is to be observed, is pretty much confined to the
circulation between dealers and dealers, as at London, there is always
plenty of gold and silver. Where it extends itself to a considerable
part of the circulation between dealers and consumers, as in Scotland,
and still more in North America, it banishes gold and silver almost
entirely from the country; almost all the ordinary transactions of its
interior commerce being thus carried on by paper. The suppression of ten
and five shilling bank notes, somewhat relieved the scarcity of gold and
silver in Scotland; and the suppression of twenty shilling notes will
probably relieve it still more. Those metals are said to have become
more abundant in America, since the suppression of some of their paper
currencies. They are said, likewise, to have been more abundant before
the institution of those currencies.

Though paper money should be pretty much confined to the circulation
between dealers and dealers, yet banks and bankers might still be able
to give nearly the same assistance to the industry and commerce of
the country, as they had done when paper money filled almost the whole
circulation. The ready money which a dealer is obliged to keep by
him, for answering occasional demands, is destined altogether for the
circulation between himself and other dealers of whom he buys goods. He
has no occasion to keep any by him for the circulation between himself
and the consumers, who are his customers, and who bring ready money to
him, instead of taking any from him. Though no paper money, therefore,
was allowed to be issued, but for such sums as would confine it pretty
much to the circulation between dealers and dealers; yet partly
by discounting real bills of exchange, and partly by lending upon
cash-accounts, banks and bankers might still be able to relieve
the greater part of those dealers from the necessity of keeping any
considerable part of their stock by them unemployed, and in ready money,
for answering occasional demands. They might still be able to give the
utmost assistance which banks and bankers can with propriety give to
traders of every kind.

To restrain private people, it may be said, from receiving in payment
the promissory notes of a banker for any sum, whether great or small,
when they themselves are willing to receive them; or, to restrain a
banker from issuing such notes, when all his neighbours are willing to
accept of them, is a manifest violation of that natural liberty, which
it is the proper business of law not to infringe, but to support. Such
regulations may, no doubt, be considered as in some respect a violation
of natural liberty. But those exertions of the natural liberty of a few
individuals, which might endanger the security of the whole society,
are, and ought to be, restrained by the laws of all governments; of the
most free, as well as or the most despotical. The obligation of building
party walls, in order to prevent the communication of fire, is a
violation of natural liberty, exactly of the same kind with the
regulations of the banking trade which are here proposed.

A paper money, consisting in bank notes, issued by people of undoubted
credit, payable upon demand, without any condition, and, in fact, always
readily paid as soon as presented, is, in every respect, equal in value
to gold and silver money, since gold and silver money can at anytime
be had for it. Whatever is either bought or sold for such paper, must
necessarily be bought or sold as cheap as it could have been for gold
and silver.

The increase of paper money, it has been said, by augmenting the
quantity, and consequently diminishing the value, of the whole currency,
necessarily augments the money price of commodities. But as the quantity
of gold and silver, which is taken from the currency, is always equal
to the quantity of paper which is added to it, paper money does not
necessarily increase the quantity of the whole currency. From the
beginning of the last century to the present time, provisions never were
cheaper in Scotland than in 1759, though, from the circulation of ten
and five shilling bank notes, there was then more paper money in the
country than at present. The proportion between the price of provisions
in Scotland and that in England is the same now as before the great
multiplication of banking companies in Scotland. Corn is, upon most
occasions, fully as cheap in England as in France, though there is a
great deal of paper money in England, and scarce any in France. In 1751
and 1752, when Mr Hume published his Political Discourses, and soon
after the great multiplication of paper money in Scotland, there was a
very sensible rise in the price of provisions, owing, probably, to the
badness of the seasons, and not to the multiplication of paper money.

It would be otherwise, indeed, with a paper money, consisting in
promissory notes, of which the immediate payment depended, in any
respect, either upon the good will of those who issued them, or upon a
condition which the holder of the notes might not always have it in his
power to fulfil, or of which the payment was not exigible till after a
certain number of years, and which, in the mean time, bore no interest.
Such a paper money would, no doubt, fall more or less below the value of
gold and silver, according as the difficulty or uncertainty of obtaining
immediate payment was supposed to be greater or less, or according to
the greater or less distance of time at which payment was exigible.

Some years ago the different banking companies of Scotland were in
the practice of inserting into their bank notes, what they called an
optional clause; by which they promised payment to the bearer, either
as soon as the note should be presented, or, in the option of the
directors, six months after such presentment, together with the legal
interest for the said six months. The directors of some of those
banks sometimes took advantage of this optional clause, and sometimes
threatened those who demanded gold and silver in exchange for a
considerable number of their notes, that they would take advantage of
it, unless such demanders would content themselves with a part of
what they demanded. The promissory notes of those banking companies
constituted, at that time, the far greater part of the currency of
Scotland, which this uncertainty of payment necessarily degraded below
value of gold and silver money. During the continuance of this abuse
(which prevailed chiefly in 1762, 1763, and 1764), while the exchange
between London and Carlisle was at par, that between London and Dumfries
would sometimes be four per cent. against Dumfries, though this town is
not thirty miles distant from Carlisle. But at Carlisle, bills were paid
in gold and silver; whereas at Dumfries they were paid in Scotch bank
notes; and the uncertainty of getting these bank notes exchanged for
gold and silver coin, had thus degraded them four per cent. below the
value of that coin. The same act of parliament which suppressed ten and
five shilling bank notes, suppressed likewise this optional clause,
and thereby restored the exchange between England and Scotland to its
natural rate, or to what the course of trade and remittances might
happen to make it.

In the paper currencies of Yorkshire, the payment of so small a sum as
6d. sometimes depended upon the condition, that the holder of the note
should bring the change of a guinea to the person who issued it; a
condition which the holders of such notes might frequently find it very
difficult to fulfil, and which must have degraded this currency below
the value of gold and silver money. An act of parliament, accordingly,
declared all such clauses unlawful, and suppressed, in the same manner
as in Scotland, all promissory notes, payable to the bearer, under 20s.
value.

The paper currencies of North America consisted, not in bank notes
payable to the bearer on demand, but in a government paper, of which
the payment was not exigible till several years after it was issued; and
though the colony governments paid no interest to the holders of this
paper, they declared it to be, and in fact rendered it, a legal tender
of payment for the full value for which it was issued. But allowing the
colony security to be perfectly good, £100, payable fifteen years hence,
for example, in a country where interest is at six per cent., is worth
little more than £40 ready money. To oblige a creditor, therefore, to
accept of this as full payment for a debt of £100, actually paid down
in ready money, was an act of such violent injustice, as has scarce,
perhaps, been attempted by the government of any other country which
pretended to be free. It bears the evident marks of having originally
been, what the honest and downright Doctor Douglas assures us it was, a
scheme of fraudulent debtors to cheat their creditors. The government
of Pennsylvania, indeed, pretended, upon their first emission of paper
money, in 1722, to render their paper of equal value with gold and
silver, by enacting penalties against all those who made any difference
in the price of their goods when they sold them for a colony paper,
and when they sold them for gold and silver, a regulation equally
tyrannical, but much less, effectual, than that which it was meant
to support. A positive law may render a shilling a legal tender for a
guinea, because it may direct the courts of justice to discharge the
debtor who has made that tender; but no positive law can oblige a person
who sells goods, and who is at liberty to sell or not to sell as he
pleases, to accept of a shilling as equivalent to a guinea in the price
of them. Notwithstanding any regulation of this kind, it appeared,
by the course of exchange with Great Britain, that £100 sterling was
occasionally considered as equivalent, in some of the colonies, to £130,
and in others to so great a sum as £1100 currency; this difference in
the value arising from the difference in the quantity of paper emitted
in the different colonies, and in the distance and probability of the
term of its final discharge and redemption.

No law, therefore, could be more equitable than the act of parliament,
so unjustly complained of in the colonies, which declared, that no paper
currency to be emitted there in time coming, should be a legal tender of
payment.

Pennsylvania was always more moderate in its emissions of paper money
than any other of our colonies. Its paper currency, accordingly, is
said never to have sunk below the value of the gold and silver which
was current in the colony before the first emission of its paper money.
Before that emission, the colony had raised the denomination of its
coin, and had, by act of assembly, ordered 5s. sterling to pass in the
colonies for 6s:3d., and afterwards for 6s:8d. A pound, colony currency,
therefore, even when that currency was gold and silver, was more than
thirty per cent. below the value of £1 sterling; and when that currency
was turned into paper, it was seldom much more than thirty per cent.
below that value. The pretence for raising the denomination of the
coin was to prevent the exportation of gold and silver, by making equal
quantities of those metals pass for greater sums in the colony than they
did in the mother country. It was found, however, that the price of all
goods from the mother country rose exactly in proportion as they raised
the denomination of their coin, so that their gold and silver were
exported as fast as ever.

The paper of each colony being received in the payment of the provincial
taxes, for the full value for which it had been issued, it necessarily
derived from this use some additional value, over and above what it
would have had, from the real or supposed distance of the term of its
final discharge and redemption. This additional value was greater or
less, according as the quantity of paper issued was more or less above
what could be employed in the payment of the taxes of the particular
colony which issued it. It was in all the colonies very much above what
could be employed in this manner.

A prince, who should enact that a certain proportion of his taxes should
be paid in a paper money of a certain kind, might thereby give a certain
value to this paper money, even though the term of its final discharge
and redemption should depend altogether upon the will of the prince. If
the bank which issued this paper was careful to keep the quantity of it
always somewhat below what could easily be employed in this manner, the
demand for it might be such as to make it even bear a premium, or sell
for somewhat more in the market than the quantity of gold or silver
currency for which it was issued. Some people account in this manner for
what is called the agio of the bank of Amsterdam, or for the superiority
of bank money over current money, though this bank money, as they
pretend, cannot be taken out of the bank at the will of the owner. The
greater part of foreign bills of exchange must be paid in bank money,
that is, by a transfer in the books of the bank; and the directors of
the bank, they allege, are careful to keep the whole quantity of bank
money always below what this use occasions a demand for. It is upon this
account, they say, the bank money sells for a premium, or bears an agio
of four or five per cent. above the same nominal sum of the gold and
silver currency of the country. This account of the bank of Amsterdam,
however, it will appear hereafter, is in a great measure chimerical.

A paper currency which falls below the value of gold and silver coin,
does not thereby sink the value of those metals, or occasion equal
quantities of them to exchange for a smaller quantity of goods of any
other kind. The proportion between the value of gold and silver and that
of goods of any other kind, depends in all cases, not upon the nature
and quantity of any particular paper money, which may be current in any
particular country, but upon the richness or poverty of the mines,
which happen at any particular time to supply the great market of the
commercial world with those metals. It 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 in order to bring thither a certain quantity of any other sort
of goods.

If bankers are restrained from issuing any circulating bank notes, or
notes payable to the bearer, for less than a certain sum; and if they
are subjected to the obligation of an immediate and unconditional
payment of such bank notes as soon as presented, their trade may, with
safety to the public, be rendered in all other respects perfectly free.
The late multiplication of banking companies in both parts of the united
kingdom, an event by which many people have been much alarmed, instead
of diminishing, increases the security of the public. It obliges all
of them to be more circumspect in their conduct, and, by not extending
their currency beyond its due proportion to their cash, to guard
themselves against those malicious runs, which the rivalship of so
many competitors is always ready to bring upon them. It restrains the
circulation of each particular company within a narrower circle, and
reduces their circulating notes to a smaller number. By dividing the
whole circulation into a greater number of parts, the failure of any
one company, an accident which, in the course of things, must
sometimes happen, becomes of less consequence to the public. This
free competition, too, obliges all bankers to be more liberal in their
dealings with their customers, lest their rivals should carry them
away. In general, if any branch of trade, or any division of labour, be
advantageous to the public, the freer and more general the competition,
it will always be the more so.




CHAPTER III. OF THE ACCUMULATION OF CAPITAL, OR OF PRODUCTIVE AND
UNPRODUCTIVE LABOUR.

There is one sort of labour which adds to the value of the subject upon
which it is bestowed; there is another which has no such effect. The
former as it produces a value, may be called productive, the latter,
unproductive labour. {Some French authors of great learning and
ingenuity have used those words in a different sense. In the last
chapter of the fourth book, I shall endeavour to shew that their sense
is an improper one.} Thus the labour of a manufacturer adds generally
to the value of the materials which he works upon, that of his own
maintenance, and of his master's profit. The labour of a menial servant,
on the contrary, adds to the value of nothing. Though the manufacturer
has his wages advanced to him by his master, he in reality costs him
no expense, the value of those wages being generally restored, together
with a profit, in the improved value of the subject upon which his
labour is bestowed. But the maintenance of a menial servant never is
restored. A man grows rich by employing a multitude of manufacturers; he
grows poor by maintaining a multitude or menial servants. The labour of
the latter, however, has its value, and deserves its reward as well
as that of the former. But the labour of the manufacturer fixes and
realizes itself in some particular subject or vendible commodity, which
lasts for some time at least after that labour is past. It is, as
it were, a certain quantity of labour stocked and stored up, to be
employed, if necessary, upon some other occasion. That subject, or,
what is the same thing, the price of that subject, can afterwards, if
necessary, put into motion a quantity of labour equal to that which
had originally produced it. The labour of the menial servant, on the
contrary, does not fix or realize itself in any particular subject or
vendible commodity. His services generally perish in the very instant of
their performance, and seldom leave any trace of value behind them, for
which an equal quantity of service could afterwards be procured.

The labour of some of the most respectable orders in the society is,
like that of menial servants, unproductive of any value, and does not
fix or realize itself in any permanent subject, or vendible commodity,
which endures after that labour is past, and for which an equal quantity
of labour could afterwards be procured. The sovereign, for example, with
all the officers both of justice and war who serve under him, the whole
army and navy, are unproductive labourers. They are the servants of
the public, and are maintained by a part of the annual produce of the
industry of other people. Their service, how honourable, how useful, or
how necessary soever, produces nothing for which an equal quantity
of service can afterwards be procured. The protection, security, and
defence, of the commonwealth, the effect of their labour this year,
will not purchase its protection, security, and defence, for the year
to come. In the same class must be ranked, some both of the gravest and
most important, and some of the most frivolous professions; churchmen,
lawyers, physicians, men of letters of all kinds; players, buffoons,
musicians, opera-singers, opera-dancers, etc. The labour of the meanest
of these has a certain value, regulated by the very same principles
which regulate that of every other sort of labour; and that of the
noblest and most useful, produces nothing which could afterwards
purchase or procure an equal quantity of labour. Like the declamation of
the actor, the harangue of the orator, or the tune of the musician, the
work of all of them perishes in the very instant of its production.

Both productive and unproductive labourers, and those who do not labour
at all, are all equally maintained by the annual produce of the land
and labour of the country. This produce, how great soever, can never
be infinite, but must have certain limits. According, therefore, as
a smaller or greater proportion of it is in any one year employed in
maintaining unproductive hands, the more in the one case, and the
less in the other, will remain for the productive, and the next year's
produce will be greater or smaller accordingly; the whole annual
produce, if we except the spontaneous productions of the earth, being
the effect of productive labour.

Though the whole annual produce of the land and labour of every country
is no doubt ultimately destined for supplying the consumption of its
inhabitants, and for procuring a revenue to them; yet when it first
comes either from the ground, or from the hands of the productive
labourers, it naturally divides itself into two parts. One of them, and
frequently the largest, is, in the first place, destined for replacing
a capital, or for renewing the provisions, materials, and finished work,
which had been withdrawn from a capital; the other for constituting a
revenue either to the owner of this capital, as the profit of his stock,
or to some other person, as the rent of his land. Thus, of the produce
of land, one part replaces the capital of the farmer; the other pays his
profit and the rent of the landlord; and thus constitutes a revenue both
to the owner of this capital, as the profits of his stock, and to
some other person as the rent of his land. Of the produce of a great
manufactory, in the same manner, one part, and that always the largest,
replaces the capital of the undertaker of the work; the other pays his
profit, and thus constitutes a revenue to the owner of this capital.

That part of the annual produce of the land and labour of any country
which replaces a capital, never is immediately employed to maintain any
but productive hands. It pays the wages of productive labour only. That
which is immediately destined for constituting a revenue, either as
profit or as rent, may maintain indifferently either productive or
unproductive hands.

Whatever part of his stock a man employs as a capital, he always expects
it to be replaced to him with a profit. He employs it, therefore,
in maintaining productive hands only; and after having served in the
function of a capital to him, it constitutes a revenue to them. Whenever
he employs any part of it in maintaining unproductive hands of any kind,
that part is from that moment withdrawn from his capital, and placed in
his stock reserved for immediate consumption.

Unproductive labourers, and those who do not labour at all, are all
maintained by revenue; either, first, by that part of the annual
produce which is originally destined for constituting a revenue to some
particular persons, either as the rent of land, or as the profits of
stock; or, secondly, by that part which, though originally destined for
replacing a capital, and for maintaining productive labourers only, yet
when it comes into their hands, whatever part of it is over and
above their necessary subsistence, may be employed in maintaining
indifferently either productive or unproductive hands. Thus, not only
the great landlord or the rich merchant, but even the common workman,
if his wages are considerable, may maintain a menial servant; or he may
sometimes go to a play or a puppet-show, and so contribute his share
towards maintaining one set of unproductive labourers; or he may pay
some taxes, and thus help to maintain another set, more honourable and
useful, indeed, but equally unproductive. No part of the annual produce,
however, which had been originally destined to replace a capital, is
ever directed towards maintaining unproductive hands, till after it has
put into motion its full complement of productive labour, or all that it
could put into motion in the way in which it was employed. The workman
must have earned his wages by work done, before he can employ any part
of them in this manner. That part, too, is generally but a small one. It
is his spare revenue only, of which productive labourers have seldom
a great deal. They generally have some, however; and in the payment of
taxes, the greatness of their number may compensate, in some measure,
the smallness of their contribution. The rent of land and the profits
of stock are everywhere, therefore, the principal sources from which
unproductive hands derive their subsistence. These are the two sorts
of revenue of which the owners have generally most to spare. They might
both maintain indifferently, either productive or unproductive hands.
They seem, however, to have some predilection for the latter. The
expense of a great lord feeds generally more idle than industrious
people. The rich merchant, though with his capital he maintains
industrious people only, yet by his expense, that is, by the employment
of his revenue, he feeds commonly the very same sort as the great lord.

The proportion, therefore, between the productive and unproductive
hands, depends very much in every country upon the proportion between
that part of the annual produce, which, as soon as it comes either from
the ground, or from the hands of the productive labourers, is destined
for replacing a capital, and that which is destined for constituting a
revenue, either as rent or as profit. This proportion is very different
in rich from what it is in poor countries.

Thus, at present, in the opulent countries of Europe, a very large,
frequently the largest, portion of the produce of the land, is destined
for replacing the capital of the rich and independent farmer; the other
for paying his profits, and the rent of the landlord. But anciently,
during the prevalency of the feudal government, a very small portion
of the produce was sufficient to replace the capital employed in
cultivation. It consisted commonly in a few wretched cattle, maintained
altogether by the spontaneous produce of uncultivated land, and which
might, therefore, be considered as a part of that spontaneous produce.
It generally, too, belonged to the landlord, and was by him advanced to
the occupiers of the land. All the rest of the produce properly belonged
to him too, either as rent for his land, or as profit upon this paltry
capital. The occupiers of land were generally bond-men, whose persons
and effects were equally his property. Those who were not bond-men were
tenants at will; and though the rent which they paid was often nominally
little more than a quit-rent, it really amounted to the whole produce
of the land. Their lord could at all times command their labour in
peace and their service in war. Though they lived at a distance from his
house, they were equally dependent upon him as his retainers who lived
in it. But the whole produce of the land undoubtedly belongs to him, who
can dispose of the labour and service of all those whom it maintains. In
the present state of Europe, the share of the landlord seldom exceeds a
third, sometimes not a fourth part of the whole produce of the land.
The rent of land, however, in all the improved parts of the country, has
been tripled and quadrupled since those ancient times; and this third
or fourth part of the annual produce is, it seems, three or four times
greater than the whole had been before. In the progress of improvement,
rent, though it increases in proportion to the extent, diminishes in
proportion to the produce of the land.

In the opulent countries of Europe, great capitals are at present
employed in trade and manufactures. In the ancient state, the little
trade that was stirring, and the few homely and coarse manufactures that
were carried on, required but very small capitals. These, however, must
have yielded very large profits. The rate of interest was nowhere less
than ten per cent. and their profits must have been sufficient to afford
this great interest. At present, the rate of interest, in the improved
parts of Europe, is nowhere higher than six per cent.; and in some of
the most improved, it is so low as four, three, and two per cent. Though
that part of the revenue of the inhabitants which is derived from the
profits of stock, is always much greater in rich than in poor countries,
it is because the stock is much greater; in proportion to the stock, the
profits are generally much less.

That part of the annual produce, therefore, which, as soon as it comes
either from the ground, or from the hands of the productive labourers,
is destined for replacing a capital, is not only much greater in rich
than in poor countries, but bears a much greater proportion to that
which is immediately destined for constituting a revenue either as
rent or as profit. The funds destined for the maintenance of productive
labour are not only much greater in the former than in the latter,
but bear a much greater proportion to those which, though they may
be employed to maintain either productive or unproductive hands, have
generally a predilection for the latter.

The proportion between those different funds necessarily determines in
every country the general character of the inhabitants as to industry or
idleness. We are more industrious than our forefathers, because, in the
present times, the funds destined for the maintenance of industry are
much greater in proportion to those which are likely to be employed in
the maintenance of idleness, than they were two or three centuries
ago. Our ancestors were idle for want of a sufficient encouragement to
industry. It is better, says the proverb, to play for nothing, than
to work for nothing. In mercantile and manufacturing towns, where the
inferior ranks of people are chiefly maintained by the employment of
capital, they are in general industrious, sober, and thriving; as
in many English, and in most Dutch towns. In those towns which are
principally supported by the constant or occasional residence of a
court, and in which the inferior ranks of people are chiefly maintained
by the spending of revenue, they are in general idle, dissolute, and
poor; as at Rome, Versailles, Compeigne, and Fontainbleau. If you except
Rouen and Bourdeaux, there is little trade or industry in any of the
parliament towns of France; and the inferior ranks of people, being
chiefly maintained by the expense of the members of the courts of
justice, and of those who come to plead before them, are in general idle
and poor. The great trade of Rouen and Bourdeaux seems to be altogether
the effect of their situation. Rouen is necessarily the entrepot of
almost all the goods which are brought either from foreign countries, or
from the maritime provinces of France, for the consumption of the great
city of Paris. Bourdeaux is, in the same manner, the entrepot of the
wines which grow upon the banks of the Garronne, and of the rivers which
run into it, one of the richest wine countries in the world, and which
seems to produce the wine fittest for exportation, or best suited to
the taste of foreign nations. Such advantageous situations necessarily
attract a great capital by the great employment which they afford it;
and the employment of this capital is the cause of the industry of those
two cities. In the other parliament towns of France, very little more
capital seems to be employed than what is necessary for supplying their
own consumption; that is, little more than the smallest capital which
can be employed in them. The same thing may be said of Paris, Madrid,
and Vienna. Of those three cities, Paris is by far the most industrious,
but Paris itself is the principal market of all the manufactures
established at Paris, and its own consumption is the principal object of
all the trade which it carries on. London, Lisbon, and Copenhagen, are,
perhaps, the only three cities in Europe, which are both the constant
residence of a court, and can at the same time be considered as trading
cities, or as cities which trade not only for their own consumption, but
for that of other cities and countries. The situation of all the three
is extremely advantageous, and naturally fits them to be the entrepots
of a great part of the goods destined for the consumption of distant
places. In a city where a great revenue is spent, to employ with
advantage a capital for any other purpose than for supplying the
consumption of that city, is probably more difficult than in one in
which the inferior ranks of people have no other maintenance but what
they derive from the employment of such a capital. The idleness of the
greater part of the people who are maintained by the expense of
revenue, corrupts, it is probable, the industry of those who ought to
be maintained by the employment of capital, and renders it less
advantageous to employ a capital there than in other places. There was
little trade or industry in Edinburgh before the Union. When the Scotch
parliament was no longer to be assembled in it, when it ceased to be the
necessary residence of the principal nobility and gentry of Scotland, it
became a city of some trade and industry. It still continues, however,
to be the residence of the principal courts of justice in Scotland,
of the boards of customs and excise, etc. A considerable revenue,
therefore, still continues to be spent in it. In trade and industry,
it is much inferior to Glasgow, of which the inhabitants are chiefly
maintained by the employment of capital. The inhabitants of a large
village, it has sometimes been observed, after having made considerable
progress in manufactures, have become idle and poor, in consequence of a
great lord's having taken up his residence in their neighbourhood.

The proportion between capital and revenue, therefore, seems everywhere
to regulate the proportion between industry and idleness Wherever
capital predominates, industry prevails; wherever revenue, idleness.
Every increase or diminution of capital, therefore, naturally tends
to increase or diminish the real quantity of industry, the number of
productive hands, and consequently the exchangeable value of the annual
produce of the land and labour of the country, the real wealth and
revenue of all its inhabitants.

Capitals are increased by parsimony, and diminished by prodigality and
misconduct.

Whatever a person saves from his revenue he adds to his capital,
and either employs it himself in maintaining an additional number of
productive hands, or enables some other person to do so, by lending
it to him for an interest, that is, for a share of the profits. As the
capital of an individual can be increased only by what he saves from his
annual revenue or his annual gains, so the capital of a society, which
is the same with that of all the individuals who compose it, can be
increased only in the same manner.

Parsimony, and not industry, is the immediate cause of the increase
of capital. Industry, indeed, provides the subject which parsimony
accumulates; but whatever industry might acquire, if parsimony did not
save and store up, the capital would never be the greater.

Parsimony, by increasing the fund which is destined for the maintenance
of productive hands, tends to increase the number of those hands whose
labour adds to the value of the subject upon winch it is bestowed.
It tends, therefore, to increase the exchangeable value of the annual
produce of the land and labour of the country. It puts into motion an
additional quantity of industry, which gives an additional value to the
annual produce.

What is annually saved, is as regularly consumed as what is annually
spent, and nearly in the same time too: but it is consumed by a
different set of people. That portion of his revenue which a rich man
annually spends, is, in most cases, consumed by idle guests and menial
servants, who leave nothing behind them in return for their consumption.
That portion which he annually saves, as, for the sake of the profit,
it is immediately employed as a capital, is consumed in the same manner,
and nearly in the same time too, but by a different set of people: by
labourers, manufacturers, and artificers, who reproduce, with a profit,
the value of their annual consumption. His revenue, we shall suppose,
is paid him in money. Had he spent the whole, the food, clothing,
and lodging, which the whole could have purchased, would have been
distributed among the former set of people. By saving a part of it,
as that part is, for the sake of the profit, immediately employed as a
capital, either by himself or by some other person, the food, clothing,
and lodging, which may be purchased with it, are necessarily reserved
for the latter. The consumption is the same, but the consumers are
different.

By what a frugal man annually saves, he not only affords maintenance to
an additional number of productive hands, for that of the ensuing year,
but like the founder of a public work-house he establishes, as it were,
a perpetual fund for the maintenance of an equal number in all times to
come. The perpetual allotment and destination of this fund, indeed, is
not always guarded by any positive law, by any trust-right or deed of
mortmain. It is always guarded, however, by a very powerful principle,
the plain and evident interest of every individual to whom any share of
it shall ever belong. No part of it can ever afterwards be employed to
maintain any but productive hands, without an evident loss to the person
who thus perverts it from its proper destination.

The prodigal perverts it in this manner: By not confining his expense
within his income, he encroaches upon his capital. Like him who perverts
the revenues of some pious foundation to profane purposes, he pays
the wages of idleness with those funds which the frugality of his
forefathers had, as it were, consecrated to the maintenance of industry.
By diminishing the funds destined for the employment of productive
labour, he necessarily diminishes, so far as it depends upon him, the
quantity of that labour which adds a value to the subject upon which it
is bestowed, and, consequently, the value of the annual produce of the
land and labour of the whole country, the real wealth and revenue of
its inhabitants. If the prodigality of some were not compensated by the
frugality of others, the conduct of every prodigal, by feeding the
idle with the bread of the industrious, would tend not only to beggar
himself, but to impoverish his country.

Though the expense of the prodigal should be altogether in home made,
and no part of it in foreign commodities, its effect upon the productive
funds of the society would still be the same. Every year there would
still be a certain quantity of food and clothing, which ought to have
maintained productive, employed in maintaining unproductive hands. Every
year, therefore, there would still be some diminution in what would
otherwise have been the value of the annual produce of the land and
labour of the country.

This expense, it may be said, indeed, not being in foreign goods, and
not occasioning any exportation of gold and silver, the same quantity of
money would remain in the country as before. But if the quantity of
food and clothing which were thus consumed by unproductive, had been
distributed among productive hands, they would have reproduced, together
with a profit, the full value of their consumption. The same quantity
of money would, in this case, equally have remained in the country,
and there would, besides, have been a reproduction of an equal value of
consumable goods. There would have been two values instead of one.

The same quantity of money, besides, can not long remain in any country
in which the value of the annual produce diminishes. The sole use of
money is to circulate consumable goods. By means of it, provisions,
materials, and finished work, are bought and sold, and distributed to
their proper consumers. The quantity of money, therefore, which can be
annually employed in any country, must be determined by the value of
the consumable goods annually circulated within it. These must consist,
either in the immediate produce of the land and labour of the country
itself, or in something which had been purchased with some part of that
produce. Their value, therefore, must diminish as the value of that
produce diminishes, and along with it the quantity of money which can
be employed in circulating them. But the money which, by this annual
diminution of produce, is annually thrown out of domestic circulation,
will not be allowed to lie idle. The interest of whoever possesses it
requires that it should be employed; but having no employment at home,
it will, in spite of all laws and prohibitions, be sent abroad, and
employed in purchasing consumable goods, which may be of some use at
home. Its annual exportation will, in this manner, continue for some
time to add something to the annual consumption of the country beyond
the value of its own annual produce. What in the days of its prosperity
had been saved from that annual produce, and employed in purchasing
gold and silver, will contribute, for some little time, to support its
consumption in adversity. The exportation of gold and silver is, in this
case, not the cause, but the effect of its declension, and may even, for
some little time, alleviate the misery of that declension.

The quantity of money, on the contrary, must in every country naturally
increase as the value of the annual produce increases. The value of the
consumable goods annually circulated within the society being greater,
will require a greater quantity of money to circulate them. A part
of the increased produce, therefore, will naturally be employed in
purchasing, wherever it is to be had, the additional quantity of gold
and silver necessary for circulating the rest. The increase of those
metals will, in this case, be the effect, not the cause, of the public
prosperity. Gold and silver are purchased everywhere in the same manner.
The food, clothing, and lodging, the revenue and maintenance, of all
those whose labour or stock is employed in bringing them from the mine
to the market, is the price paid for them in Peru as well as in England.
The country which has this price to pay, will never belong without the
quantity of those metals which it has occasion for; and no country will
ever long retain a quantity which it has no occasion for.

Whatever, therefore, we may imagine the real wealth and revenue of a
country to consist in, whether in the value of the annual produce of its
land and labour, as plain reason seems to dictate, or in the quantity
of the precious metals which circulate within it, as vulgar prejudices
suppose; in either view of the matter, every prodigal appears to be a
public enemy, and every frugal man a public benefactor.

The effects of misconduct are often the same as those of prodigality.
Every injudicious and unsuccessful project in agriculture, mines,
fisheries, trade, or manufactures, tends in the same manner to diminish
the funds destined for the maintenance of productive labour. In every
such project, though the capital is consumed by productive hands only,
yet as, by the injudicious manner in which they are employed, they do
not reproduce the full value of their consumption, there must always be
some diminution in what would otherwise have been the productive funds
of the society.

It can seldom happen, indeed, that the circumstances of a great
nation can be much affected either by the prodigality or misconduct of
individuals; the profusion or imprudence of some being always more than
compensated by the frugality and good conduct of others.

With regard to profusion, the principle which prompts to expense is the
passion for present enjoyment; which, though sometimes violent and very
difficult to be restrained, is in general only momentary and occasional.
But the principle which prompts to save, is the desire of bettering
our condition; a desire which, though generally calm and dispassionate,
comes with us from the womb, and never leaves us till we go into the
grave. In the whole interval which separates those two moments, there is
scarce, perhaps, a single instance, in which any man is so perfectly and
completely satisfied with his situation, as to be without any wish of
alteration or improvement of any kind. An augmentation of fortune is the
means by which the greater part of men propose and wish to better their
condition. It is the means the most vulgar and the most obvious; and the
most likely way of augmenting their fortune, is to save and accumulate
some part of what they acquire, either regularly and annually, or upon
some extraordinary occasion. Though the principle of expense, therefore,
prevails in almost all men upon some occasions, and in some men upon
almost all occasions; yet in the greater part of men, taking the whole
course of their life at an average, the principle of frugality seems not
only to predominate, but to predominate very greatly.

With regard to misconduct, the number of prudent and successful
undertakings is everywhere much greater than that of injudicious
and unsuccessful ones. After all our complaints of the frequency of
bankruptcies, the unhappy men who fall into this misfortune, make but
a very small part of the whole number engaged in trade, and all other
sorts of business; not much more, perhaps, than one in a thousand.
Bankruptcy is, perhaps, the greatest and most humiliating calamity
which can befal an innocent man. The greater part of men, therefore, are
sufficiently careful to avoid it. Some, indeed, do not avoid it; as some
do not avoid the gallows.

Great nations are never impoverished by private, though they sometimes
are by public prodigality and misconduct. The whole, or almost the
whole public revenue is, in most countries, employed in maintaining
unproductive hands. Such are the people who compose a numerous and
splendid court, a great ecclesiastical establishment, great fleets and
armies, who in time of peace produce nothing, and in time of war acquire
nothing which can compensate the expense of maintaining them, even while
the war lasts. Such people, as they themselves produce nothing, are
all maintained by the produce of other men's labour. When multiplied,
therefore, to an unnecessary number, they may in a particular year
consume so great a share of this produce, as not to leave a sufficiency
for maintaining the productive labourers, who should reproduce it next
year. The next year's produce, therefore, will be less than that of the
foregoing; and if the same disorder should continue, that of the third
year will be still less than that of the second. Those unproductive
hands who should be maintained by a part only of the spare revenue of
the people, may consume so great a share of their whole revenue, and
thereby oblige so great a number to encroach upon their capitals, upon
the funds destined for the maintenance of productive labour, that
all the frugality and good conduct of individuals may not be able to
compensate the waste and degradation of produce occasioned by this
violent and forced encroachment.

This frugality and good conduct, however, is, upon most occasions, it
appears from experience, sufficient to compensate, not only the private
prodigality and misconduct of individuals, but the public extravagance
of government. The uniform, constant, and uninterrupted effort of
every man to better his condition, the principle from which public
and national, as well as private opulence is originally derived, is
frequently powerful enough to maintain the natural progress of things
towards improvement, in spite both of the extravagance of government,
and of the greatest errors of administration. Like the unknown principle
of animal life, it frequently restores health and vigour to the
constitution, in spite not only of the disease, but of the absurd
prescriptions of the doctor.

The annual produce of the land and labour of any nation can be increased
in its value by no other means, but by increasing either the number of
its productive labourers, or the productive powers of those labourers
who had before been employed. The number of its productive labourers,
it is evident, can never be much increased, but in consequence of an
increase of capital, or of the funds destined for maintaining them. The
productive powers of the same number of labourers cannot be increased,
but in consequence either of some addition and improvement to those
machines and instruments which facilitate and abridge labour, or of
more proper division and distribution of employment. In either case,
an additional capital is almost always required. It is by means of an
additional capital only, that the undertaker of any work can either
provide his workmen with better machinery, or make a more proper
distribution of employment among them. When the work to be done consists
of a number of parts, to keep every man constantly employed in one way,
requires a much greater capital than where every man is occasionally
employed in every different part of the work. When we compare,
therefore, the state of a nation at two different periods, and find that
the annual produce of its land and labour is evidently greater at the
latter than at the former, that its lands are better cultivated, its
manufactures more numerous and more flourishing, and its trade more
extensive; we may be assured that its capital must have increased during
the interval between those two periods, and that more must have been
added to it by the good conduct of some, than had been taken from
it either by the private misconduct of others, or by the public
extravagance of government. But we shall find this to have been the case
of almost all nations, in all tolerably quiet and peaceable times,
even of those who have not enjoyed the most prudent and parsimonious
governments. To form a right judgment of it, indeed, we must compare the
state of the country at periods somewhat distant from one another.
The progress is frequently so gradual, that, at near periods, the
improvement is not only not sensible, but, from the declension either
of certain branches of industry, or of certain districts of the country,
things which sometimes happen, though the country in general is in great
prosperity, there frequently arises a suspicion, that the riches and
industry of the whole are decaying.

The annual produce of the land and labour of England, for example, is
certainly much greater than it was a little more than a century ago, at
the restoration of Charles II. Though at present few people, I believe,
doubt of this, yet during this period five years have seldom passed
away, in which some book or pamphlet has not been published, written,
too, with such abilities as to gain some authority with the public,
and pretending to demonstrate that the wealth of the nation was fast
declining; that the country was depopulated, agriculture neglected,
manufactures decaying, and trade undone. Nor have these publications
been all party pamphlets, the wretched offspring of falsehood and
venality. Many of them have been written by very candid and very
intelligent people, who wrote nothing but what they believed, and for no
other reason but because they believed it.

The annual produce of the land and labour of England, again, was
certainly much greater at the Restoration than we can suppose it to have
been about a hundred years before, at the accession of Elizabeth. At
this period, too, we have all reason to believe, the country was much
more advanced in improvement, than it had been about a century before,
towards the close of the dissensions between the houses of York and
Lancaster. Even then it was, probably, in a better condition than it had
been at the Norman conquest: and at the Norman conquest, than during
the confusion of the Saxon heptarchy. Even at this early period, it was
certainly a more improved country than at the invasion of Julius Caesar,
when its inhabitants were nearly in the same state with the savages in
North America.

In each of those periods, however, there was not only much private and
public profusion, many expensive and unnecessary wars, great perversion
of the annual produce from maintaining productive to maintain
unproductive hands; but sometimes, in the confusion of civil discord,
such absolute waste and destruction of stock, as might be supposed, not
only to retard, as it certainly did, the natural accumulation of riches,
but to have left the country, at the end of the period, poorer than at
the beginning. Thus, in the happiest and most fortunate period of them
all, that which has passed since the Restoration, how many disorders
and misfortunes have occurred, which, could they have been foreseen, not
only the impoverishment, but the total ruin of the country would have
been expected from them? The fire and the plague of London, the two
Dutch wars, the disorders of the revolution, the war in Ireland, the
four expensive French wars of 1688, 1701, 1742, and 1756, together with
the two rebellions of 1715 and 1745. In the course of the four French
wars, the nation has contracted more than £145,000,000 of debt, over and
above all the other extraordinary annual expense which they occasioned;
so that the whole cannot be computed at less than £200,000,000. So great
a share of the annual produce of the land and labour of the country,
has, since the Revolution, been employed upon different occasions, in
maintaining an extraordinary number of unproductive hands. But had not
those wars given this particular direction to so large a capital, the
greater part of it would naturally have been employed in maintaining
productive hands, whose labour would have replaced, with a profit, the
whole value of their consumption. The value of the annual produce of the
land and labour of the country would have been considerably increased by
it every year, and every years increase would have augmented still more
that of the following year. More houses would have been built, more
lands would have been improved, and those which had been improved before
would have been better cultivated; more manufactures would have been
established, and those which had been established before would have been
more extended; and to what height the real wealth and revenue of the
country might by this time have been raised, it is not perhaps very easy
even to imagine.

But though the profusion of government must undoubtedly have retarded
the natural progress of England towards wealth and improvement, it has
not been able to stop it. The annual produce of its land and labour
is undoubtedly much greater at present than it was either at the
Restoration or at the Revolution. The capital, therefore, annually
employed in cultivating this land, and in maintaining this labour,
must likewise be much greater. In the midst of all the exactions of
government, this capital has been silently and gradually accumulated
by the private frugality and good conduct of individuals, by their
universal, continual, and uninterrupted effort to better their own
condition. It is this effort, protected by law, and allowed by liberty
to exert itself in the manner that is most advantageous, which has
maintained the progress of England towards opulence and improvement in
almost all former times, and which, it is to be hoped, will do so in all
future times. England, however, as it has never been blessed with a
very parsimonious government, so parsimony has at no time been the
characteristic virtue of its inhabitants. It is the highest impertinence
and presumption, therefore, in kings and ministers to pretend to watch
over the economy of private people, and to restrain their expense,
either by sumptuary laws, or by prohibiting the importation of foreign
luxuries. They are themselves always, and without any exception, the
greatest spendthrifts in the society. Let them look well after their own
expense, and they may safely trust private people with theirs. If their
own extravagance does not ruin the state, that of the subject never
will.

As frugality increases, and prodigality diminishes, the public capital,
so the conduct of those whose expense just equals their revenue, without
either accumulating or encroaching, neither increases nor diminishes it.
Some modes of expense, however, seem to contribute more to the growth of
public opulence than others.

The revenue of an individual may be spent, either in things which
are consumed immediately, and in which one day's expense can neither
alleviate nor support that of another; or it may be spent in things mere
durable, which can therefore be accumulated, and in which every day's
expense may, as he chooses, either alleviate, or support and heighten,
the effect of that of the following day. A man of fortune, for example,
may either spend his revenue in a profuse and sumptuous table, and in
maintaining a great number of menial servants, and a multitude of
dogs and horses; or, contenting himself with a frugal table, and few
attendants, he may lay out the greater part of it in adorning his house
or his country villa, in useful or ornamental buildings, in useful or
ornamental furniture, in collecting books, statues, pictures; or in
things more frivolous, jewels, baubles, ingenious trinkets of different
kinds; or, what is most trifling of all, in amassing a great wardrobe of
fine clothes, like the favourite and minister of a great prince who died
a few years ago. Were two men of equal fortune to spend their revenue,
the one chiefly in the one way, the other in the other, the magnificence
of the person whose expense had been chiefly in durable commodities,
would be continually increasing, every day's expense contributing
something to support and heighten the effect of that of the following
day; that of the other, on the contrary, would be no greater at the end
of the period than at the beginning. The former too would, at the end of
the period, be the richer man of the two. He would have a stock of goods
of some kind or other, which, though it might not be worth all that
it cost, would always be worth something. No trace or vestige of the
expense of the latter would remain, and the effects of ten or twenty
years' profusion would be as completely annihilated as if they had never
existed.

As the one mode of expense is more favourable than the other to the
opulence of an individual, so is it likewise to that of a nation. The
houses, the furniture, the clothing of the rich, in a little time,
become useful to the inferior and middling ranks of people. They are
able to purchase them when their superiors grow weary of them; and the
general accommodation of the whole people is thus gradually improved,
when this mode of expense becomes universal among men of fortune.
In countries which have long been rich, you will frequently find the
inferior ranks of people in possession both of houses and furniture
perfectly good and entire, but of which neither the one could have been
built, nor the other have been made for their use. What was formerly
a seat of the family of Seymour, is now an inn upon the Bath road. The
marriage-bed of James I. of Great Britain, which his queen brought
with her from Denmark, as a present fit for a sovereign to make to
a sovereign, was, a few years ago, the ornament of an alehouse at
Dunfermline. In some ancient cities, which either have been long
stationary, or have gone somewhat to decay, you will sometimes scarce
find a single house which could have been built for its present
inhabitants. If you go into those houses, too, you will frequently find
many excellent, though antiquated pieces of furniture, which are still
very fit for use, and which could as little have been made for them.
Noble palaces, magnificent villas, great collections of books, statues,
pictures, and other curiosities, are frequently both an ornament and an
honour, not only to the neighbourhood, but to the whole country to which
they belong. Versailles is an ornament and an honour to France, Stowe
and Wilton to England. Italy still continues to command some sort of
veneration, by the number of monuments of this kind which it possesses,
though the wealth which produced them has decayed, and though the genius
which planned them seems to be extinguished, perhaps from not having the
same employment.

The expense, too, which is laid out in durable commodities, is
favourable not only to accumulation, but to frugality. If a person
should at any time exceed in it, he can easily reform without exposing
himself to the censure of the public. To reduce very much the number
of his servants, to reform his table from great profusion to great
frugality, to lay down his equipage after he has once set it up, are
changes which cannot escape the observation of his neighbours, and which
are supposed to imply some acknowledgment of preceding bad conduct. Few,
therefore, of those who have once been so unfortunate as to launch
out too far into this sort of expense, have afterwards the courage to
reform, till ruin and bankruptcy oblige them. But if a person has, at
any time, been at too great an expense in building, in furniture, in
books, or pictures, no imprudence can be inferred from his changing
his conduct. These are things in which further expense is frequently
rendered unnecessary by former expense; and when a person stops short,
he appears to do so, not because he has exceeded his fortune, but
because he has satisfied his fancy.

The expense, besides, that is laid out in durable commodities, gives
maintenance, commonly, to a greater number of people than that which is
employed in the most profuse hospitality. Of two or three hundred weight
of provisions, which may sometimes be served up at a great festival, one
half, perhaps, is thrown to the dunghill, and there is always a great
deal wasted and abused. But if the expense of this entertainment had
been employed in setting to work masons, carpenters, upholsterers,
mechanics, etc. a quantity of provisions of equal value would have
been distributed among a still greater number of people, who would
have bought them in pennyworths and pound weights, and not have lost
or thrown away a single ounce of them. In the one way, besides, this
expense maintains productive, in the other unproductive hands. In the
one way, therefore, it increases, in the other it does not increase the
exchangeable value of the annual produce of the land and labour of the
country.

I would not, however, by all this, be understood to mean, that the one
species of expense always betokens a more liberal or generous spirit
than the other. When a man of fortune spends his revenue chiefly in
hospitality, he shares the greater part of it with his friends
and companions; but when he employs it in purchasing such durable
commodities, he often spends the whole upon his own person, and gives
nothing to any body without an equivalent. The latter species of
expense, therefore, especially when directed towards frivolous objects,
the little ornaments of dress and furniture, jewels, trinkets, gew-gaws,
frequently indicates, not only a trifling, but a base and selfish
disposition. All that I mean is, that the one sort of expense, as it
always occasions some accumulation of valuable commodities, as it is
more favourable to private frugality, and, consequently, to the increase
of the public capital, and as it maintains productive rather than
unproductive hands, conduces more than the other to the growth of public
opulence.




CHAPTER IV. OF STOCK LENT AT INTEREST.

The stock which is lent at interest is always considered as a capital by
the lender. He expects that in due time it is to be restored to him, and
that, in the mean time, the borrower is to pay him a certain annual rent
for the use of it. The borrower may use it either as a capital, or as a
stock reserved for immediate consumption. If he uses it as a capital, he
employs it in the maintenance of productive labourers, who reproduce the
value, with a profit. He can, in this case, both restore the capital,
and pay the interest, without alienating or encroaching upon any other
source of revenue. If he uses it as a stock reserved for immediate
consumption, he acts the part of a prodigal, and dissipates, in the
maintenance of the idle, what was destined for the support of the
industrious. He can, in this case, neither restore the capital nor pay
the interest, without either alienating or encroaching upon some other
source of revenue, such as the property or the rent of land.

The stock which is lent at interest is, no doubt, occasionally employed
in both these ways, but in the former much more frequently than in the
latter. The man who borrows in order to spend will soon be ruined, and
he who lends to him will generally have occasion to repent of his folly.
To borrow or to lend for such a purpose, therefore, is, in all cases,
where gross usury is out of the question, contrary to the interest of
both parties; and though it no doubt happens sometimes, that people do
both the one and the other, yet, from the regard that all men have for
their own interest, we may be assured, that it cannot happen so very
frequently as we are sometimes apt to imagine. Ask any rich man of
common prudence, to which of the two sorts of people he has lent
the greater part of his stock, to those who he thinks will employ it
profitably, or to those who will spend it idly, and he will laugh at
you for proposing the question. Even among borrowers, therefore, not the
people in the world most famous for frugality, the number of the frugal
and industrious surpasses considerably that of the prodigal and idle.

The only people to whom stock is commonly lent, without their being
expected to make any very profitable use of it, are country gentlemen,
who borrow upon mortgage. Even they scarce ever borrow merely to spend.
What they borrow, one may say, is commonly spent before they borrow it.
They have generally consumed so great a quantity of goods, advanced
to them upon credit by shop-keepers and tradesmen, that they find it
necessary to borrow at interest, in order to pay the debt. The capital
borrowed replaces the capitals of those shop-keepers and tradesmen which
the country gentlemen could not have replaced from the rents of their
estates. It is not properly borrowed in order to be spent, but in order
to replace a capital which had been spent before.

Almost all loans at interest are made in money, either of paper, or of
gold and silver; but what the borrower really wants, and what the lender
readily supplies him with, is not the money, but the money's worth, or
the goods which it can purchase. If he wants it as a stock for immediate
consumption, it is those goods only which he can place in that stock. If
he wants it as a capital for employing industry, it is from those goods
only that the industrious can be furnished with the tools, materials,
and maintenance necessary for carrying on their work. By means of the
loan, the lender, as it were, assigns to the borrower his right to a
certain portion of the annual produce of the land and labour of the
country, to be employed as the borrower pleases.

The quantity of stock, therefore, or, as it is commonly expressed, of
money, which can be lent at interest in any country, is not regulated
by the value of the money, whether paper or coin, which serves as the
instrument of the different loans made in that country, but by the value
of that part of the annual produce, which, as soon as it comes either
from the ground, or from the hands of the productive labourers, is
destined, not only for replacing a capital, but such a capital as the
owner does not care to be at the trouble of employing himself. As such
capitals are commonly lent out and paid back in money, they constitute
what is called the monied interest. It is distinct, not only from the
landed, but from the trading and manufacturing interests, as in these
last the owners themselves employ their own capitals. Even in the monied
interest, however, the money is, as it were, but the deed of assignment,
which conveys from one hand to another those capitals which the owners
do not care to employ themselves. Those capitals may be greater, in
almost any proportion, than the amount of the money which serves as the
instrument of their conveyance; the same pieces of money successively
serving for many different loans, as well as for many different
purchases. A, for example, lends to W £1000, with which W immediately
purchases of B £1000 worth of goods. B having no occasion for the money
himself, lends the identical pieces to X, with which X immediately
purchases of C another £1000 worth of goods. C, in the same manner, and
for the same reason, lends them to Y, who again purchases goods with
them of D. In this manner, the same pieces, either of coin or of paper,
may, in the course of a few days, serve as the Instrument of three
different loans, and of three different purchases, each of which is, in
value, equal to the whole amount of those pieces. What the three monied
men, A, B, and C, assigned to the three borrowers, W, X, and Y, is the
power of making those purchases. In this power consist both the value
and the use of the loans. The stock lent by the three monied men is
equal to the value of the goods which can be purchased with it, and is
three times greater than that of the money with which the purchases are
made. Those loans, however, may be all perfectly well secured, the goods
purchased by the different debtors being so employed as, in due time,
to bring back, with a profit, an equal value either of coin or of paper.
And as the same pieces of money can thus serve as the instrument of
different loans to three, or, for the same reason, to thirty times their
value, so they may likewise successively serve as the instrument of
repayment.

A capital lent at interest may, in this manner, be considered as an
assignment, from the lender to the borrower, of a certain considerable
portion of the annual produce, upon condition that the burrower in
return shall, during the continuance of the loan, annually assign to the
lender a small portion, called the interest; and, at the end of it,
a portion equally considerable with that which had originally been
assigned to him, called the repayment. Though money, either coin or
paper, serves generally as the deed of assignment, both to the smaller
and to the more considerable portion, it is itself altogether different
from what is assigned by it.

In proportion as that share of the annual produce which, as soon as
it comes either from the ground, or from the hands of the productive
labourers, is destined for replacing a capital, increases in any
country, what is called the monied interest naturally increases with it.
The increase of those particular capitals from which the owners wish
to derive a revenue, without being at the trouble of employing them
themselves, naturally accompanies the general increase of capitals; or,
in other words, as stock increases, the quantity of stock to be lent at
interest grows gradually greater and greater.

As the quantity of stock to be lent at interest increases, the interest,
or the price which must be paid for the use of that stock, necessarily
diminishes, not only from those general causes which make the market
price of things commonly diminish as their quantity increases, but from
other causes which are peculiar to this particular case. As capitals
increase in any country, the profits which can be made by employing them
necessarily diminish. It becomes gradually more and more difficult
to find within the country a profitable method of employing any new
capital. There arises, in consequence, a competition between different
capitals, the owner of one endeavouring to get possession of that
employment which is occupied by another; but, upon most occasions, he
can hope to justle that other out of this employment by no other means
but by dealing upon more reasonable terms. He must not only sell what
he deals in somewhat cheaper, but, in order to get it to sell, he must
sometimes, too, buy it dearer. The demand for productive labour, by the
increase of the funds which are destined for maintaining it, grows
every day greater and greater. Labourers easily find employment; but the
owners of capitals find it difficult to get labourers to employ. Their
competition raises the wages of labour, and sinks the profits of stock.
But when the profits which can be made by the use of a capital are in
this manner diminished, as it were, at both ends, the price which can be
paid for the use of it, that is, the rate of interest, must necessarily
be diminished with them.

Mr Locke, Mr Lawe, and Mr Montesquieu, as well as many other writers,
seem to have imagined that the increase of the quantity of gold and
silver, in consequence of the discovery of the Spanish West Indies,
was the real cause of the lowering of the rate of interest through the
greater part of Europe. Those metals, they say, having become of less
value themselves, the use of any particular portion of them necessarily
became of less value too, and, consequently, the price which could be
paid for it. This notion, which at first sight seems so plausible, has
been so fully exposed by Mr Hume, that it is, perhaps, unnecessary
to say any thing more about it. The following very short and plain
argument, however, may serve to explain more distinctly the fallacy
which seems to have misled those gentlemen.

Before the discovery of the Spanish West Indies, ten per cent. seems
to have been the common rate of interest through the greater part of
Europe. It has since that time, in different countries, sunk to six,
five, four, and three per cent. Let us suppose, that in every particular
country the value of silver has sunk precisely in the same proportion
as the rate of interest; and that in those countries, for example, where
interest has been reduced from ten to five per cent. the same quantity
of silver can now purchase just half the quantity of goods which it
could have purchased before. This supposition will not, I believe, be
found anywhere agreeable to the truth; but it is the most favourable
to the opinion which we are going to examine; and, even upon this
supposition, it is utterly impossible that the lowering of the value of
silver could have the smallest tendency to lower the rate of interest.
If £100 are in those countries now of no more value than £50 were then,
£10 must now be of no more value than £5 were then. Whatever were the
causes which lowered the value of the capital, the same must necessarily
have lowered that of the interest, and exactly in the same proportion.
The proportion between the value of the capital and that of the interest
must have remained the same, though the rate had never been altered.
By altering the rate, on the contrary, the proportion between those two
values is necessarily altered. If £100 now are worth no more than
£50 were then, £5 now can be worth no more than £2:10s. were then. By
reducing the rate of interest, therefore, from ten to five per cent. we
give for the use of a capital, which is supposed to be equal to one half
of its former value, an interest which is equal to one fourth only of
the value of the former interest.

An increase in the quantity of silver, while that of the commodities
circulated by means of it remained the same, could have no other effect
than to diminish the value of that metal. The nominal value of all sorts
of goods would be greater, but their real value would be precisely the
same as before. They would be exchanged for a greater number of pieces
of silver; but the quantity of labour which they could command, the
number of people whom they could maintain and employ, would be precisely
the same. The capital of the country would be the same, though a greater
number of pieces might be requisite for conveying any equal portion
of it from one hand to another. The deeds of assignment, like the
conveyances of a verbose attorney, would be more cumbersome; but the
thing assigned would be precisely the same as before, and could produce
only the same effects. The funds for maintaining productive labour
being the same, the demand for it would be the same. Its price or wages,
therefore, though nominally greater, would really be the same. They
would be paid in a greater number of pieces of silver, but they would
purchase only the same quantity of goods. The profits of stock would be
the same, both nominally and really. The wages of labour are commonly
computed by the quantity of silver which is paid to the labourer. When
that is increased, therefore, his wages appear to be increased, though
they may sometimes be no greater than before. But the profits of stock
are not computed by the number of pieces of silver with which they are
paid, but by the proportion which those pieces bear to the whole capital
employed. Thus, in a particular country, 5s. a-week are said to be the
common wages of labour, and ten per cent. the common profits of stock;
but the whole capital of the country being the same as before, the
competition between the different capitals of individuals into which it
was divided would likewise be the same. They would all trade with the
same advantages and disadvantages. The common proportion between capital
and profit, therefore, would be the same, and consequently the common
interest of money; what can commonly be given for the use of money being
necessarily regulated by what can commonly be made by the use of it.

Any increase in the quantity of commodities annually circulated within
the country, while that of the money which circulated them remained
the same, would, on the contrary, produce many other important effects,
besides that of raising the value of the money. The capital of the
country, though it might nominally be the same, would really be
augmented. It might continue to be expressed by the same quantity of
money, but it would command a greater quantity of labour. The quantity
of productive labour which it could maintain and employ would be
increased, and consequently the demand for that labour. Its wages would
naturally rise with the demand, and yet might appear to sink. They might
be paid with a smaller quantity of money, but that smaller quantity
might purchase a greater quantity of goods than a greater had done
before. The profits of stock would be diminished, both really and
in appearance. The whole capital of the country being augmented, the
competition between the different capitals of which it was composed
would naturally be augmented along with it. The owners of those
particular capitals would be obliged to content themselves with a
smaller proportion of the produce of that labour which their respective
capitals employed. The interest of money, keeping pace always with the
profits of stock, might, in this manner, be greatly diminished, though
the value of money, or the quantity of goods which any particular sum
could purchase, was greatly augmented.

In some countries the interest of money has been prohibited by law. But
as something can everywhere be made by the use of money, something ought
everywhere to be paid for the use of it. This regulation, instead of
preventing, has been found from experience to increase the evil of
usury. The debtor being obliged to pay, not only for the use of
the money, but for the risk which his creditor runs by accepting a
compensation for that use, he is obliged, if one may say so, to insure
his creditor from the penalties of usury.

In countries where interest is permitted, the law in order to prevent
the extortion of usury, generally fixes the highest rate which can be
taken without incurring a penalty. This rate ought always to be somewhat
above the lowest market price, or the price which is commonly paid for
the use of money by those who can give the most undoubted security.
If this legal rate should be fixed below the lowest market rate, the
effects of this fixation must be nearly the same as those of a total
prohibition of interest. The creditor will not lend his money for less
than the use of it is worth, and the debtor must pay him for the risk
which he runs by accepting the full value of that use. If it is fixed
precisely at the lowest market price, it ruins, with honest people who
respect the laws of their country, the credit of all those who cannot
give the very best security, and obliges them to have recourse to
exorbitant usurers. In a country such as Great Britain, where money is
lent to government at three per cent. and to private people, upon good
security, at four and four and a-half, the present legal rate, five per
cent. is perhaps as proper as any.

The legal rate, it is to be observed, though it ought to be somewhat
above, ought not to be much above the lowest market rate. If the legal
rate of interest in Great Britain, for example, was fixed so high as
eight or ten per cent. the greater part of the money which was to be
lent, would be lent to prodigals and projectors, who alone would be
willing to give this high interest. Sober people, who will give for the
use of money no more than a part of what they are likely to make by the
use of it, would not venture into the competition. A great part of the
capital of the country would thus be kept out of the hands which were
most likely to make a profitable and advantageous use of it, and thrown
into those which were most likely to waste and destroy it. Where the
legal rate of interest, on the contrary, is fixed but a very little
above the lowest market rate, sober people are universally preferred, as
borrowers, to prodigals and projectors. The person who lends money gets
nearly as much interest from the former as he dares to take from the
latter, and his money is much safer in the hands of the one set of
people than in those of the other. A great part of the capital of the
country is thus thrown into the hands in which it is most likely to be
employed with advantage.

No law can reduce the common rate of interest below the lowest ordinary
market rate at the time when that law is made. Notwithstanding the
edict of 1766, by which the French king attempted to reduce the rate
of interest from five to four per cent. money continued to be lent in
France at five per cent. the law being evaded in several different ways.

The ordinary market price of land, it is to be observed, depends
everywhere upon the ordinary market rate of interest. The person who has
a capital from which he wishes to derive a revenue, without taking the
trouble to employ it himself, deliberates whether he should buy land
with it, or lend it out at interest. The superior security of land,
together with some other advantages which almost everywhere attend upon
this species of property, will generally dispose him to content himself
with a smaller revenue from land, than what he might have by lending out
his money at interest. These advantages are sufficient to compensate
a certain difference of revenue; but they will compensate a certain
difference only; and if the rent of land should fall short of the
interest of money by a greater difference, nobody would buy land, which
would soon reduce its ordinary price. On the contrary, if the advantages
should much more than compensate the difference, everybody would buy
land, which again would soon raise its ordinary price. When interest
was at ten per cent. land was commonly sold for ten or twelve years
purchase. As interest sunk to six, five, and four per cent. the price
of land rose to twenty, five-and-twenty, and thirty years purchase. The
market rate of interest is higher in France than in England, and the
common price of land is lower. In England it commonly sells at thirty,
in France at twenty years purchase.




CHAPTER V. OF THE DIFFERENT EMPLOYMENTS OF CAPITALS.

Though all capitals are destined for the maintenance of productive
labour only, yet the quantity of that labour which equal capitals
are capable of putting into motion, varies extremely according to the
diversity of their employment; as does likewise the value which that
employment adds to the annual produce of the land and labour of the
country.

A capital may be employed in four different ways; either, first, in
procuring the rude produce annually required for the use and consumption
of the society; or, secondly, in manufacturing and preparing that rude
produce for immediate use and consumption; or, thirdly in transporting
either the rude or manufactured produce from the places where they
abound to those where they are wanted; or, lastly, in dividing
particular portions of either into such small parcels as suit the
occasional demands of those who want them. In the first way are employed
the capitals of all those who undertake improvement or cultivation
of lands, mines, or fisheries; in the second, those of all master
manufacturers; in the third, those of all wholesale merchants; and in
the fourth, those of all retailers. It is difficult to conceive that
a capital should be employed in any way which may not be classed under
some one or other of those four.

Each of those four methods of employing a capital is essentially
necessary, either to the existence or extension of the other three, or
to the general conveniency of the society.

Unless a capital was employed in furnishing rude produce to a certain
degree of abundance, neither manufactures nor trade of any kind could
exist.

Unless a capital was employed in manufacturing that part of the rude
produce which requires a good deal of preparation before it can be fit
for use and consumption, it either would never be produced, because
there could be no demand for it; or if it was produced spontaneously, it
would be of no value in exchange, and could add nothing to the wealth of
the society.

Unless a capital was employed in transporting either the rude or
manufactured produce from the places where it abounds to those where it
is wanted, no more of either could be produced than was necessary
for the consumption of the neighbourhood. The capital of the merchant
exchanges the surplus produce of one place for that of another, and thus
encourages the industry, and increases the enjoyments of both.

Unless a capital was employed in breaking and dividing certain portions
either of the rude or manufactured produce into such small parcels as
suit the occasional demands of those who want them, every man would be
obliged to purchase a greater quantity of the goods he wanted than his
immediate occasions required. If there was no such trade as a butcher,
for example, every man would be obliged to purchase a whole ox or a
whole sheep at a time. This would generally be inconvenient to the rich,
and much more so to the poor. If a poor workman was obliged to purchase
a month's or six months' provisions at a time, a great part of the stock
which he employs as a capital in the instruments of his trade, or in
the furniture of his shop, and which yields him a revenue, he would
be forced to place in that part of his stock which is reserved for
immediate consumption, and which yields him no revenue. Nothing can
be more convenient for such a person than to be able to purchase his
subsistence from day to day, or even from hour to hour, as he wants it.
He is thereby enabled to employ almost his whole stock as a capital. He
is thus enabled to furnish work to a greater value; and the profit which
he makes by it in this way much more than compensates the additional
price which the profit of the retailer imposes upon the goods. The
prejudices of some political writers against shopkeepers and tradesmen
are altogether without foundation. So far is it from being necessary
either to tax them, or to restrict their numbers, that they can never be
multiplied so as to hurt the public, though they may so as to hurt one
another. The quantity of grocery goods, for example, which can be sold
in a particular town, is limited by the demand of that town and its
neighbourhood. The capital, therefore, which can be employed in the
grocery trade, cannot exceed what is sufficient to purchase that
quantity. If this capital is divided between two different grocers,
their competition will tend to make both of them sell cheaper than if
it were in the hands of one only; and if it were divided among twenty,
their competition would be just so much the greater, and the chance of
their combining together, in order to raise the price, just so much the
less. Their competition might, perhaps, ruin some of themselves; but to
take care of this, is the business of the parties concerned, and it
may safely be trusted to their discretion. It can never hurt either
the consumer or the producer; on the contrary, it must tend to make the
retailers both sell cheaper and buy dearer, than if the whole trade was
monopolized by one or two persons. Some of them, perhaps, may sometimes
decoy a weak customer to buy what he has no occasion for. This evil,
however, is of too little importance to deserve the public attention,
nor would it necessarily be prevented by restricting their numbers. It
is not the multitude of alehouses, to give the must suspicious example,
that occasions a general disposition to drunkenness among the common
people; but that disposition, arising from other causes, necessarily
gives employment to a multitude of alehouses.

The persons whose capitals are employed in any of those four ways, are
themselves productive labourers. Their labour, when properly directed,
fixes and realizes itself in the subject or vendible commodity upon
which it is bestowed, and generally adds to its price the value at least
of their own maintenance and consumption. The profits of the farmer, of
the manufacturer, of the merchant, and retailer, are all drawn from the
price of the goods which the two first produce, and the two last buy and
sell. Equal capitals, however, employed in each of those four different
ways, will immediately put into motion very different quantities of
productive labour; and augment, too, in very different proportions, the
value of the annual produce of the land and labour of the society to
which they belong.

The capital of the retailer replaces, together with its profits, that
of the merchant of whom he purchases goods, and thereby enables him
to continue his business. The retailer himself is the only productive
labourer whom it immediately employs. In his profit consists the whole
value which its employment adds to the annual produce of the land and
labour of the society.

The capital of the wholesale merchant replaces, together with their
profits, the capital's of the farmers and manufacturers of whom he
purchases the rude and manufactured produce which he deals in, and
thereby enables them to continue their respective trades. It is by this
service chiefly that he contributes indirectly to support the productive
labour of the society, and to increase the value of its annual produce.
His capital employs, too, the sailors and carriers who transport his
goods from one place to another; and it augments the price of those
goods by the value, not only of his profits, but of their wages. This is
all the productive labour which it immediately puts into motion, and all
the value which it immediately adds to the annual produce. Its operation
in both these respects is a good deal superior to that of the capital of
the retailer.

Part of the capital of the master manufacturer is employed as a fixed
capital in the instruments of his trade, and replaces, together with its
profits, that of some other artificer of whom he purchases them. Part
of his circulating capital is employed in purchasing materials, and
replaces, with their profits, the capitals of the farmers and miners
of whom he purchases them. But a great part of it is always, either
annually, or in a much shorter period, distributed among the different
workmen whom he employs. It augments the value of those materials by
their wages, and by their masters' profits upon the whole stock of
wages, materials, and instruments of trade employed in the business.
It puts immediately into motion, therefore, a much greater quantity of
productive labour, and adds a much greater value to the annual produce
of the land and labour of the society, than an equal capital in the
hands of any wholesale merchant.

No equal capital puts into motion a greater quantity of productive
labour than that of the farmer. Not only his labouring servants, but his
labouring cattle, are productive labourers. In agriculture, too, Nature
labours along with man; and though her labour costs no expense, its
produce has its value, as well as that of the most expensive workmen.
The most important operations of agriculture seem intended, not so much
to increase, though they do that too, as to direct the fertility of
Nature towards the production of the plants most profitable to man.
A field overgrown with briars and brambles, may frequently produce as
great a quantity of vegetables as the best cultivated vineyard or corn
field. Planting and tillage frequently regulate more than they animate
the active fertility of Nature; and after all their labour, a great
part of the work always remains to be done by her. The labourers and
labouring cattle, therefore, employed in agriculture, not only occasion,
like the workmen in manufactures, the reproduction of a value equal to
their own consumption, or to the capital which employs them, together
with its owner's profits, but of a much greater value. Over and above
the capital of the farmer, and all its profits, they regularly
occasion the reproduction of the rent of the landlord. This rent may be
considered as the produce of those powers of Nature, the use of which
the landlord lends to the farmer. It is greater or smaller, according
to the supposed extent of those powers, or, in other words, according to
the supposed natural or improved fertility of the land. It is the work
of Nature which remains, after deducting or compensating every thing
which can be regarded as the work of man. It is seldom less than a
fourth, and frequently more than a third, of the whole produce. No
equal quantity of productive labour employed in manufactures, can ever
occasion so great reproduction. In them Nature does nothing; man does
all; and the reproduction must always be in proportion to the strength
of the agents that occasion it. The capital employed in agriculture,
therefore, not only puts into motion a greater quantity of productive
labour than any equal capital employed in manufactures; but in
proportion, too, to the quantity of productive labour which it employs,
it adds a much greater value to the annual produce of the land
and labour of the country, to the real wealth and revenue of its
inhabitants. Of all the ways in which a capital can be employed, it is
by far the most advantageous to society.

The capitals employed in the agriculture and in the retail trade of any
society, must always reside within that society. Their employment is
confined almost to a precise spot, to the farm, and to the shop of the
retailer. They must generally, too, though there are some exceptions to
this, belong to resident members of the society.

The capital of a wholesale merchant, on the contrary, seems to have no
fixed or necessary residence anywhere, but may wander about from place
to place, according as it can either buy cheap or sell dear.

The capital of the manufacturer must, no doubt, reside where the
manufacture is carried on; but where this shall be, is not always
necessarily determined. It may frequently be at a great distance,
both from the place where the materials grow, and from that where the
complete manufacture is consumed. Lyons is very distant, both from the
places which afford the materials of its manufactures, and from those
which consume them. The people of fashion in Sicily are clothed in silks
made in other countries, from the materials which their own produces.
Part of the wool of Spain is manufactured in Great Britain, and some
part of that cloth is afterwards sent back to Spain.

Whether the merchant whose capital exports the surplus produce of any
society, be a native or a foreigner, is of very little importance. If he
is a foreigner, the number of their productive labourers is necessarily
less than if he had been a native, by one man only; and the value of
their annual produce, by the profits of that one man. The sailors or
carriers whom he employs, may still belong indifferently either to his
country, or to their country, or to some third country, in the same
manner as if he had been a native. The capital of a foreigner gives
a value to their surplus produce equally with that of a native, by
exchanging it for something for which there is a demand at home. It
as effectually replaces the capital of the person who produces that
surplus, and as effectually enables him to continue his business, the
service by which the capital of a wholesale merchant chiefly contributes
to support the productive labour, and to augment the value of the annual
produce of the society to which he belongs.

It is of more consequence that the capital of the manufacturer should
reside within the country. It necessarily puts into motion a greater
quantity of productive labour, and adds a greater value to the annual
produce of the land and labour of the society. It may, however, be
very useful to the country, though it should not reside within it. The
capitals of the British manufacturers who work up the flax and hemp
annually imported from the coasts of the Baltic, are surely very useful
to the countries which produce them. Those materials are a part of
the surplus produce of those countries, which, unless it was annually
exchanged for something which is in demand here, would be of no value,
and would soon cease to be produced. The merchants who export it,
replace the capitals of the people who produce it, and thereby encourage
them to continue the production; and the British manufacturers replace
the capitals of those merchants.

A particular country, in the same manner as a particular person, may
frequently not have capital sufficient both to improve and cultivate
all its lands, to manufacture and prepare their whole rude produce for
immediate use and consumption, and to transport the surplus part either
of the rude or manufactured produce to those distant markets, where it
can be exchanged for something for which there is a demand at home. The
inhabitants of many different parts of Great Britain have not capital
sufficient to improve and cultivate all their lands. The wool of the
southern counties of Scotland is, a great part of it, after a long land
carriage through very bad roads, manufactured in Yorkshire, for want of
a capital to manufacture it at home. There are many little manufacturing
towns in Great Britain, of which the inhabitants have not capital
sufficient to transport the produce of their own industry to those
distant markets where there is demand and consumption for it. If there
are any merchants among them, they are, properly, only the agents of
wealthier merchants who reside in some of the great commercial cities.

When the capital of any country is not sufficient for all those
three purposes, in proportion as a greater share of it is employed in
agriculture, 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.

The country, indeed, which has not capital sufficient for all those
three purposes, has not arrived at that degree of opulence for which it
seems naturally destined. To attempt, however, prematurely, and with an
insufficient capital, to do all the three, is certainly not the shortest
way for a society, no more than it would be for an individual, to
acquire a sufficient one. The capital of all the individuals of a nation
has its limits, in the same manner as that of a single individual, and
is capable of executing only certain purposes. The capital of all the
individuals of a nation is increased in the same manner as that of a
single individual, by their continually accumulating and adding to it
whatever they save out of their revenue. It is likely to increase the
fastest, therefore, when it is employed in the way that affords the
greatest revenue to all the inhabitants or the country, as they will
thus be enabled to make the greatest savings. But the revenue of all the
inhabitants of the country is necessarily in proportion to the value of
the annual produce of their land and labour.

It has been the principal cause of the rapid progress of our American
colonies towards wealth and greatness, that almost their whole capitals
have hitherto been employed in agriculture. They have no manufactures,
those household and coarser manufactures excepted, which necessarily
accompany the progress of agriculture, and which are the work of the
women and children in every private family. The greater part, both of
the exportation and coasting trade of America, is carried on by the
capitals of merchants who reside in Great Britain. Even the stores and
warehouses from which goods are retailed in some provinces, particularly
in Virginia and Maryland, belong many of them to merchants who reside
in the mother country, and afford one of the few instances of the retail
trade of a society being carried on by the capitals of those who are not
resident members of it. Were the Americans, either by combination, or
by any other sort of violence, to stop the importation of European
manufactures, and, by thus giving a monopoly to such of their own
countrymen as could manufacture the like goods, divert any considerable
part of their capital into this employment, they would retard, instead
of accelerating, the further increase in the value of their annual
produce, and would obstruct, instead of promoting, the progress of their
country towards real wealth and greatness. This would be still more
the case, were they to attempt, in the same manner, to monopolize to
themselves their whole exportation trade.

The course of human prosperity, indeed, seems scarce ever to have been
of so long continuance as to unable any great country to acquire capital
sufficient for all those three purposes; unless, perhaps, we give credit
to the wonderful accounts of the wealth and cultivation of China, of
those of ancient Egypt, and of the ancient state of Indostan. Even those
three countries, the wealthiest, according to all accounts, that
ever were in the world, are chiefly renowned for their superiority in
agriculture and manufactures. They do not appear to have been eminent
for foreign trade. The ancient Egyptians had a superstitious antipathy
to the sea; a superstition nearly of the same kind prevails among the
Indians; and the Chinese have never excelled in foreign commerce. The
greater part of the surplus produce of all those three countries seems
to have been always exported by foreigners, who gave in exchange for it
something else, for which they found a demand there, frequently gold and
silver.

It is thus that the same capital will in any country put into motion a
greater or smaller quantity of productive labour, and add a greater or
smaller value to the annual produce of its land and labour, according
to the different proportions in which it is employed in agriculture,
manufactures, and wholesale trade. The difference, too, is very great,
according to the different sorts of wholesale trade in which any part of
it is employed.

All wholesale trade, all buying in order to sell again by wholesale,
maybe reduced to three different sorts: the home trade, the foreign
trade of consumption, and the carrying trade. The home trade is employed
in purchasing in one part of the same country, and selling in another,
the produce of the industry of that country. It comprehends both the
inland and the coasting trade. The foreign trade of consumption is
employed in purchasing foreign goods for home consumption. The carrying
trade is employed in transacting the commerce of foreign countries, or
in carrying the surplus produce of one to another.

The capital which is employed in purchasing in one part of the country,
in order to sell in another, the produce of the industry of that
country, generally replaces, by every such operation, two distinct
capitals, that had both been employed in the agriculture or manufactures
of that country, and thereby enables them to continue that employment.
When it sends out from the residence of the merchant a certain value of
commodities, it generally brings hack in return at least an equal value
of other commodities. When both are the produce of domestic industry,
it necessarily replaces, by every such operation, two distinct capitals,
which had both been employed in supporting productive labour, and
thereby enables them to continue that support. The capital which
sends Scotch manufactures to London, and brings back English corn
and manufactures to Edinburgh, 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 those of the
home trade, the capital employed in it will give but one half of the
encouragement to the industry or productive labour of the country.

But the returns of the foreign trade of consumption are very seldom
so quick as those of the home trade. The returns of the home trade
generally come in before the end of the year, and sometimes three or
four times in the year. The returns of the foreign trade of consumption
seldom come in before the end of the year, and sometimes not till after
two or three years. A capital, therefore, employed in the home trade,
will sometimes make twelve operations, or be sent out and returned
twelve times, before a capital employed in the foreign trade of
consumption has made one. If the capitals are equal, therefore, the one
will give four-and-twenty times more encouragement and support to the
industry of the country than the other.

The foreign goods for home consumption may sometimes be purchased, not
with the produce of domestic industry but with some other foreign goods.
These last, however, must have been purchased, either immediately with
the produce of domestic industry, or with something else that had been
purchased with it; for, the case of war and conquest excepted, foreign
goods can never be acquired, but in exchange for something that had been
produced at home, either immediately, or after two or more different
exchanges. The effects, therefore, of a capital employed in such a
round-about foreign trade of consumption, are, in every respect, the
same as those of one employed in the most direct trade of the same kind,
except that the final returns are likely to be still more distant,
as they must depend upon the returns of two or three distinct foreign
trades. If the hemp and flax of Riga are purchased with the tobacco
of Virginia, which had been purchased with British manufactures, the
merchant must wait for the returns of two distinct foreign trades,
before he can employ the same capital in repurchasing a like quantity of
British manufactures. If the tobacco of Virginia had been purchased, not
with British manufactures, but with the sugar and rum of Jamaica, which
had been purchased with those manufactures, he must wait for the returns
of three. If those two or three distinct foreign trades should happen
to be carried on by two or three distinct merchants, of whom the second
buys the goods imported by the first, and the third buys those imported
by the second, in order to export them again, each merchant, indeed,
will, in this case, receive the returns of his own capital more quickly;
but the final returns of the whole capital employed in the trade will be
just as slow as ever. Whether the whole capital employed in such a round
about trade belong to one merchant or to three, can make no difference
with regard to the country, though it may with regard to the particular
merchants. Three times a greater capital must in both cases be employed,
in order to exchange a certain value of British manufactures for a
certain quantity of flax and hemp, than would have been necessary, had
the manufactures and the flax and hemp been directly exchanged for one
another. The whole capital employed, therefore, in such a round-about
foreign trade of consumption, will generally give less encouragement and
support to the productive labour of the country, than an equal capital
employed in a more direct trade of the same kind.

Whatever be the foreign commodity with which the foreign goods for home
consumption are purchased, it can occasion no essential difference,
either in the nature of the trade, or in the encouragement and support
which it can give to the productive labour of the country from which
it is carried on. If they are purchased with the gold of Brazil, for
example, or with the silver of Peru, this gold and silver, like the
tobacco of Virginia, must have been purchased with something that
either was the produce of the industry of the country, or that had been
purchased with something else that was so. So far, therefore, as the
productive labour of the country is concerned, the foreign trade of
consumption, which is carried on by means of gold and silver, has
all the advantages and all the inconveniencies of any other equally
round-about foreign trade of consumption; and will replace, just as
fast, or just as slow, the capital which is immediately employed in
supporting that productive labour. It seems even to have one advantage
over any other equally round-about foreign trade. The transportation of
those metals from one place to another, on account of their small bulk
and great value, is less expensive than that of almost any other foreign
goods of equal value. Their freight is much less, and their insurance
not greater; and no goods, besides, are less liable to suffer by the
carriage. An equal quantity of foreign goods, therefore, may frequently
be purchased with a smaller quantity of the produce of domestic
industry, by the intervention of gold and silver, than by that of any
other foreign goods. The demand of the country may frequently, in this
manner, be supplied more completely, and at a smaller expense, than
in any other. Whether, by the continual exportation of those metals, a
trade of this kind is likely to impoverish the country from which it is
carried on in any other way, I shall have occasion to examine at great
length hereafter.

That part of the capital of any country which is employed in the
carrying trade, is altogether withdrawn from supporting the productive
labour of that particular country, to support that of some foreign
countries. Though it may replace, by every operation, two distinct
capitals, yet neither of them belongs to that particular country. The
capital of the Dutch merchant, which carries the corn of Poland to
Portugal, and brings back the fruits and wines of Portugal to Poland,
replaces by every such operation two capitals, neither of which had been
employed in supporting the productive labour of Holland; but one of
them in supporting that of Poland, and the other that of Portugal.
The profits only return regularly to Holland, and constitute the whole
addition which this trade necessarily makes to the annual produce of the
land and labour of that country. When, indeed, the carrying trade of
any particular country is carried on with the ships and sailors of that
country, that part of the capital employed in it which pays the
freight is distributed among, and puts into motion, a certain number of
productive labourers of that country. Almost all nations that have had
any considerable share of the carrying trade have, in fact, carried it
on in this manner. The trade itself has probably derived its name from
it, the people of such countries being the carriers to other countries.
It does not, however, seem essential to the nature of the trade that it
should be so. A Dutch merchant may, for example, employ his capital in
transacting the commerce of Poland and Portugal, by carrying part of the
surplus produce of the one to the other, not in Dutch, but in British
bottoms. It maybe presumed, that he actually does so upon some
particular occasions. It is upon this account, however, that the
carrying trade has been supposed peculiarly advantageous to such a
country as Great Britain, of which the defence and security depend upon
the number of its sailors and shipping. But the same capital may
employ as many sailors and shipping, either in the foreign trade of
consumption, or even in the home trade, when carried on by coasting
vessels, as it could in the carrying trade. The number of sailors and
shipping which any particular capital can employ, does not depend upon
the nature of the trade, but partly upon the bulk of the goods, in
proportion to their value, and partly upon the distance of the ports
between which they are to be carried; chiefly upon the former of those
two circumstances. The coal trade from Newcastle to London, for example,
employs more shipping than all the carrying trade of England, though the
ports are at no great distance. To force, therefore, by extraordinary
encouragements, a larger share of the capital of any country into the
carrying trade, than what would naturally go to it, will not always
necessarily increase the shipping of that country.

The capital, therefore, employed in the home trade of any country,
will generally give encouragement and support to a greater quantity of
productive labour in that country, and increase the value of its annual
produce, more than an equal capital employed in the foreign trade of
consumption; and the capital employed in this latter trade has, in both
these respects, a still greater advantage over an equal capital employed
in the carrying trade. 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. But the great object of the political economy of
every country, is to increase the riches and power of that country. It
ought, therefore, to give no preference nor superior encouragement
to the foreign trade of consumption above the home trade, nor to the
carrying trade above either of the other two. It ought neither to force
nor to allure into either of those two channels a greater share of the
capital of the country, than what would naturally flow into them of its
own accord.

Each of those different branches of trade, however, is not only
advantageous, but necessary and unavoidable, when the course of things,
without any constraint or violence, naturally introduces it.

When the produce of any particular branch of industry exceeds what the
demand of the country requires, the surplus must be sent abroad, and
exchanged for something for which there is a demand at home. Without
such exportation, a part of the productive labour of the country must
cease, and the value of its annual produce diminish. The land and labour
of Great Britain produce generally more corn, woollens, and hardware,
than the demand of the home market requires. The surplus part of them,
therefore, must be sent abroad, and exchanged for something for which
there is a demand at home. It is only by means of such exportation, that
this surplus can acquired value sufficient to compensate the labour and
expense of producing it. The neighbourhood of the sea-coast, and the
banks of all navigable rivers, are advantageous situations for industry,
only because they facilitate the exportation and exchange of such
surplus produce for something else which is more in demand there.

When the foreign goods which are thus purchased with the surplus produce
of domestic industry exceed the demand of the home market, the surplus
part of them must be sent abroad again, and exchanged for something
more in demand at home. About 96,000 hogsheads of tobacco are annually
purchased in Virginia and Maryland with a part of the surplus produce
of British industry. But the demand of Great Britain does not require,
perhaps, more than 14,000. If the remaining 82,000, therefore, could not
be sent abroad, and exchanged for something more in demand at home, the
importation of them must cease immediately, and with it the productive
labour of all those inhabitants of Great Britain who are at present
employed in preparing the goods with which these 82,000 hogsheads are
annually purchased. Those goods, which are part of the produce of the
land and labour of Great Britain, having no market at home, and being
deprived of that which they had abroad, must cease to be produced. The
most round-about foreign trade of consumption, therefore, may, upon some
occasions, be as necessary for supporting the productive labour of the
country, and the value of its annual produce, as the most direct.

When the capital stock of any country is increased to such a degree that
it cannot be all employed in supplying the consumption, and supporting
the productive labour of that particular country, the surplus part of it
naturally disgorges itself into the carrying trade, and is employed in
performing the same offices to other countries. The carrying trade is
the natural effect and symptom of great national wealth; but it does
not seem to be the natural cause of it. Those statesmen who have been
disposed to favour it with particular encouragement, seem to have
mistaken the effect and symptom for the cause. Holland, in proportion
to the extent of the land and the number of it's inhabitants, by far
the richest country in Europe, has accordingly the greatest share of the
carrying trade of Europe. England, perhaps the second richest country of
Europe, is likewise supposed to have a considerable share in it; though
what commonly passes for the carrying trade of England will frequently,
perhaps, be found to be no more than a round-about foreign trade of
consumption. Such are, in a great measure, the trades which carry
the goods of the East and West Indies and of America to the different
European markets. Those goods are generally purchased, either
immediately with the produce of British industry, or with something else
which had been purchased with that produce, and the final returns of
those trades are generally used or consumed in Great Britain. The trade
which is carried on in British bottoms between the different ports of
the Mediterranean, and some trade of the same kind carried on by British
merchants between the different ports of India, make, perhaps, the
principal branches of what is properly the carrying trade of Great
Britain.

The extent of the home trade, and of the capital which can be employed
in it, is necessarily limited by the value of the surplus produce of all
those distant places within the country which have occasion to exchange
their respective productions with one another; that of the foreign
trade of consumption, by the value of the surplus produce of the whole
country, and of what can be purchased with it; that of the carrying
trade, by the value of the surplus produce of all the different
countries in the world. Its possible extent, therefore, is in a manner
infinite in comparison of that of the other two, and is capable of
absorbing the greatest capitals.

The consideration of his own private profit is the sole motive which
determines the owner of any capital to employ it either in agriculture,
in manufactures, or in some particular branch of the wholesale or retail
trade. The different quantities of productive labour which it may put
into motion, and the different values which it may add to the annual
produce of the land and labour of the society, according as it is
employed in one or other of those different ways, never enter into
his thoughts. In countries, therefore, where agriculture is the most
profitable of all employments, and farming and improving the most direct
roads to a splendid fortune, the capitals of individuals will naturally
be employed in the manner most advantageous to the whole society. The
profits of agriculture, however, seem to have no superiority over those
of other employments in any part of Europe. Projectors, indeed, in every
corner of it, have, within these few years, amused the public with most
magnificent accounts of the profits to be made by the cultivation and
improvement of land. Without entering into any particular discussion of
their calculations, a very simple observation may satisfy us that the
result of them must be false. We see, every day, the most splendid
fortunes, that have been acquired in the course of a single life, by
trade and manufactures, frequently from a very small capital, sometimes
from no capital. A single instance of such a fortune, acquired by
agriculture in the same time, and from such a capital, has not, perhaps,
occurred in Europe, during the course of the present century. In all
the great countries of Europe, however, much good land still remains
uncultivated; and the greater part of what is cultivated, is far from
being improved to the degree of which it is capable. Agriculture,
therefore, is almost everywhere capable of absorbing a much greater
capital than has ever yet been employed in it. What circumstances in the
policy of Europe have given the trades which are carried on in towns so
great an advantage over that which is carried on in the country, that
private persons frequently find it more for their advantage to employ
their capitals in the most distant carrying trades of Asia and America
than in the improvement and cultivation of the most fertile fields in
their own neighbourhood, I shall endeavour to explain at full length in
the two following books.