The Wealth of Nations

Adam Smith those of other countries; and, secondly, upon the fertility or bar- proportion to the fertility, and rise in proportion to the barren- renness of the mines which may happen at any particular time to ness of those mines. supply the commercial world with those metals. The quantity of those metals in the countries most remote from the mines, must The fertility or barrenness of the mines, however, which may be more or less affected by this fertility or barrenness, on account happen at any particular time to supply the commercial world, is of the easy and cheap transportation of those metals, of their small a circumstance which, it is evident, may have no sort of connec- bulk and great value. Their quantity in China and Indostan must tion with the state of industry in a particular country. It seems have been more or less affected by the abundance of the mines of even to have no very necessary connection with that of the world America. in general. As arts and commerce, indeed, gradually spread them- selves over a greater and a greater part of the earth, the search for So far as their quantity in any particular country depends upon new mines, being extended over a wider surface, may have some- the former of those two circumstances (the power of purchasing), what a better chance for being successful than when confined within their real price, like that of all other luxuries and superfluities, is narrower bounds. The discovery of new mines, however, as the likely to rise with the wealth and improvement of the country, old ones come to be gradually exhausted, is a matter of the great- and to fall with its poverty and depression. Countries which have est uncertainty, and such as no human skill or industry can insure. a great quantity of labour and subsistence to spare, can afford to All indications, it is acknowledged, are doubtful; and the actual purchase any particular quantity of those metals at the expense of discovery and successful working of a new mine can alone ascer- a greater quantity of labour and subsistence, than countries which tain the reality of its value, or even of its existence. In this search have less to spare. there seem to be no certain limits, either to the possible success, or to the possible disappointment of human industry. In the course So far as their quantity in any particular country depends upon of a century or two, it is possible that new mines may be discov- the latter of those two circumstances (the fertility or barrenness of ered, more fertile than any that have ever yet been known; and it is the mines which happen to supply the commercial world), their just equally possible, that the most fertile mine then known may real price, the real quantity of labour and subsistence which they be more barren than any that was wrought before the discovery of will purchase or exchange for, will, no doubt, sink more or less in 201

The Wealth of Nations the mines of America. Whether the one or the other of those two money price of corn, and of goods in general, or, in other words, events may happen to take place, is of very little importance to the the high value of gold and silver, as a proof, not only of the scar- real wealth and prosperity of the world, to the real value of the city of those metals, but of the poverty and barbarism of the coun- annual produce of the land and labour of mankind. Its nominal try at the time when it took place. This notion is connected with value, the quantity of gold and silver by which this annual pro- the system of political economy, which represents national wealth duce could be expressed or represented, would, no doubt, be very as consisting in the abundance and national poverty in the scar- different; but its real value, the real quantity of labour which it city, of gold and silver; a system which I shall endeavour to ex- could purchase or command, would be precisely the same. A shil- plain and examine at great length in the fourth book of this In- ling might, in the one case, represent no more labour than a penny quiry. I shall only observe at present, that the high value of the does at present; and a penny, in the other, might represent as much precious metals can be no proof of the poverty or barbarism of as a shilling does now. But in the one case, he who had a shilling in any particular country at the time when it took place. It is a proof his pocket would be no richer than he who has a penny at present; only of the barrenness of the mines which happened at that time and in the other, he who had a penny would be just as rich as he to supply the commercial world. A poor country, as it cannot af- who has a shilling now. The cheapness and abundance of gold and ford to buy more, so it can as little afford to pay dearer for gold silver plate would be the sole advantage which the world could and silver than a rich one; and the value of those metals, therefore, derive from the one event; and the dearness and scarcity of those is not likely to be higher in the former than in the latter. In China, trifling superfluities, the only inconveniency it could suffer from a country much richer than any part of Europe, the value of the the other. precious metals is much higher than in any part of Europe. As the wealth of Europe, indeed, has increased greatly since the discovery Conclusion of the Digression concerning the Variations in the of the mines of America, so the value of gold and silver has gradu- Value of Silver. ally diminished. This diminution of their value, however, has not been owing to the increase of the real wealth of Europe, of the The greater part of the writers who have collected the money annual produce of its land and labour, but to the accidental dis- price of things in ancient times, seem to have considered the low 202

Adam Smith covery of more abundant mines than any that were known before. in Europe. The value of the precious metals, however, must be The increase of the quantity of gold and silver in Europe, and the lower in Spain and Portugal than in any other part of Europe, as increase of its manufactures and agriculture, are two events which, they come from those countries to all other parts of Europe, loaded, though they have happened nearly about the same time, yet have not only with a freight and an insurance, but with the expense of arisen from very different causes, and have scarce any natural con- smuggling, their exportation being either prohibited or subjected nection with one another. The one has arisen from a mere acci- to a duty. In proportion to the annual produce of the land and dent, in which neither prudence nor policy either had or could labour, therefore, their quantity must be greater in those countries have any share; the other, from the fall of the feudal system, and than in any other part of Europe; those countries, however, are from the establishment of a government which afforded to indus- poorer than the greater part of Europe. Though the feudal system try the only encouragement which it requires, some tolerable se- has been abolished in Spain and Portugal, it has not been suc- curity that it shall enjoy the fruits of its own labour. Poland, where ceeded by a much better. the feudal system still continues to take place, is at this day as beggarly a country as it was before the discovery of America. The As the low value of gold and silver, therefore, is no proof of the money price of corn, however, has risen; the real value of the pre- wealth and flourishing state of the country where it takes place; so cious metals has fallen in Poland, in the same manner as in other neither is their high value, or the low money price either of goods parts of Europe. Their quantity, therefore, must have increased in general, or of corn in particular, any proof of its poverty and there as in other places, and nearly in the same proportion to the barbarism. annual produce of its land and labour. This increase of the quan- tity of those metals, however, has not, it seems, increased that But though the low money price, either of goods in general, or annual produce, has neither improved the manufactures and agri- of corn in particular, be no proof of the poverty or barbarism of culture of the country, nor mended the circumstances of its in- the times, the low money price of some particular sorts of goods, habitants. Spain and Portugal, the countries which possess the such as cattle, poultry, game of all kinds, etc. in proportion to that mines, are, after Poland, perhaps the two most beggarly countries of corn, is a most decisive one. It clearly demonstrates, first, their great abundance in proportion to that of corn, and, consequently, the great extent of the land which they occupied in proportion to 203

The Wealth of Nations what was occupied by corn; and, secondly, the low value of this much reasoning and conversation, does not affect all sorts of pro- land in proportion to that of corn land, and, consequently, the visions equally. Taking the course of the present century at an uncultivated and unimproved state of the far greater part of the average, the price of corn, it is acknowledged, even by those who lands of the country. It clearly demonstrates, that the stock and account for this rise by the degradation of the value of silver, has population of the country did not bear the same proportion to risen much less than that of some other sorts of provisions. The the extent of its territory, which they commonly do in civilized rise in the price of those other sorts of provisions, therefore, can- countries; and that society was at that time, and in that country, not be owing altogether to the degradation of the value of silver. but in its infancy. From the high or low money price, either of Some other causes must be taken into the account; and those which goods in general, or of corn in particular, we can infer only, that have been above assigned, will, perhaps, without having recourse the mines, which at that time happened to supply the commercial to the supposed degradation of the value of silver, sufficiently ex- world with gold and silver, were fertile or barren, not that the plain this rise in those particular sorts of provisions, of which the country was rich or poor. But from the high or low money price price has actually risen in proportion to that of corn. of some sorts of goods in proportion to that of others, we can infer, with a degree of probability that approaches almost to cer- As to the price of corn itself, it has, during the sixty-four first tainty, that it was rich or poor, that the greater part of its lands years of the present century, and before the late extraordinary course were improved or unimproved, and that it was either in a more or of bad seasons, been somewhat lower than it was during the sixty- less barbarous state, or in a more or less civilized one. four last years of the preceding century. This fact is attested, not only by the accounts of Windsor market, but by the public fiars of Any rise in the money price of goods which proceeded alto- all the different counties of Scotland, and by the accounts of sev- gether from the degradation of the value of silver, would affect all eral different markets in France, which have been collected with sorts of goods equally, and raise their price universally, a third, or great diligence and fidelity by Mr Messance, and by Mr Dupré de a fourth, or a fifth part higher, according as silver happened to St Maur. The evidence is more complete than could well have lose a third, or a fourth, or a fifth part of its former value. But the been expected in a matter which is naturally so very difficult to be rise in the price of provisions, which has been the subject of so ascertained. 204

Adam Smith As to the high price of corn during these last ten or twelve years, wealth of the country, the annual produce of its land and labour, it can be sufficiently accounted for from the badness of the sea- may, notwithstanding this circumstance, be either gradually de- sons, without supposing any degradation in the value of silver. clining, as in Portugal and Poland; or gradually advancing, as in most other parts of Europe. But if this rise in the price of some The opinion, therefore, that silver is continually sinking in its sorts of provisions be owing to a rise in the real value of the land value, seems not to be founded upon any good observations, ei- which produces them, to its increased fertility, or, in consequence ther upon the prices of corn, or upon those of other provisions. of more extended improvement and good cultivation, to its hav- ing been rendered fit for producing corn; it is owing to a circum- The same quantity of silver, it may perhaps be said, will, in the stance which indicates, in the clearest manner, the prosperous and present times, even according to the account which has been here advancing state of the country. The land constitutes by far the given, purchase a much smaller quantity of several sorts of provi- greatest, the most important, and the most durable part of the sions than it would have done during some part of the last cen- wealth of every extensive country. It may surely be of some use, or, tury; and to ascertain whether this change be owing to a rise in the at least, it may give some satisfaction to the public, to have so value of those goods, or to a fall in the value of silver, is only to decisive a proof of the increasing value of by far the greatest, the establish a vain and useless distinction, which can be of no sort of most important, and the most durable part of its wealth. service to the man who has only a certain quantity of silver to go to market with, or a certain fixed revenue in money. I certainly do It may, too, be of some use to the public, in regulating the pecu- not pretend that the knowledge of this distinction will enable him niary reward of some of its inferior servants. If this rise in the price to buy cheaper. It may not, however, upon that account be alto- of some sorts of provisions be owing to a fall in the value of silver, gether useless. their pecuniary reward, provided it was not too large before, ought certainly to be augmented in proportion to the extent of this fall. It may be of some use to the public, by affording an easy proof If it is not augmented, their real recompence will evidently be so of the prosperous condition of the country. If the rise in the price much diminished. But if this rise of price is owing to the increased of some sorts of provisions be owing altogether to a fall in the value, in consequence of the improved fertility of the land which value of silver, it is owing to a circumstance, from which nothing can be inferred but the fertility of the American mines. The real 205

The Wealth of Nations produces such provisions, it becomes a much nicer matter to judge, sarily rises, that of another as necessarily falls; and it becomes a either in what proportion any pecuniary reward ought to be aug- matter of more nicety to judge how far the rise in the one may be mented, or whether it ought to be augmented at all. The exten- compensated by the fall in the other. When the real price of sion of improvement and cultivation, as it necessarily raises more butcher’s meat has once got to its height (which, with regard to or less, in proportion to the price of corn, that of every sort of every sort, except perhaps that of hogs flesh, it seems to have done animal food, so it as necessarily lowers that of, I believe, every sort through a great part of England more than a century ago), any rise of vegetable food. It raises the price of animal food; because a which can afterwards happen in that of any other sort of animal great part of the land which produces it, being rendered fit for food, cannot much affect the circumstances of the inferior ranks producing corn, must afford to the landlord anti farmer the rent of people. The circumstances of the poor, through a great part of and profit of corn land. It lowers the price of vegetable food; be- England, cannot surely be so much distressed by any rise in the cause, by increasing the fertility of the land, it increases its abun- price of poultry, fish, wild-fowl, or venison, as they must be re- dance. The improvements of agriculture, too, introduce many sorts lieved by the fall in that of potatoes. of vegetable food, which requiring less land, and not more labour than corn, come much cheaper to market. Such are potatoes and In the present season of scarcity, the high price of corn no doubt maize, or what is called Indian corn, the two most important im- distresses the poor. But in times of moderate plenty, when corn is provements which the agriculture of Europe, perhaps, which Eu- at its ordinary or average price, the natural rise in the price of any rope itself, has received from the great extension of its commerce other sort of rude produce cannot much affect them. They suffer and navigation. Many sorts of vegetable food, besides, which in more, perhaps, by the artificial rise which has been occasioned by the rude state of agriculture are confined to the kitchen-garden, taxes in the price of some manufactured commodities, as of salt, and raised only by the spade, come, in its improved state, to be soap, leather, candles, malt, beer, ale, etc. introduced into common fields, and to be raised by the plough; such as turnips, carrots, cabbages, etc. If, in the progress of im- provement, therefore, the real price of one species of food neces- 206

Adam Smith Effects of the Progress of Improvement upon the real Price of But in all cases in which the real price of the rude material either Manufactures. does not rise at all, or does not rise very much, that of the manu- factured commodity sinks very considerably. It is the natural effect of improvement, however, to diminish gradually the real price of almost all manufactures. That of the This diminution of price has, in the course of the present and manufacturing workmanship diminishes, perhaps, in all of them preceding century, been most remarkable in those manufactures without exception. In consequence of better machinery, of greater of which the materials are the coarser metals. A better movement dexterity, and of a more proper division and distribution of work, of a watch, than about the middle of the last century could have all of which are the natural effects of improvement, a much smaller been bought for twenty pounds, may now perhaps be had for quantity of labour becomes requisite for executing any particular twenty shillings. In the work of cutlers and locksmiths, in all the piece of work; and though, in consequence of the flourishing cir- toys which are made of the coarser metals, and in all those goods cumstances of the society, the real price of labour should rise very which are commonly known by the name of Birmingham and considerably, yet the great diminution of the quantity will gener- Sheffield ware, there has been, during the same period, a very great ally much more than compensate the greatest rise which can hap- reduction of price, though not altogether so great as in watch- pen in the price. work. It has, however, been sufficient to astonish the workmen of every other part of Europe, who in many cases acknowledge that There are, indeed, a few manufactures, in which the necessary they can produce no work of equal goodness for double or even rise in the real price of the rude materials will more than compen- for triple the price. There are perhaps no manufactures, in which sate all the advantages which improvement can introduce into the the division of labour can be carried further, or in which the ma- execution of the work In carpenters’ and joiners’ work, and in the chinery employed admits of ’ a greater variety of improvements, coarser sort of cabinet work, the necessary rise in the real price of than those of which the materials are the coarser metals. barren timber, in consequence of the improvement of land, will more than compensate all the advantages which can be derived In the clothing manufacture there has, during the same period, from the best machinery, the greatest dexterity, and the most proper been no such sensible reduction of price. The price of superfine division and distribution of work. cloth, I have been assured, on the contrary, has, within these five- 207

The Wealth of Nations and-twenty or thirty years, risen somewhat in proportion to its as four-and-twenty shillings of our present money, was, at that quality, owing, it was said, to a considerable rise in the price of the time, reckoned not an unreasonable price for a yard of the finest material, which consists altogether of Spanish wool. That of the cloth; and as this is a sumptuary law, such cloth, it is probable, Yorkshire cloth, which is made altogether of English wool, is said, had usually been sold somewhat dearer. A guinea may be reck- indeed, during the course of the present century, to have fallen a oned the highest price in the present times. Even though the qual- good deal in proportion to its quality. Quality, however, is so very ity of the cloths, therefore, should be supposed equal, and that of disputable a matter, that I look upon all information of this kind the present times is most probably much superior, yet, even upon as somewhat uncertain. In the clothing manufacture, the division this supposition, the money price of the finest cloth appears to of labour is nearly the same now as it was a century ago, and the have been considerably reduced since the end of the fifteenth cen- machinery employed is not very different. There may, however, tury. But its real price has been much more reduced. Six shillings have been some small improvements in both, which may have and eightpence was then, and long afterwards, reckoned the aver- occasioned some reduction of price. age price of a quarter of wheat. Sixteen shillings, therefore, was the price of two quarters and more than three bushels of wheat. But the reduction will appear much more sensible and undeni- Valuing a quarter of wheat in the present times at eight-and-twenty able, if we compare the price of this manufacture in the present shillings, the real price of a yard of fine cloth must, in those times, times with what it was in a much remoter period, towards the end have been equal to at least three pounds six shillings and sixpence of the fifteenth century, when the labour was probably much less of our present money. The man who bought it must have parted subdivided, and the machinery employed much more imperfect, with the command of a quantity of labour and subsistence equal than it is at present. to what that sum would purchase in the present times. In 1487, being the 4th of Henry VII., it was enacted, that “who- The reduction in the real price of the coarse manufacture, though soever shall sell by retail a broad yard of the finest scarlet grained, considerable, has not been so great as in that of the fine. or of other grained cloth of the finest making, above sixteen shil- lings, shall forfeit forty shillings for every yard so sold.” Sixteen In 1463, being the 3rd of Edward IV. it was enacted, that “no shillings, therefore, containing about the same quantity of silver servant in husbandry nor common labourer, nor servant to any 208

Adam Smith artificer inhabiting out of a city or burgh, shall use or wear in their money. But fourteen-pence was in those times the price of a bushel clothing any cloth above two shillings the broad yard.” In the 3rd and near two pecks of wheat; which in the present times, at three of Edward IV., two shillings contained very nearly the same quan- and sixpence the bushel, would cost five shillings and threepence. tity of silver as four of our present money. But the Yorkshire cloth We should in the present times consider this as a very high price which is now sold at four shillings the yard, is probably much for a pair of stockings to a servant of the poorest and lowest order. superior to any that was then made for the wearing of the very He must however, in those times, have paid what was really equiva- poorest order of common servants. Even the money price of their lent to this price for them. clothing, therefore, may, in proportion to the quality, be some- what cheaper in the present than it was in those ancient times. In the time of Edward IV. the art of knitting stockings was prob- The real price is certainly a good deal cheaper. Tenpence was then ably not known in any part of Europe. Their hose were made of reckoned what is called the moderate and reasonable price of a common cloth, which may have been one of the causes of their bushel of wheat. Two shillings, therefore, was the price of two dearness. The first person that wore stockings in England is said bushels and near two pecks of wheat, which in the present times, to have been Queen Elizabeth. She received them as a present at three shillings and sixpence the bushel, would be worth eight from the Spanish ambassador. shillings and ninepence. For a yard of this cloth the poor servant must have parted with the power of purchasing a quantity of sub- Both in the coarse and in the fine woollen manufacture, the sistence equal to what eight shillings and ninepence would pur- machinery employed was much more imperfect in those ancient, chase in the present times. This is a sumptuary law, too, restrain- than it is in the present times. It has since received three very ing the luxury and extravagance of the poor. Their clothing, there- capital improvements, besides, probably, many smaller ones, of fore, had commonly been much more expensive. which it may be difficult to ascertain either the number or the importance. The three capital improvements are, first, the exchange The same order of people are, by the same law, prohibited from of the rock and spindle for the spinning-wheel, which, with the wearing hose, of which the price should exceed fourteen-pence same quantity of labour, will perform more than double the quan- the pair, equal to about eight-and-twenty pence of our present tity of work. Secondly, the use of several very ingenious machines, which facilitate and abridge, in a still greater proportion, the wind- 209

The Wealth of Nations ing of the worsted and woollen yarn, or the proper arrangement business from which any of them derived the greater part of their of the warp and woof before they are put into the loom; an opera- subsistence. The work which is performed in this manner, it has tion which, previous to the invention of those machines, must already been observed, comes always much cheaper to market than have been extremely tedious and troublesome. Thirdly, the em- that which is the principal or sole fund of the workman’s subsis- ployment of the fulling-mill for thickening the cloth, instead of tence. The fine manufacture, on the other hand, was not, in those treading it in water. Neither wind nor water mills of any kind times, carried on in England, but in the rich and commercial coun- were known in England so early as the beginning of the sixteenth try of Flanders; and it was probably conducted then, in the same century, nor, so far as I know, in any other part of Europe north of manner as now, by people who derived the whole, or the principal the Alps. They had been introduced into Italy some time before. part of their subsistence from it. It was, besides, a foreign manu- facture, and must have paid some duty, the ancient custom of The consideration of these circumstances may, perhaps, in some tonnage and poundage at least, to the king. This duty, indeed, measure, explain to us why the real price both of the coarse and of would not probably be very great. It was not then the policy of the fine manufacture was so much higher in those ancient than it Europe to restrain, by high duties, the importation of foreign is in the present times. It cost a greater quantity of labour to bring manufactures, but rather to encourage it, in order that merchants the goods to market. When they were brought thither, therefore, might be enabled to supply, at as easy a rate as possible, the great they must have purchased, or exchanged for the price of, a greater men with the conveniencies and luxuries which they wanted, and quantity. which the industry of their own country could not afford them. The coarse manufacture probably was, in those ancient times, The consideration of these circumstances may, perhaps, in some carried on in England in the same manner as it always has been in measure explain to us why, in those ancient times, the real price of countries where arts and manufactures are in their infancy. It was the coarse manufacture was, in proportion to that of the fine, so probably a household manufacture, in which every different part much lower than in the present times. of the work was occasionally performed by all the different mem- bers of almost every private family, but so as to be their work only when they had nothing else to do, and not to be the principal 210

Adam Smith Conclusion of the Chapter. All those improvements in the productive powers of labour, which tend directly to reduce the rent price of manufactures, tend I shall conclude this very long chapter with observing, that every indirectly to raise the real rent of land. The landlord exchanges improvement in the circumstances of the society tends, either di- that part of his rude produce, which is over and above his own rectly or indirectly, to raise the real rent of land to increase the real consumption, or, what comes to the same thing, the price of that wealth of the landlord, his power of purchasing the labour, or the part of it, for manufactured produce. Whatever reduces the real produce of the labour of other people. price of the latter, raises that of the former. An equal quantity of the former becomes thereby equivalent to a greater quantity of the The extension of improvement and cultivation tends to raise it latter; and the landlord is enabled to purchase a greater quantity directly. The landlord’s share of the produce necessarily increases of the conveniencies, ornaments, or luxuries which he has occa- with the increase of the produce. sion for. That rise in the real price of those parts of the rude produce of Every increase in the real wealth of the society, every increase in land, which is first the effect of the extended improvement and the quantity of useful labour employed within it, tends indirectly cultivation, and afterwards the cause of their being still further to raise the real rent of land. A certain proportion of this labour extended, the rise in the price of cattle, for example, tends, too, to naturally goes to the land. A greater number of men and cattle are raise the rent of land directly, and in a still greater proportion. The employed in its cultivation, the produce increases with the in- real value of the landlord’s share, his real command of the labour crease of the stock which is thus employed in raising it, and the of other people, not only rises with the real value of the produce, rent increases with the produce. but the proportion of his share to the whole produce rises with it. The contrary circumstances, the neglect of cultivation and im- That produce, after the rise in its real price, requires no more provement, the fall in the real price of any part of the rude pro- labour to collect it than before. A smaller proportion of it will, duce of land, the rise in the real price of manufactures from the therefore, be sufficient to replace, with the ordinary profit, the decay of manufacturing art and industry, the declension of the stock which employs that labour. A greater proportion of it must real wealth of the society, all tend, on the other hand, to lower the consequently belong to the landlord. 211

The Wealth of Nations real rent of land, to reduce the real wealth of the landlord, to di- of its own accord, and independent of any plan or project of their minish his power of purchasing either the labour, or the produce own. That indolence which is the natural effect of the ease and of the labour, of other people. security of their situation, renders them too often, not only igno- rant, but incapable of that application of mind, which is necessary The whole annual produce of the land and labour of every coun- in order to foresee and understand the consequence of any public try, or, what comes to the same thing, the whole price of that regulation. annual produce, naturally divides itself, it has already been ob- served, into three parts; the rent of land, the wages of labour, and The interest of the second order, that of those who live by wages, the profits of stock; and constitutes a revenue to three different is as strictly connected with the interest of the society as that of orders of people; to those who live by rent, to those who live by the first. The wages of the labourer, it has already been shewn, are wages, and to those who live by profit. These are the three great, never so high as when the demand for labour is continually rising, original, and constituent, orders of every civilized society, from or when the quantity employed is every year increasing consider- whose revenue that of every other order is ultimately derived. ably. When this real wealth of the society becomes stationary, his wages are soon reduced to what is barely enough to enable him to The interest of the first of those three great orders, it appears bring up a family, or to continue the race of labourers. When the from what has been just now said, is strictly and inseparably con- society declines, they fall even below this. The order of proprietors nected with the general interest of the society. Whatever either may perhaps gain more by the prosperity of the society than that promotes or obstructs the one, necessarily promotes or obstructs of labourers; but there is no order that suffers so cruelly from its the other. When the public deliberates concerning any regulation decline. But though the interest of the labourer is strictly con- of commerce or police, the proprietors of land never can mislead nected with that of the society, he is incapable either of compre- it, with a view to promote the interest of their own particular hending that interest, or of understanding its connexion with his order; at least, if they have any tolerable knowledge of that inter- own. His condition leaves him no time to receive the necessary est. They are, indeed, too often defective in this tolerable knowl- information, and his education and habits are commonly such as edge. They are the only one of the three orders whose revenue to render him unfit to judge, even though he was fully informed. costs them neither labour nor care, but comes to them, as it were, 212

Adam Smith In the public deliberations, therefore, his voice is little heard, and the interest of their own particular branch of business. than about less regarded; except upon particular occasions, when his clamour that of the society, their judgment, even when given with the great- is animated, set on, and supported by his employers, not for his, est candour (which it has not been upon every occasion), is much but their own particular purposes. more to be depended upon with regard to the former of those two objects, than with regard to the latter. Their superiority over the His employers constitute the third order, that of those who live country gentleman is, not so much in their knowledge of the pub- by profit. It is the stock that is employed for the sake of profit, lic interest, as in their having a better knowledge of their own which puts into motion the greater part of the useful labour of interest than he has of his. It is by this superior knowledge of their every society. The plans and projects of the employers of stock own interest that they have frequently imposed upon his generos- regulate and direct all the most important operation of labour, ity, and persuaded him to give up both his own interest and that and profit is the end proposed by all those plans and projects. But of the public, from a very simple but honest conviction, that their the rate of profit does not, like rent and wages, rise with the pros- interest, and not his, was the interest of the public. The interest of perity, and fall with the declension of the society. On the contrary, the dealers, however, in any particular branch of trade or manu- it is naturally low in rich, and high in poor countries, and it is factures, is always in some respects different from, and even oppo- always highest in the countries which are going fastest to ruin. site to, that of the public. To widen the market, and to narrow the The interest of this third order, therefore, has not the same competition, is always the interest of the dealers. To widen the connexion with the general interest of the society, as that of the market may frequently be agreeable enough to the interest of the other two. Merchants and master manufacturers are, in this order, public; but to narrow the competition must always be against it, the two classes of people who commonly employ the largest capi- and can only serve to enable the dealers, by raising their profits tals, and who by their wealth draw to themselves the greatest share above what they naturally would be, to levy, for their own benefit, of the public consideration. As during their whole lives they are an absurd tax upon the rest of their fellow-citizens. The proposal engaged in plans and projects, they have frequently more acute- of any new law or regulation of commerce which comes from this ness of understanding than the greater part of country gentlemen. order, ought always to be listened to with great precaution, and As their thoughts, however, are commonly exercised rather about 213

The Wealth of Nations ought never to be adopted till after having been long and carefully 1247 0 13 5 200 2 11 0 examined, not only with the most scrupulous, but with the most 1257 140 3 12 0 suspicious attention. It comes from an order of men, whose inter- 1258 100 est is never exactly the same with that of the public, who have 0 15 0 0 17 0 generally an interest to deceive and even to oppress the public, 1270 0 16 0 and who accordingly have, upon many occasions, both deceived 4 16 0 5 12 0 16 16 0 and oppressed it. 1286 680 028 # PRICES OF WHEAT 0 16 0 094 180 Total 35 9 3 Year Prices/Quarter Average of different Average prices of Average 2 19 1¼ in each year prices in one year each year in money £sd of 1776 1287 034 0 10 0 1 16 0 £sd 1288 008 £sd 010 1202 0 12 0 0 13 5 203 1289 014 1205 0 12 0 016 0 13 4 018 0 3 0¼ 0 9 1¾ 1223 0 15 0 020 1237 0 12 0 1 16 0 034 1243 034 0 10 0 094 1244 020 060 0 12 0 1246 020 060 060 0 16 0 280 214

020 0 10 1½ 1 10 4½ Adam Smith 020 052 0 10 8 1349 168 322 1290 100 1 10 6 280 1359 020 120 048 1294 0 16 0 280 1361 0 15 0 1 15 0 1302 0 16 0 0 12 0 1363 100 0 14 5 1309 040 116 1369 140 294 1315 072 300 040 0 3 10 094 1316 100 1379 020 Total 048 100 4 11 6 1387 0 13 4 Average 1317 1 10 0 1390 0 14 0 1 13 7 1 12 0 1 19 6 5 18 6 0 16 0 1336 200 1401 0 16 0 1 17 6 1338 240 1407 0 4 4¾ 0 14 0 034 0 8 10 2 13 0 1416 0 16 0 1 12 0 400 15 9 4 068 1 5 9½ 020 034 060 1423 080 0 0 10 0 1425 040 0 Total 23 4 11¼ 1434 168 4 Average 1 18 8 1435 054 8 1439 100 1339 0 9 0 170 215

1440 168 134 268 The Wealth of Nations 050 1444 140 042 280 1 11 0 044 048 1495 0 3 4 890 1445 040 1497 1 0 0 0 14 1 1447 046 1448 080 Total 1449 068 Average 1451 050 080 090 1499 040 060 0 16 0 1504 058 086 Total 0 13 4 1521 100 1 10 0 Average 0 10 0 1551 080 080 0 16 0 1553 080 080 12 15 4 1554 080 080 1 1 3¹/³ 1555 080 080 1556 080 080 1453 054 0 10 8 1557 080 1455 012 024 040 0 17 8½ 0 17 8½ 1457 078 1 15 4 1558 050 1459 050 0 1 10 0 10 0 1559 2 13 4 080 1460 080 0 16 0 1560 080 080 1463 020 038 080 080 018 080 6 0 2½ 1464 068 0 10 0 0 10 0½ 1486 140 1 17 0 Total 1491 0 14 8 120 Average 1494 040 060 216

1561 080 200 080 Adam Smith 1562 080 080 1574 2 16 0 4 12 0 PRICES OF THE QUARTER OF NINE BUSHELS OF THE 140 200 BEST OR HIGHEST PRICED WHEAT AT WINDSOR MAR- 1587 340 Total 340 KET, ON LADY DAY AND MICHAELMAS, FROM 1595 TO 1594 2 16 0 Average 2 16 0 1764 BOTH INCLUSIVE; THE PRICE OF EACH YEAR BE- 1595 2 13 0 2 13 0 ING THE MEDIUM BETWEEN THE HIGHEST PRICES 1596 400 400 OF THESE TWO MARKET DAYS. 1597 540 400 4 12 0 1595 £sd 1598 2 16 8 2 16 8 1596 200 1599 1 19 2 1 19 8 1597 280 1600 1 17 8 1 17 8 1598 396 1601 1 14 10 1 14 10 1599 2 16 8 28 9 4 1600 1 19 2 2 7 5½ 1601 1 17 8 1602 1 14 10 1603 194 1604 1 15 4 1605 1 10 8 1606 1 15 10 1607 1 13 0 1608 1 16 8 1609 2 16 8 2 10 0 217

The Wealth of Nations 1610 1 15 10 1630 2 15 8 0 1611 1 18 8 1631 3 8 0 1612 2 2 4 1632 2 13 4 1613 2 8 8 1633 2 18 0 1614 2 1 8½ 1634 2 16 0 1615 1 18 8 1635 2 16 0 1616 2 0 4 1636 2 16 8 1617 2 8 8 1618 2 6 8 16)40 0 1619 1 15 4 Average 2 10 0 1620 1 10 4 1637 2 13 0 26)54 0 6½ 1638 2 17 4 Average 2 1 6¾ 1639 2 4 10 1640 24 8 1621 1 10 4 1641 28 0 1622 2 18 8 1646 28 0 1623 2 12 0 1647 3 13 0 1624 28 0 1648 45 0 1625 2 12 0 1649 40 0 1626 29 4 1650 3 16 8 1627 1 16 0 1651 3 13 4 1628 18 0 1652 29 6 1629 22 0 1653 1 15 6 218

1654 16 0 Adam Smith 22 0 1655 1 13 4 2 19 0 1656 23 0 1677 30 0 1657 26 8 1678 25 0 1658 35 0 1679 26 8 1659 36 0 1680 24 0 1660 2 16 6 1681 20 0 1661 3 10 0 1682 24 0 1662 3 14 0 1683 26 8 1663 2 17 0 1684 1 14 0 1664 20 6 1685 15 2 1665 29 4 1686 26 0 1666 1 16 0 1687 1 10 0 1667 1 16 0 1688 1 14 8 1668 20 0 1689 1 14 0 1669 24 4 1690 26 8 1670 21 8 1691 37 8 1671 22 0 1692 34 0 1672 21 0 1693 2 13 0 1673 26 8 1694 3 11 0 1674 38 8 1695 30 0 1675 34 8 1696 38 4 1676 1 18 0 1697 34 0 1698 1699 219

The Wealth of Nations 1700 2 0 0 1720 1 17 0 60) 153 1 8 1721 1 17 6 1722 1 16 0 Average 2 11 0¹/³ 1723 1 14 8 1724 1 17 0 1701 1 17 8 1725 28 6 1 12 10 1702 19 6 1726 26 0 16 8 1703 1 16 0 1727 22 0 18 4 1704 26 6 1728 2 14 6 1 18 10 1705 1 10 0 1729 2 6 10 23 0 1706 16 0 1730 1 16 6 20 4 1707 18 6 1731 1 12 10 1 18 0 1708 21 6 1732 16 8 1 15 6 1709 3 18 6 1733 18 4 1 18 6 1710 3 18 0 1734 1 18 10 2 10 8 1711 2 14 0 1735 23 0 10) 18 12 8 1712 26 4 1736 20 4 1 17 3½ 1713 2 11 0 1737 1 18 0 1714 2 10 4 1738 1 15 6 1715 23 0 1739 1 18 6 1716 28 0 1740 2 10 8 1717 25 8 1718 1 18 10 1719 1 15 0 220

Adam Smith 1741 26 8 26 8 1761 1 10 3 6 1742 1 14 0 1 14 0 1762 1 19 0 1743 1 4 10 1 4 10 1763 2 0 9 1744 1 4 10 1 4 10 1764 2 6 9 1745 17 6 17 6 1746 1 19 0 1 19 0 64) 129 13 1747 1 14 10 1 14 10 Average 2 0 6¾ 1748 1 17 0 1 17 0 1749 1 17 0 1 17 0 1750 1 12 6 1 12 6 10) 16 18 2 1 13 9¾ 1751 1 18 6 1752 2 1 10 1753 24 8 1754 1 13 8 1755 1 14 10 1756 25 3 1757 30 0 1758 2 10 0 1759 1 19 10 1760 1 16 6 221

The Wealth of Nations BOOK II 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 OF THE NATURE, ACCUMULATION, been completed, but sold. A stock of goods of different kinds, AND EMPLOYMENT OF STOCK therefore, must be stored up somewhere, sufficient to maintain him, and to supply him with the materials and tools of his work, INTRODUCTION till such time at least as both these events can be brought about. A weaver cannot apply himself entirely to his peculiar business, un- IN THAT RUDE STATE OF SOCIETY, in which there is no division less there is before-hand stored up somewhere, either in his own of labour, in which exchanges are seldom made, and in which possession, or in that of some other person, a stock sufficient to every man provides every thing for himself, it is not neces- maintain him, and to supply him with the materials and tools of sary that any stock should be accumulated, or stored up before- his work, till he has not only completed, but sold his web. This hand, in order to carry on the business of the society. Every man accumulation must evidently be previous to his applying his in- endeavours to supply, by his own industry, his own occasional dustry for so long a time to such a peculiar business. 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 As the accumulation of stock must, in the nature of things, be of the first large animal he kills: and when his hut begins to go to previous to the division of labour, so labour can be more and more ruin, he repairs it, as well as he can, with the trees and the turf that subdivided in proportion only as stock is previously more and are nearest it. more accumulated. The quantity of materials which the same number of people can work up, increases in a great proportion as But when the division of labour has once been thoroughly in- labour comes to be more and more subdivided; and as the opera- troduced, the produce of a man’s own labour can supply but a tions of each workman are gradually reduced to a greater degree of very small part of his occasional wants. The far greater part of simplicity, a variety of new machines come to be invented for fa- them are supplied by the produce of other men’s labour, which he cilitating and abridging those operations. As the division of labour purchases with the produce, or, what is the same thing, with the advances, therefore, in order to give constant employment to an 222

Adam Smith equal number of workmen, an equal stock of provisions, and a industry and its productive powers. greater stock of materials and tools than what would have been In the following book, I have endeavoured to explain the nature necessary in a ruder state of things, must be accumulated before- hand. But the number of workmen in every branch of business of stock, the effects of its accumulation into capital of different generally increases with the division of labour in that branch; or kinds, and the effects of the different employments of those capi- rather it is the increase of their number which enables them to tals. This book is divided into five chapters. In the first chapter, I class and subdivide themselves in this manner. have endeavoured to shew what are the different parts or branches into which the stock, either of an individual, or of a great society, As the accumulation of stock is previously necessary for carry- naturally divides itself. In the second, I have endeavoured to ex- ing on this great improvement in the productive powers of labour, plain the nature and operation of money, considered as a particu- so that accumulation naturally leads to this improvement. The lar branch of the general stock of the society. The stock which is person who employs his stock in maintaining labour, necessarily accumulated into a capital, may either be employed by the person wishes to employ it in such a manner as to produce as great a to whom it belongs, or it may be lent to some other person. In the quantity of work as possible. He endeavours, therefore, both to third and fourth chapters, I have endeavoured to examine the make among his workmen the most proper distribution of em- manner in which it operates in both these situations. The fifth ployment, and to furnish them with the best machines which he and last chapter treats of the different effects which the different can either invent or afford to purchase. His abilities, in both these employments of capital immediately produce upon the quantity, respects, are generally in proportion to the extent of his stock, or both of national industry, and of the annual produce of land and to the number of people whom it can employ. The quantity of labour. 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 223

The Wealth of Nations CHAPTER I sumed, such as a stock of clothes, household furniture, and the like. In one or other, or all of these three articles, consists the stock OF THE DIVISION OF STOCK which men commonly reserve for their own immediate consump- tion. WHEN THE STOCK which a man possesses is no more than suffi- cient to maintain him for a few days or a few weeks, he seldom There are two different ways in which a capital may be em- thinks of deriving any revenue from it. He consumes it as spar- ployed so as to yield a revenue or profit to its employer. ingly as he can, and endeavours, by his labour, to acquire some- First, it maybe employed in raising, manufacturing, or purchas- ing goods, and selling them again with a profit. The capital em- thing which may supply its place before it be consumed altogether. ployed in this manner yields no revenue or profit to its employer, His revenue is, in this case, derived from his labour only. This is while it either remains in his possession, or continues in the same the state of the greater part of the labouring poor in all countries. 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 But when he possesses stock sufficient to maintain him for it is again exchanged for goods. His capital is continually going months or years, he naturally endeavours to derive a revenue from from him in one shape, and returning to him in another; and it is the greater part of it, reserving only so much for his immediate consumption as may maintain him till this revenue begins to come only by means of such circulation, or successive changes, that it in. His whole stock, therefore, is distinguished into two parts. can yield him any profit. Such capitals, therefore, may very prop- That part which he expects is to afford him this revenue is called erly be called circulating capitals. his capital. The other is that which supplies his immediate con- sumption, and which consists either, first, in that portion of his Secondly, it may be employed in the improvement of land, in whole stock which was originally reserved for this purpose; or, the purchase of useful machines and instruments of trade, or in secondly, in his revenue, from whatever source derived, as it gradu- such like things as yield a revenue or profit without changing ally comes in; or, thirdly, in such things as had been purchased by masters, or circulating any further. Such capitals, therefore, may very properly be called fixed capitals. either of these in former years, and which are not yet entirely con- Different occupations require very different proportions between 224

Adam Smith the fixed and circulating capitals employed in them. capital. He makes a profit of the one by keeping it in his own The capital of a merchant, for example, is altogether a circulat- 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 ing capital. He has occasion for no machines or instruments of of the instruments of husbandry; their maintenance is a circulat- trade, unless his shop or warehouse be considered as such. ing capital, in the same manner as that of the labouring servants. The farmer makes his profit by keeping the labouring cattle, and Some part of the capital of every master artificer or manufac- by parting with their maintenance. Both the price and the main- turer must be fixed in the instruments of his trade. This part, tenance of the cattle which are bought in and fattened, not for however, is very small in some, and very great in others, A master labour, but for sale, are a circulating capital. The farmer makes his tailor requires no other instruments of trade but a parcel of needles. profit by parting with them. A flock of sheep or a herd of cattle, Those of the master shoemaker are a little, though but a very little, that, in a breeding country, is brought in neither for labour nor more expensive. Those of the weaver rise a good deal above those for sale, but in order to make a profit by their wool, by their milk, of the shoemaker. The far greater part of the capital of all such and by their increase, is a fixed capital. The profit is made by master artificers, however, is circulated either in the wages of their keeping them. Their maintenance is a circulating capital. The profit workmen, or in the price of their materials, and repaid, with a is made by parting with it; and it comes back with both its own profit, by the price of the work. 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 In other works a much greater fixed capital is required. In a the seed, too, is properly a fixed capital. Though it goes backwards great iron-work, for example, the furnace for melting the ore, the and forwards between the ground and the granary, it never changes forge, the slit-mill, are instruments of trade which cannot be erected masters, and therefore does not properly circulate. The farmer without a very great expense. In coal works, and mines of every makes his profit, not by its sale, but by its increase. kind, the machinery necessary, both for drawing out the water, and for other purposes, is frequently still more expensive. The general stock of any country or society is the same with that of all its inhabitants or members; and, therefore, naturally 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 225

The Wealth of Nations divides itself into the same three portions, each of which has a gree increased by it. Clothes and household furniture, in the same distinct function or office. manner, sometimes yield a revenue, and thereby serve in the func- tion of a capital to particular persons. In countries where mas- The first is that portion which is reserved for immediate con- querades are common, it is a trade to let out masquerade dresses sumption, and of which the characteristic is, that it affords no for a night. Upholsterers frequently let furniture by the month or revenue or profit. It consists in the stock of food, clothes, house- by the year. Undertakers let the furniture of funerals by the day hold furniture, etc. which have been purchased by their proper and by the week. Many people let furnished houses, and get a consumers, but which are not yet entirely consumed. The whole rent, not only for the use of the house, but for that of the furni- stock of mere dwelling-houses, too, subsisting at anyone time in ture. The revenue, however, which is derived from such things, the country, make a part of this first portion. The stock that is laid must always be ultimately drawn from some other source of rev- out in a house, if it is to be the dwelling-house of the proprietor, enue. Of all parts of the stock, either of an individual or of a ceases from that moment to serve in the function of a capital, or society, reserved for immediate consumption, what is laid out in to afford any revenue to its owner. A dwelling-house, as such, houses is most slowly consumed. A stock of clothes may last sev- contributes nothing to the revenue of its inhabitant; and though eral years; a stock of furniture half a century or a century; but a it is, no doubt, extremely useful to him, it is as his clothes and stock of houses, well built and properly taken care of, may last household furniture are useful to him, which, however, make a many centuries. Though the period of their total consumption, part of his expense, and not of his revenue. If it is to be let to a however, is more distant, they are still as really a stock reserved for tenant for rent, as the house itself can produce nothing, the tenant immediate consumption as either clothes or household furniture. must always pay the rent out of some other revenue, which he derives, either from labour, or stock, or land. Though a house, The second of the three portions into which the general stock therefore, may yield a revenue to its proprietor, and thereby serve of the society divides itself, is the fixed capital; of which the char- in the function of a capital to him, it cannot yield any to the acteristic is, that it affords a revenue or profit without circulating public, nor serve in the function of a capital to it, and the revenue or changing masters. It consists chiefly of the four following ar- of the whole body of the people can never be in the smallest de- ticles. 226

Adam Smith First, of all useful machines and instruments of trade, which apprenticeship, always costs a real expense, which is a capital fixed facilitate and abridge labour. 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 Secondly, of all those profitable buildings which are the means which he belongs. The improved dexterity of a workman may be of procuring a revenue, not only to the proprietor who lets them considered in the same light as a machine or instrument of trade for a rent, but to the person who possesses them, and pays that which facilitates and abridges labour, and which, though it costs a rent for them; such as shops, warehouses, work-houses, farm- certain expense, repays that expense with a profit. houses, with all their necessary buildings, stables, granaries, etc. These are very different from mere dwelling-houses. They are a The third and last of the three portions into which the general sort of instruments of trade, and may be considered in the same stock of the society naturally divides itself, is the circulating capital, light. of which the characteristic is, that it affords a revenue only by circu- lating or changing masters. It is composed likewise of four parts. Thirdly, of the improvements of land, of what has been profit- ably laid out in clearing, draining, inclosing, manuring, and re- First, of the money, by means of which all the other three are ducing it into the condition most proper for tillage and culture. circulated and distributed to their proper consumers. An improved farm may very justly be regarded in the same light as those useful machines which facilitate and abridge labour, and by Secondly, of the stock of provisions which are in the possession means of which an equal circulating capital can afford a much of the butcher, the grazier, the farmer, the corn-merchant, the greater revenue to its employer. An improved farm is equally ad- brewer, etc. and from the sale of which they expect to derive a vantageous and more durable than any of those machines, fre- profit. quently requiring no other repairs than the most profitable appli- cation of the farmer’s capital employed in cultivating it. Thirdly, of the materials, whether altogether rude, or more or less manufactured, of clothes, furniture, and building which are Fourthly, of the acquired and useful abilities of all the inhabit- not yet made up into any of those three shapes, but which remain ants and members of the society. The acquisition of such talents, in the hands of the growers, the manufacturers, the mercers, and by the maintenance of the acquirer during his education, study, or drapers, the timber-merchants, the carpenters and joiners, the brick-makers, etc. 227

The Wealth of Nations Fourthly, and lastly, of the work which is made up and com- will produce nothing, without the circulating capital, which af- pleted, but which is still in the hands of the merchant and manu- fords the materials they are employed upon, and the maintenance facturer, and not yet disposed of or distributed to the proper con- of the workmen who employ them. Land, however improved, will sumers; such as the finished work which we frequently find ready yield no revenue without a circulating capital, which maintains made in the shops of the smith, the cabinet-maker, the goldsmith, the labourers who cultivate and collect its produce. the jeweller, the china-merchant, etc. The circulating capital con- sists, in this manner, of the provisions, materials, and finished To maintain and augment the stock which maybe reserved for work of all kinds that are in the hands of their respective dealers, immediate consumption, is the sole end and purpose both of the and of the money that is necessary for circulating and distributing fixed and circulating capitals. It is this stock which feeds, clothes, them to those who are finally to use or to consume them. and lodges the people. Their riches or poverty depend upon the abundant or sparing supplies which those two capitals can afford Of these four parts, three—provisions, materials, and finished to the stock reserved for immediate consumption. work, are either annually or in a longer or shorter period, regu- larly withdrawn from it, and placed either in the fixed capital, or So great a part of the circulating capital being continually with- in the stock reserved for immediate consumption. drawn 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 con- Every fixed capital is both originally derived from, and requires tinual supplies without which it would soon cease to exist. These to be continually supported by, a circulating capital. All useful supplies are principally drawn from three sources; the produce of machines and instruments of trade are originally derived from a land, of mines, and of fisheries. These afford continual supplies of circulating capital, which furnishes the materials of which they provisions and materials, of which part is afterwards wrought up are made, and the maintenance of the workmen who make them. into finished work and by which are replaced the provisions, ma- They require, too, a capital of the same kind to keep them in terials, and finished work, continually withdrawn from the circu- constant repair. lating capital. From mines, too, is drawn what is necessary for maintaining and augmenting that part of it which consists in No fixed capital can yield any revenue but by means of a circu- money. For though, in the ordinary course of business, this part is lating capital The most useful machines and instruments of trade 228

Adam Smith not, like the other three, necessarily withdrawn from it, in order capitals with which fisheries and mines are cultivated. It is the to be placed in the other two branches of the general stock of the produce of land which draws the fish from the waters; and it is the society, it must, however, like all other things, be wasted and worn produce of the surface of the earth which extracts the minerals out at last, and sometimes, too, be either lost or sent abroad, and from its bowels. must, therefore, require continual, though no doubt much smaller supplies. The produce of land, mines, and fisheries, when their natural fertility is equal, is in proportion to the extent and proper appli- Lands, mines, and fisheries, require all both a fixed and circulat- cation of the capitals employed about them. When the capitals ing capital to cultivate them; and their produce replaces, with a are equal, and equally well applied, it is in proportion to their profit not only those capitals, but all the others in the society. natural fertility. Thus the farmer annually replaces to the manufacturer the provi- sions which he had consumed, and the materials which he had In all countries where there is a tolerable security, every man of wrought up the year before; and the manufacturer replaces to the common understanding will endeavour to employ whatever stock farmer the finished work which he had wasted and worn out in he can command, in procuring either present enjoyment or future the same time. This is the real exchange that is annually made profit. If it is employed in procuring present enjoyment, it is a between those two orders of people, though it seldom happens stock reserved for immediate consumption. If it is employed in that the rude produce of the one, and the manufactured produce procuring future profit, it must procure this profit either by stay- of the other, are directly bartered for one another; because it sel- ing with him, or by going from him. In the one case it is a fixed, in dom happens that the farmer sells his corn and his cattle, his flax the other it is a circulating capital. A man must be perfectly crazy, and his wool, to the very same person of whom he chuses to pur- who, where there is a tolerable security, does not employ all the chase the clothes, furniture, and instruments of trade, which he stock which he commands, whether it be his own, or borrowed of wants. He sells, therefore, his rude produce for money, with which other people, in some one or other of those three ways. he can purchase, wherever it is to be had, the manufactured pro- duce he has occasion for. Land even replaces, in part at least, the In those unfortunate countries, indeed, where men are continu- ally 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 229

The Wealth of Nations hand to carry with them to some place of safety, in case of their CHAPTER II being threatened with any of those disasters to which they con- sider themselves at all times exposed. This is said to be a common OF MONEY, CONSIDERED AS A PAR- practice in Turkey, in Indostan, and, I believe, in most other gov- TICULAR BRANCH OF THE GENERAL ernments of Asia. It seems to have been a common practice among STOCK OF THE SOCIETY, OR OF THE our ancestors during the violence of the feudal government. Trea- EXPENSE OF MAINTAINING THE NA- sure-trove was, in these times, considered as no contemptible part of the revenue of the greatest sovereigns in Europe. It consisted in TIONAL CAPITAL such treasure as was found concealed in the earth, and to which IT HAS BEEN SHOWN in the First Book, that the price of the greater no particular person could prove any right. This was regarded, in part of commodities resolves itself into three parts, of which one those times, as so important an object, that it was always consid- pays the wages of the labour, another the profits of the stock, and ered as belonging to the sovereign, and neither to the finder nor to a third the rent of the land which had been employed in produc- the proprietor of the land, unless the right to it had been conveyed ing and bringing them to market: that there are, indeed, some to the latter by an express clause in his charter. It was put upon the commodities of which the price is made up of two of those parts same footing with gold and silver mines, which, without a special only, the wages of labour, and the profits of stock; and a very few clause in the charter, were never supposed to be comprehended in in which it consists altogether in one, the wages of labour; but the general grant of the lands, though mines of lead, copper, tin, that the price of every commodity necessarily resolves itself into and coal were, as things of smaller consequence. 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 230

Adam Smith of the land and labour of every country, taken complexly. The lating capital, or what, without encroaching upon their capital, whole price or exchangeable value of that annual produce must they can place in their stock reserved for immediate consump- resolve itself into the same three parts, and be parcelled out among tion, or spend upon their subsistence, conveniencies, and amuse- the different inhabitants of the country, either as the wages of ments. Their real wealth, too, is in proportion, not to their gross, their labour, the profits of their stock, or the rent of their land. but to their neat revenue. But though the whole value of the annual produce of the land The whole expense of maintaining the fixed capital must evi- and labour of every country, is thus divided among, and consti- dently be excluded from the neat revenue of the society. Neither tutes a revenue to, its different inhabitants; yet, as in the rent of a the materials necessary for supporting their useful machines and private estate, we distinguish between the gross rent and the neat instruments of trade, their profitable buildings, etc. nor the pro- rent, so may we likewise in the revenue of all the inhabitants of a duce of the labour necessary for fashioning those materials into great country. 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 The gross rent of a private estate comprehends whatever is paid may place the whole value of their wages in their stock reserved by the farmer; the neat rent, what remains free to the landlord, for immediate consumption. But in other sorts of labour, both after deducting the expense of management, of repairs, and all the price and the produce go to this stock; the price to that of the other necessary charges; or what, without hurting his estate, he workmen, the produce to that of other people, whose subsistence, can afford to place in his stock reserved for immediate consump- conveniencies, and amusements, are augmented by the labour of tion, or to spend upon his table, equipage, the ornaments of his those workmen. house and furniture, his private enjoyments and amusements. His real wealth is in proportion, not to his gross, but to his neat rent. The intention of the fixed capital is to increase the productive powers of labour, or to enable the same number of labourers to The gross revenue of all the inhabitants of a great country com- perform a much greater quantity of work. In a farm where all the prehends the whole annual produce of their land and labour; the necessary buildings, fences, drains, communications, etc. are in neat revenue, what remains free to them, after deducting the ex- the most perfect good order, the same number of labourers and pense of maintaining first, their fixed, and, secondly, their circu- 231

The Wealth of Nations labouring cattle will raise a much greater produce, than in one of only for performing. The undertaker of some great manufactory, equal extent and equally good ground, but not furnished with who employs a thousand a-year in the maintenance of his ma- equal conveniencies. In manufactures, the same number of hands, chinery, if he can reduce this expense to five hundred, will natu- assisted with the best machinery, will work up a much greater rally employ the other five hundred in purchasing an additional quantity of goods than with more imperfect instruments of trade. quantity of materials, to be wrought up by an additional number The expense which is properly laid out upon a fixed capital of any of workmen. The quantity of that work, therefore, which his ma- kind, is always repaid with great profit, and increases the annual chinery was useful only for performing, will naturally be aug- produce by a much greater value than that of the support which mented, and with it all the advantage and conveniency which the such improvements require. This support, however, still requires a society can derive from that work. certain portion of that produce. A certain quantity of materials, and the labour of a certain number of workmen, both of which The expense of maintaining the fixed capital in a great country, might have been immediately employed to augment the food, may very properly be compared to that of repairs in a private es- clothing, and lodging, the subsistence and conveniencies of the tate. The expense of repairs may frequently be necessary for sup- society, are thus diverted to another employment, highly advanta- porting the produce of the estate, and consequently both the gross geous indeed, but still different from this one. It is upon this ac- and the neat rent of the landlord. When by a more proper direc- count that all such improvements in mechanics, as enable the same tion, however, it can be diminished without occasioning any dimi- number of workmen to perform an equal quantity of work with nution of produce, the gross rent remains at least the same as be- cheaper and simpler machinery than had been usual before, are fore, and the neat rent is necessarily augmented. always regarded as advantageous to every society. A certain quan- tity of materials, and the labour of a certain number of workmen, But though the whole expense of maintaining the fixed capital which had before been employed in supporting a more complex is thus necessarily excluded from the neat revenue of the society, it and expensive machinery, can afterwards be applied to augment is not the same case with that of maintaining the circulating capi- the quantity of work which that or any other machinery is useful tal. 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 232

Adam Smith placed either in the fixed capital of the society, or in their stock The fixed capital, and that part of the circulating capital which reserved for immediate consumption. Whatever portion of those consists in money, so far as they affect the revenue of the society, consumable goods is not employed in maintaining the former, bear a very great resemblance to one another. 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 First, as those machines and instruments of trade, etc. require a capital, therefore, withdraws no portion of the annual produce certain expense, first to erect them, and afterwards to support them, from the neat revenue of the society, besides what is necessary for both which expenses, though they make a part of the gross, are maintaining the fixed capital. deductions from the neat revenue of the society; so the stock of money which circulates in any country must require a certain ex- The circulating capital of a society is in this respect different pense, first to collect it, and afterwards to support it; both which from that of an individual. That of an individual is totally ex- expenses, though they make a part of the gross, are, in the same cluded from making any part of his neat revenue, which must manner, deductions from the neat revenue of the society. A certain consist altogether in his profits. But though the circulating capital quantity of very valuable materials, gold and silver, and of very cu- of every individual makes a part of that of the society to which he rious labour, instead of augmenting the stock reserved for immedi- belongs, it is not upon that account totally excluded from making ate consumption, the subsistence, conveniencies, and amusements a part likewise of their neat revenue. Though the whole goods in a of individuals, is employed in supporting that great but expensive merchant’s shop must by no means be placed in his own stock instrument of commerce, by means of which every individual in reserved for immediate consumption, they may in that of other the society has his subsistence, conveniencies, and amusements, regu- people, who, from a revenue derived from other funds, may regu- larly distributed to him in their proper proportions. larly replace their value to him, together with its profits, without occasioning any diminution either of his capital or of theirs. Secondly, as the machines and instruments of trade, etc. which compose the fixed capital either of an individual or of a society, Money, therefore, is the only part of the circulating capital of a make no part either of the gross or of the neat revenue of either; so society, of which the maintenance can occasion any diminution money, by means of which the whole revenue of the society is in their neat revenue. regularly distributed among all its different members, makes itself 233

The Wealth of Nations no part of that revenue. The great wheel of circulation is alto- purchase or consume; we mean commonly to ascertain what is or gether different from the goods which are circulated by means of ought to be his way of living, or the quantity and quality of the it. The revenue of the society consists altogether in those goods, necessaries and conveniencies of life in which he can with propri- and not in the wheel which circulates them. In computing either ety indulge himself. the gross or the neat revenue of any society, we must always, from the whole annual circulation of money and goods, deduct the whole When, by any particular sum of money, we mean not only to value of the money, of which not a single farthing can ever make express the amount of the metal pieces of which it is composed, any part of either. but to include in its signification some obscure reference to the goods which can be had in exchange for them, the wealth or rev- It is the ambiguity of language only which can make this propo- enue which it in this case denotes, is equal only to one of the two sition appear either doubtful or paradoxical. When properly ex- values which are thus intimated somewhat ambiguously by the plained and understood, it is almost self-evident. same word, and to the latter more properly than to the former, to the money’s worth more properly than to the money. When we talk of any particular sum of money, we sometimes mean nothing but the metal pieces of which it is composed, and Thus, if a guinea be the weekly pension of a particular person, sometimes we include in our meaning some obscure reference to he can in the course of the week purchase with it a certain quan- the goods which can be had in exchange for it, or to the power of tity of subsistence, conveniencies, and amusements. In propor- purchasing which the possession of it conveys. Thus, when we say tion as this quantity is great or small, so are his real riches, his real that the circulating money of England has been computed at eigh- weekly revenue. His weekly revenue is certainly not equal both to teen millions, we mean only to express the amount of the metal the guinea and to what can be purchased with it, but only to one pieces, which some writers have computed, or rather have sup- or other of those two equal values, and to the latter more properly posed, to circulate in that country. But when we say that a man is than to the former, to the guinea’s worth rather than to the guinea. worth fifty or a hundred pounds a-year, we mean commonly to express, not only the amount of the metal pieces which are annu- If the pension of such a person was paid to him, not in gold, but ally paid to him, but the value of the goods which he can annually in a weekly bill for a guinea, his revenue surely would not so prop- erly consist in the piece of paper, as in what he could get for it. A 234

Adam Smith guinea may be considered as a bill for a certain quantity of neces- But if this is sufficiently evident, even with regard to an indi- saries and conveniencies upon all the tradesmen in the vidual, it is still more so with regard to a society. The amount of neighbourhood The revenue of the person to whom it is paid, the metal pieces which are annually paid to an individual, is often does not so properly consist in the piece of gold, as in what he can precisely equal to his revenue, and is upon that account the short- get for it, or in what he can exchange it for. If it could be ex- est and best expression of its value. But the amount of the metal changed for nothing, it would, like a bill upon a bankrupt, be of pieces which circulate in a society, can never be equal to the rev- no more value than the most useless piece of paper. enue 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, Though the weekly or yearly revenue of all the different inhab- and that of a third the day thereafter, the amount of the metal itants of any country, in the same manner, may be, and in reality pieces which annually circulate in any country, must always be of frequently is, paid to them in money, their real riches, however, much less value than the whole money pensions annually paid the real weekly or yearly revenue of all of them taken together, with them. But the power of purchasing, or the goods which can must always be great or small, in proportion to the quantity of successively be bought with the whole of those money pensions, consumable goods which they can all of them purchase with this as they are successively paid, must always be precisely of the same money. The whole revenue of all of them taken together is evi- value with those pensions; as must likewise be the revenue of the dently not equal to both the money and the consumable goods, different persons to whom they are paid. That revenue, therefore, but only to one or other of those two values, and to the latter cannot consist in those metal pieces, of which the amount is so more properly than to the former. much inferior to its value, but in the power of purchasing, in the goods which can successively be bought with them as they circu- Though we frequently, therefore, express a person’s revenue by late from hand to hand. the metal pieces which are annually paid to him, it is because the amount of those pieces regulates the extent of his power of purchas- Money, therefore, the great wheel of circulation, the great instru- ing, or the value of the goods which he can annually afford to con- ment of commerce, like all other instruments of trade, though it sume. We still consider his revenue as consisting in this power of makes a part, and a very valuable part, of the capital, makes no part purchasing or consuming, and not in the pieces which convey it. 235

The Wealth of Nations of the revenue of the society to which it belongs; and though the ductive powers of labour, must increase the fund which puts in- metal pieces of which it is composed, in the course of their annual dustry into motion, and consequently the annual produce of land circulation, distribute to every man the revenue which properly be- and labour, the real revenue of every society. longs to him, they make themselves no part of that revenue. The substitution of paper in the room of gold and silver money, Thirdly, and lastly, the machines and instruments of trade, etc. replaces a very expensive instrument of commerce with one much which compose the fixed capital, bear this further resemblance to less costly, and sometimes equally convenient. Circulation comes that part of the circulating capital which consists in money; that to be carried on by a new wheel, which it costs less both to erect as every saving in the expense of erecting and supporting those and to maintain than the old one. But in what manner this opera- machines, which does not diminish the introductive powers of tion is performed, and in what manner it tends to increase either labour, is an improvement of the neat revenue of the society; so the gross or the neat revenue of the society, is not altogether so every saving in the expense of collecting and supporting that part obvious, and may therefore require some further explication. of the circulating capital which consists in money is an improve- ment of exactly the same kind. There are several different sorts of paper money; but the circu- lating notes of banks and bankers are the species which is best It is sufficiently obvious, and it has partly, too, been explained known, and which seems best adapted for this purpose. already, in what manner every saving in the expense of supporting the fixed capital is an improvement of the neat revenue of the When the people of any particular country have such confi- society. The whole capital of the undertaker of every work is nec- dence in the fortune, probity and prudence of a particular banker, essarily divided between his fixed and his circulating capital. While as to believe that he is always ready to pay upon demand such of his whole capital remains the same, the smaller the one part, the his promissory notes as are likely to be at any time presented to greater must necessarily be the other. It is the circulating capital him, those notes come to have the same currency as gold and which furnishes the materials and wages of labour, and puts in- silver money, from the confidence that such money can at any dustry into motion. Every saving, therefore, in the expense of time be had for them. maintaining the fixed capital, which does not diminish the pro- A particular banker lends among his customers his own promis- sory notes, to the extent, we shall suppose, of a hundred thousand 236

Adam Smith pounds. As those notes serve all the purposes of money, his debt- million sterling, that sum being then sufficient for circulating the ors pay him the same interest as if he had lent them so much whole annual produce of their land and labour; let us suppose, money. This interest is the source of his gain. Though some of too, that some time thereafter, different banks and bankers issued those notes are continually coming back upon him for payment, promissory notes payable to the bearer, to the extent of one mil- part of them continue to circulate for months and years together. lion, reserving in their different coffers two hundred thousand Though he has generally in circulation, therefore, notes to the pounds for answering occasional demands; there would remain, extent of a hundred thousand pounds, twenty thousand pounds therefore, in circulation, eight hundred thousand pounds in gold in gold and silver may, frequently, be a sufficient provision for and silver, and a million of bank notes, or eighteen hundred thou- answering occasional demands. By this operation, therefore, twenty sand pounds of paper and money together. But the annual pro- thousand pounds in gold and silver perform all the functions which duce of the land and labour of the country had before required a hundred thousand could otherwise have performed. The same only one million to circulate and distribute it to its proper con- exchanges may be made, the same quantity of consumable goods sumers, and that annual produce cannot be immediately aug- may be circulated and distributed to their proper consumers, by mented by those operations of banking. One million, therefore, means of his promissory notes, to the value of a hundred thou- will be sufficient to circulate it after them. The goods to be bought sand pounds, as by an equal value of gold and silver money. Eighty and sold being precisely the same as before, the same quantity of thousand pounds of gold and silver, therefore, can in this manner money will be sufficient for buying and selling them. The channel be spared from the circulation of the country; and if different of circulation, if I may be allowed such an expression, will remain operations of the the same kind should, at the same time, be car- precisely the same as before. One million we have supposed suffi- ried on by many different banks and bankers, the whole circula- cient to fill that channel. Whatever, therefore, is poured into it tion may thus be conducted with a fifth part only of the gold and beyond this sum, cannot run into it, but must overflow. One mil- silver which would otherwise have been requisite. lion eight hundred thousand pounds are poured into it. Eight hundred thousand pounds, therefore, must overflow, that sum Let us suppose, for example, that the whole circulating money being over and above what can be employed in the circulation of of some particular country amounted, at a particular time, to one 237

The Wealth of Nations the country. But though this sum cannot be employed at home, it If they employ it in purchasing foreign goods for home consump- is too valuable to be allowed to lie idle. It will, therefore, be sent tion, they may either, first, purchase such goods as are likely to be abroad, in order to seek that profitable employment which it can- consumed by idle people, who produce nothing, such as foreign not find at home. But the paper cannot go abroad; because at a wines, foreign silks, etc.; or, secondly, they may purchase an addi- distance from the banks which issue it, and from the country in tional stock of materials, tools, and provisions, in order to maintain which payment of it can be exacted by law, it will not be received and employ an additional number of industrious people, who re- in common payments. Gold and silver, therefore, to the amount produce, with a profit, the value of their annual consumption. of eight hundred thousand pounds, will be sent abroad, and the channel of home circulation will remain filled with a million of So far as it is employed in the first way, it promotes prodigality, paper instead of a million of those metals which filled it before. increases expense and consumption, without increasing produc- tion, or establishing any permanent fund for supporting that ex- But though so great a quantity of gold and silver is thus sent pense, and is in every respect hurtful to the society. 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 So far as it is employed in the second way, it promotes industry; will exchange it for foreign goods of some kind or another, in and though it increases the consumption of the society, it provides order to supply the consumption either of some other foreign coun- a permanent fund for supporting that consumption; the people try, or of their own. who consume reproducing, with a profit, the whole value of their annual consumption. The gross revenue of the society, the annual If they employ it in purchasing goods in one foreign country, in produce of their land and labour, is increased by the whole value order to supply the consumption of another, or in what is called which the labour of those workmen adds to the materials upon the carrying trade, whatever profit they make will be in addition which they are employed, and their neat revenue by what remains to the neat revenue of their own country. It is like a new fund, of this value, after deducting what is necessary for supporting the created for carrying on a new trade; domestic business being now tools and instruments of their trade. transacted by paper, and the gold and silver being converted into a fund for this new trade. That the greater part of the gold and silver which being forced abroad by those operations of banking, is employed in purchasing 238

Adam Smith foreign goods for home consumption, is, and must be, employed ished work; the other, which consists in money, and which serves in purchasing those of this second kind, seems not only probable, only to circulate those three, must always be deducted. In order to put but almost unavoidable. Though some particular men may some- industry into motion, three things are requisite; materials to work times increase their expense very considerably, though their rev- upon, tools to work with, and the wages or recompence for the sake enue does not increase at all, we maybe assured that no class or of which the work is done. Money is neither a material to work upon, order of men ever does so; because, though the principles of com- nor a tool to work with; and though the wages of the workman are mon prudence do not always govern the conduct of every indi- commonly paid to him in money, his real revenue, like that of all vidual, they always influence that of the majority of every class or other men, consists, not in the money, but in the money’s worth; not order. But the revenue of idle people, considered as a class or or- in the metal pieces, but in what can be got for them. der, cannot, in the smallest degree, be increased by those opera- tions of banking. Their expense in general, therefore, cannot be The quantity of industry which any capital can employ, must much increased by them, though that of a few individuals among evidently be equal to the number of workmen whom it can sup- them may, and in reality sometimes is. The demand of idle people, ply with materials, tools, and a maintenance suitable to the nature therefore, for foreign goods, being the same, or very nearly the of the work. Money may be requisite for purchasing the materials same as before, a very small part of the money which, being forced and tools of the work, as well as the maintenance of the workmen; abroad by those operations of banking, is employed in purchasing but the quantity of industry which the whole capital can employ, foreign goods for home consumption, is likely to be employed in is certainly not equal both to the money which purchases, and to purchasing those for their use. The greater part of it will naturally the materials, tools, and maintenance, which are purchased with be destined for the employment of industry, and not for the main- it, but only to one or other of those two values, and to the latter tenance of idleness. more properly than to the former. When we compute the quantity of industry which the circulating When paper is substituted in the room of gold and silver money, capital of any society can employ, we must always have regard to the quantity of the materials, tools, and maintenance, which the those parts of it only which consist in provisions, materials, and fin- whole circulating capital can supply, may be increased by the whole value of gold and silver which used to be employed in purchasing 239

The Wealth of Nations them. The whole value of the great wheel of circulation and distri- the value of the annual produce of land and labour. bution is added to the goods which are circulated and distributed An operation of this kind has, within these five-and-twenty or by means of it. The operation, in some measure, resembles that of the undertaker of some great work, who, in consequence of some thirty years, been performed in Scotland, by the erection of new improvement in mechanics, takes down his old machinery, and banking companies in almost every considerable town, and even adds the difference between its price and that of the new to his in some country villages. The effects of it have been precisely those circulating capital, to the fund from which he furnishes materials above described. The business of the country is almost entirely and wages to his workmen. carried on by means of the paper of those different banking com- panies, with which purchases and payments of all kinds are com- What is the proportion which the circulating money of any coun- monly made. Silver very seldom appears, except in the change of a try bears to the whole value of the annual produce circulated by twenty shilling bank note, and gold still seldomer. But though the means of it, it is perhaps impossible to determine. It has been conduct of all those different companies has not been unexcep- computed by different authors at a fifth, at a tenth, at a twentieth, tionable, and has accordingly required an act of parliament to regu- and at a thirtieth, part of that value. But how small soever the late it, the country, notwithstanding, has evidently derived great proportion which the circulating money may bear to the whole benefit from their trade. I have heard it asserted, that the trade of value of the annual produce, as but a part, and frequently but a the city of Glasgow doubled in about fifteen years after the first small part, of that produce, is ever destined for the maintenance erection of the banks there; and that the trade of Scotland has of industry, it must always bear a very considerable proportion to more than quadrupled since the first erection of the two public that part. When, therefore, by the substitution of paper, the gold banks at Edinburgh; of which the one, called the Bank of Scot- and silver necessary for circulation is reduced to, perhaps, a fifth land, was established by act of parliament in 1695, and the other, part of the former quantity, if the value of only the greater part of called the Royal Bank, by royal charter in 1727. Whether the trade, the other four-fifths be added to the funds which are destined for either of Scotland in general, or of the city of Glasgow in particu- the maintenance of industry, it must make a very considerable lar, has really increased in so great a proportion, during so short a addition to the quantity of that industry, and, consequently, to period, I do not pretend to know. If either of them has increased 240

Adam Smith in this proportion, it seems to be an effect too great to be ac- probably, does not amount to half a million. But though the cir- counted for by the sole operation of this cause. That the trade and culating gold and silver of Scotland have suffered so great a dimi- industry of Scotland, however, have increased very considerably nution during this period, its real riches and prosperity do not during this period, and that the banks have contributed a good appear to have suffered any. Its agriculture, manufactures, and deal to this increase, cannot be doubted. trade, on the contrary, the annual produce of its land and labour, have evidently been augmented. The value of the silver money which circulated in Scotland be- fore the Union in 1707, and which, immediately after it, was It is chiefly by discounting bills of exchange, that is, by advanc- brought into the Bank of Scotland, in order to be recoined, ing money upon them before they are due, that the greater part of amounted to £411,117: 10: 9 sterling. No account has been got banks and bankers issue their promissory notes. They deduct al- of the gold coin; but it appears from the ancient accounts of the ways, upon whatever sum they advance, the legal interest till the mint of Scotland, that the value of the gold annually coined some- bill shall become due. The payment of the bill, when it becomes what exceeded that of the silver. There were a good many people, due, replaces to the bank the value of what had been advanced, too, upon this occasion, who, from a diffidence of repayment, did together with a clear profit of the interest. The banker, who ad- not bring their silver into the Bank of Scotland; and there was, vances to the merchant whose bill he discounts, not gold and sil- besides, some English coin, which was not called in. The whole ver, but his own promissory notes, has the advantage of being able value of the gold and silver, therefore, which circulated in Scot- to discount to a greater amount by the whole value of his promis- land before the Union, cannot be estimated at less than a million sory notes, which he finds, by experience, are commonly in circu- sterling. It seems to have constituted almost the whole circulation lation. He is thereby enabled to make his clear gain of interest on of that country; for though the circulation of the Bank of Scot- so much a larger sum. land, 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 The commerce of Scotland, which at present is not very great, whole circulation of Scotland cannot be estimated at less than two was still more inconsiderable when the two first banking companies millions, of which that part which consists in gold and silver, most were established; and those companies would have had but little trade, had they confined their business to the discounting of bills of 241

The Wealth of Nations exchange. They invented, therefore, another method of issuing their in all payments, and by encouraging all those with whom they promissory notes; by granting what they call cash accounts, that is, have any influence to do the same. The banks, when their cus- by giving credit, to the extent of a certain sum (two or three thou- tomers apply to them for money, generally advance it to them in sand pounds for example), to any individual who could procure their own promissory notes. These the merchants pay away to the two persons of undoubted credit and good landed estate to become manufacturers for goods, the manufacturers to the farmers for surety for him, that whatever money should be advanced to him, materials and provisions, the farmers to their landlords for rent; within the sum for which the credit had been given, should be re- the landlords repay them to the merchants for the conveniencies paid upon demand, together with the legal interest. Credits of this and luxuries with which they supply them, and the merchants kind are, I believe, commonly granted by banks and bankers in all again return them to the banks, in order to balance their cash different parts of the world. But the easy terms upon which the accounts, or to replace what they my have borrowed of them; and Scotch banking companies accept of repayment are, so far as I know, thus almost the whole money business of the country is transacted peculiar to them, and have perhaps been the principal cause, both by means of them. Hence the great trade of those companies. of the great trade of those companies,and of the benefit which the country has received from it. By means of those cash accounts, every merchant can, without imprudence, carry on a greater trade than he otherwise could do. Whoever has a credit of this kind with one of those companies, If there are two merchants, one in London and the other in and borrows a thousand pounds upon it, for example, may repay Edinburgh, who employ equal stocks in the same branch of trade, this sum piece-meal, by twenty and thirty pounds at a time, the the Edinburgh merchant can, without imprudence, carry on a company discounting a proportionable part of the interest of the greater trade, and give employment to a greater number of people, great sum, from the day on which each of those small sums is paid than the London merchant. The London merchant must always in, till the whole be in this manner repaid. All merchants, there- keep by him a considerable sum of money, either in his own cof- fore, and almost all men of business, find it convenient to keep fers, or in those of his banker, who gives him no interest for it, in such cash accounts with them, and are thereby interested to pro- order to answer the demands continually coming upon him for mote the trade of those companies, by readily receiving their notes payment of the goods which he purchases upon credit. Let the 242

Adam Smith ordinary amount of this sum be supposed five hundred pounds; benefit which the country has derived from this trade. the value of the goods in his warehouse must always be less, by The facility of discounting bills of exchange, it may be thought, five hundred pounds, than it would have been, had he not been obliged to keep such a sum unemployed. Let us suppose that he indeed, gives the English merchants a conveniency equivalent to generally disposes of his whole stock upon hand, or of goods to the cash accounts of the Scotch merchants. But the Scotch mer- the value of his whole stock upon hand, once in the year. By being chants, it must be remembered, can discount their bills of ex- obliged to keep so great a sum unemployed, he must sell in a year change as easily as the English merchants; and have, besides, the five hundred pounds worth less goods than he might otherwise additional conveniency of their cash accounts. 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; The whole paper money of every kind which can easily circulate and the number of people employed in preparing his goods for in any country, never can exceed the value of the gold and silver, the market must be less by all those that five hundred pounds of which it supplies the place, or which (the commerce being sup- more stock could have employed. The merchant in Edinburgh, posed the same) would circulate there, if there was no paper money. on the other hand, keeps no money unemployed for answering If twenty shilling notes, for example, are the lowest paper money such occasional demands. When they actually come upon him, current in Scotland, the whole of that currency which can easily he satisfies them from his cash account with the bank, and gradu- circulate there, cannot exceed the sum of gold and silver which ally replaces the sum borrowed with the money or paper which would be necessary for transacting the annual exchanges of twenty comes in from the occasional sales of his goods. With the same shillings value and upwards usually transacted within that coun- stock, therefore, he can, without imprudence, have at all times in try. Should the circulating paper at any time exceed that sum, as his warehouse a larger quantity of goods than the London mer- the excess could neither be sent abroad nor be employed in the chant; and can thereby both make a greater profit himself, and circulation of the country, it must immediately return upon the give constant employment to a greater number of industrious banks, to be exchanged for gold and silver. Many people would people who prepare those goods for the market. Hence the great 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 243

The Wealth of Nations it from the banks. When this superfluous paper was converted their quantity. Such a company, therefore, ought to increase the into gold and silver, they could easily find a use for it, by sending first article of their expense, not only in proportion to this forced it abroad; but they could find none while it remained in the shape increase of their business, but in a much greater proportion. of paper. There would immediately, therefore, be a run upon the banks to the whole extent of this superfluous paper, and if they The coffers of such a company, too, though they ought to be showed any difficulty or backwardness in payment, to a much filled much fuller, yet must empty themselves much faster than if greater extent; the alarm which this would occasion necessarily their business was confined within more reasonable bounds, and increasing the run. must require not only a more violent, but a more constant and uninterrupted exertion of expense, in order to replenish them, Over and above the expenses which are common to every branch The coin, too, which is thus continually drawn in such large quan- of trade, such as the expense of house-rent, the wages of servants, tities from their coffers, cannot be employed in the circulation of clerks, accountants, etc. the expenses peculiar to a bank consist the country. It comes in place of a paper which is over and above chiefly in two articles: first, in the expense of keeping at all times what can be employed in that circulation, and is, therefore, over in its coffers, for answering the occasional demands of the holders and above what can be employed in it too. But as that coin will of its notes, a large sum of money, of which it loses the interest; not be allowed to lie idle, it must, in one shape or another, be sent and, secondly, in the expense of replenishing those coffers as fast abroad, in order to find that profitable employment which it can- as they are emptied by answering such occasional demands. not find at home; and this continual exportation of gold and sil- ver, by enhancing the difficulty, must necessarily enhance still far- A banking company which issues more paper than can be em- ther the expense of the bank, in finding new gold and silver in ployed in the circulation of the country, and of which the excess is order to replenish those coffers, which empty themselves so very continually returning upon them for payment, ought to increase rapidly. Such a company, therefore, must in proportion to this the quantity of gold and silver which they keep at all times in their forced increase of their business, increase the second article of their coffers, not only in proportion to this excessive increase of their expense still more than the first. circulation, but in a much greater proportion; their notes return- ing upon them much faster than in proportion to the excess of Let us suppose that all the paper of a particular bank, which the 244

Adam Smith circulation of the country can easily absorb and employ, amounts coin gold to the extent of between eight hundred thousand pounds exactly to forty thousand pounds, and that, for answering occa- and a million a-year; or, at an average, about eight hundred and sional demands, this bank is obliged to keep at all times in its fifty thousand pounds. For this great coinage, the bank (inconse- coffers ten thousand pounds in gold and silver. Should this bank quence of the worn and degraded state into which the gold coin attempt to circulate forty-four thousand pounds, the four thou- had fallen a few years ago) was frequently obliged to purchase sand pounds which are over and above what the circulation can gold bullion at the high price of four pounds an ounce, which it easily absorb and employ, will return upon it almost as fast as they soon after issued in coin at £3:17:10 1/2 an ounce, losing in this are issued. For answering occasional demands, therefore, this bank manner between two and a half and three per cent. upon the coin- ought to keep at all times in its coffers, not eleven thousand pounds age of so very large a sum. Though the bank, therefore, paid no only, but fourteen thousand pounds. It will thus gain nothing by seignorage, though the government was properly at the expense of the interest of the four thousand pounds excessive circulation; and this coinage, this liberality of government did not prevent alto- it will lose the whole expense of continually collecting four thou- gether the expense of the bank. sand pounds in gold and silver, which will be continually going out of its coffers as fast as they are brought into them. The Scotch banks, in consequence of an excess of the same kind, were all obliged to employ constantly agents at London to collect Had every particular banking company always understood and money for them, at an expense which was seldom below one and attended to its own particular interest, the circulation never could a half or two per cent. This money was sent down by the waggon, have been overstocked with paper money. But every particular and insured by the carriers at an additional expense of three quar- banking company has not always understood or attended to its ters per cent. or fifteen shillings on the hundred pounds. Those own particular interest, and the circulation has frequently been agents were not always able to replenish the coffers of their em- overstocked with paper money. ployers so fast as they were emptied. In this case, the resource of the banks was, to draw upon their correspondents in London bills By issuing too great a quantity of paper, of which the excess was of exchange, to the extent of the sum which they wanted. When continually returning, in order to be exchanged for gold and sil- those correspondents afterwards drew upon them for the payment ver, the Bank of England was for many years together obliged to 245

The Wealth of Nations of this sum, together with the interest and commission, some of were of more value abroad, or when melted down into bullion at those banks, from the distress into which their excessive circula- home. The Bank of England, notwithstanding their great annual tion had thrown them, had sometimes no other means of satisfy- coinage, found, to their astonishment, that there was every year ing this draught, but by drawing a second set of bills, either upon the same scarcity of coin as there had been the year before; and the same, or upon some other correspondents in London; and the that, notwithstanding the great quantity of good and new coin same sum, or rather bills for the same sum, would in this manner which was every year issued from the bank, the state of the coin, make sometimes more than two or three journeys; the debtor bank instead of growing better and better, became every year worse and paying always the interest and commission upon the whole accu- worse. Every year they found themselves under the necessity of mulated sum. Even those Scotch banks which never distinguished coining nearly the same quantity of gold as they had coined the themselves by their extreme imprudence, were sometimes obliged year before; and from the continual rise in the price of gold bul- to employ this ruinous resource. lion, in consequence of the continual wearing and clipping of the coin, the expense of this great annual coinage became, every year, The gold coin which was paid out, either by the Bank of En- greater and greater. The Bank of England, it is to be observed, by gland or by the Scotch banks, in exchange for that part of their supplying its own coffers with coin, is indirectly obliged to supply paper which was over and above what could be employed in the the whole kingdom, into which coin is continually flowing from circulation of the country, being likewise over and above what those coffers in a great variety of ways. Whatever coin, therefore, could be employed in that circulation, was sometimes sent abroad was wanted to support this excessive circulation both of Scotch in the shape of coin, sometimes melted down and sent abroad in and English paper money, whatever vacuities this excessive circu- the shape of bullion, and sometimes melted down and sold to the lation occasioned in the necessary coin of the kingdom, the Bank Bank of England at the high price of four pounds an ounce. It was of England was obliged to supply them. The Scotch banks, no the newest, the heaviest, and the best pieces only, which were care- doubt, paid all of them very dearly for their own imprudence and fully picked out of the whole coin, and either sent abroad or melted inattention: but the Bank of England paid very dearly, not only down. At home, and while they remained in the shape of coin, for its own imprudence, but for the much greater imprudence of those heavy pieces were of no more value than the light; but they 246

Adam Smith almost all the Scotch banks. though a stream is continually running out, yet another is con- The over-trading of some bold projectors in both parts of the tinually running in, fully equal to that which runs out; so that, without any further care or attention, the pond keeps always united kingdom, was the original cause of this excessive circula- equally, or very near equally full. Little or no expense can ever be tion of paper money. necessary for replenishing the coffers of such a bank. What a bank can with propriety advance to a merchant or un- A merchant, without over-trading, may frequently have occa- dertaker of any kind, is not either the whole capital with which he sion for a sum of ready money, even when he has no bills to dis- trades, or even any considerable part of that capital; but that part count. When a bank, besides discounting his bills, advances him of it only which he would otherwise be obliged to keep by him likewise, upon such occasions, such sums upon his cash account, unemployed and in ready money, for answering occasional de- and accepts of a piece-meal repayment, as the money comes in mands. If the paper money which the bank advances never ex- from the occasional sale of his goods, upon the easy terms of the ceeds this value, it can never exceed the value of the gold and silver banking companies of Scotland; it dispenses him entirely from which would necessarily circulate in the country if there was no the necessity of keeping any part of his stock by him unemployed paper money; it can never exceed the quantity which the circula- and in ready money for answering occasional demands. When tion of the country can easily absorb and employ. such demands actually come upon him, he can answer them suf- ficiently from his cash account. The bank, however, in dealing When a bank discounts to a merchant a real bill of exchange, with such customers, ought to observe with great attention, drawn by a real creditor upon a real debtor, and which, as soon as whether, in the course of some short period (of four, five, six, or it becomes due, is really paid by that debtor; it only advances to eight months, for example), the sum of the repayments which it him a part of the value which he would otherwise be obliged to commonly receives from them, is, or is not, fully equal to that of keep by him unemployed and in ready money, for answering oc- the advances which it commonly makes to them. If, within the casional demands. The payment of the bill, when it becomes due, course of such short periods, the sum of the repayments from replaces to the bank the value of what it had advanced, together certain customers is, upon most occasions, fully equal to that of with the interest. The coffers of the bank, so far as its dealings are confined to such customers, resemble a water-pond, from which, 247

The Wealth of Nations the advances, it may safely continue to deal with such customers. First, by this attention they were enabled to make some toler- Though the stream which is in this case continually running out able judgment concerning the thriving or declining circumstances from its coffers may be very large, that which is continually run- of their debtors, without being obliged to look out for any other ning into them must be at least equally large, so that, without any evidence besides what their own books afforded them; men being, further care or attention, those coffers are likely to be always equally for the most part, either regular or irregular in their repayments, or very near equally full, and scarce ever to require any extraordi- according as their circumstances are either thriving or declining. nary expense to replenish them. If, on the contrary, the sum of the A private man who lends out his money to perhaps half a dozen or repayments from certain other customers, falls commonly very a dozen of debtors, may, either by himself or his agents, observe much short of the advances which it makes to them, it cannot and inquire both constantly and carefully into the conduct and with any safety continue to deal with such customers, at least if situation of each of them. But a banking company, which lends they continue to deal with it in this manner. The stream which is money to perhaps five hundred different people, and of which the in this case continually running out from its coffers, is necessarily attention is continually occupied by objects of a very different much larger than that which is continually running in; so that, kind, can have no regular information concerning the conduct unless they are replenished by some great and continual effort of and circumstances of the greater part of its debtors, beyond what expense, those coffers must soon be exhausted altogether. its own books afford it. In requiring frequent and regular repay- ments from all their customers, the banking companies of Scot- The banking companies of Scotland, accordingly, were for a land had probably this advantage in view. long time very careful to require frequent and regular repayments from all their customers, and did not care to deal with any person, Secondly, by this attention they secured themselves from the whatever might be his fortune or credit, who did not make, what possibility of issuing more paper money than what the circulation they called, frequent and regular operations with them. By this of the country could easily absorb and employ. When they ob- attention, besides saving almost entirely the extraordinary expense served, that within moderate periods of time, the repayments of a of replenishing their coffers, they gained two other very consider- particular customer were, upon most occasions, fully equal to the able advantages. advances which they had made to him, they might be assured that 248

Adam Smith the paper money which they had advanced to him had not, at any exceeding the quantity of gold and silver which, had there been time, exceeded the quantity of gold and silver which he would no such advances, he would have been obliged to keep by him for otherwise have been obliged to keep by him for answering occa- answering occasional demands, might soon come to exceed the sional demands; and that, consequently, the paper money, which whole quantity of gold and silver which ( the commerce being they had circulated by his means, had not at any time exceeded supposed the same ) would have circulated in the country, had the quantity of gold and silver which would have circulated in the there been no paper money; and, consequently, to exceed the quan- country, had there been no paper money. The frequency, regular- tity which the circulation of the country could easily absorb and ity, and amount of his repayments, would sufficiently demonstrate employ; and the excess of this paper money would immediately that the amount of their advances had at no time exceeded that have returned upon the bank, in order to be exchanged for gold part of his capital which he would otherwise have been obliged to and silver. This second advantage, though equally real, was not, keep by him unemployed, and in ready money, for answering oc- perhaps, so well understood by all the different banking compa- casional demands; that is, for the purpose of keeping the rest of nies in Scotland as the first. his capital in constant employment. It is this part of his capital only which, within moderate periods of time, is continually re- When, partly by the conveniency of discounting bills, and partly turning to every dealer in the shape of money, whether paper or by that of cash accounts, the creditable traders of any country can coin, and continually going from him in the same shape. If the be dispensed from the necessity of keeping any part of their stock advances of the bank had commonly exceeded this part of his by them unemployed, and in ready money, for answering occa- capital, the ordinary amount of his repayments could not, within sional demands, they can reasonably expect no farther assistance moderate periods of time, have equalled the ordinary amount of from hanks and bankers, who, when they have gone thus far, can- its advances. The stream which, by means of his dealings, was not, consistently with their own interest and safety, go farther. A continually running into the coffers of the bank, could not have bank cannot, consistently with its own interest, advance to a trader been equal to the stream which, by means of the same dealings the whole, or even the greater part of the circulating capital with was continually running out. The advances of the bank paper, by which he trades; because, though that capital is continually re- turning to him in the shape of money, and going from him in the 249

The Wealth of Nations same shape, yet the whole of the returns is too distant from the the capital of those creditors; or to render it extremely improbable whole of the outgoings, and the sum of his repayments could not that those creditors should incur any loss, even though the success equal the sum of his advances within such moderate periods of of the project should fall very much short of the expectation of the time as suit the conveniency of a bank. Still less could a bank projectors. Even with this precaution, too, the money which is bor- afford to advance him any considerable part of his fixed capital; of rowed, and which it is meant should not be repaid till after a period the capital which the undertaker of an iron forge, for example, of several years, ought not to be borrowed of a bank, but ought to employs in erecting his forge and smelting-houses, his work-houses, be borrowed upon bond or mortgage, of such private people as and warehouses, the dwelling-houses of his workmen, etc.; of the propose to live upon the interest of their money, without taking the capital which the undertaker of a mine employs in sinking his trouble themselves to employ the capital, and who are, upon that shafts, in erecting engines for drawing out the water, in making account, willing to lend that capital to such people of good credit as roads and waggon-ways, etc.; of the capital which the person who are likely to keep it for several years. A bank, indeed, which lends its undertakes to improve land employs in clearing, draining, inclos- money without the expense of stamped paper, or of attorneys’ fees ing, manuring, and ploughing waste and uncultivated fields; in for drawing bonds and mortgages, and which accepts of repayment building farmhouses, with all their necessary appendages of stables, upon the easy terms of the banking companies of Scotland, would, granaries, etc. The returns of the fixed capital are, in almost all no doubt, be a very convenient creditor to such traders and under- cases, much slower than those of the circulating capital: and such takers. But such traders and undertakers would surely be most in- expenses, even when laid out with the greatest prudence and judg- convenient debtors to such a bank. ment, very seldom return to the undertaker till after a period of many years, a period by far too distant to suit the conveniency of It is now more than five and twenty years since the paper money a bank. Traders and other undertakers may, no doubt with great issued by the different banking companies of Scotland was fully propriety, carry on a very considerable part of their projects with equal, or rather was somewhat more than fully equal, to what the borrowed money. In justice to their creditors, however, their own circulation of the country could easily absorb and employ. Those capital ought in this case to be sufficient to insure, if I may say so, companies, therefore, had so long ago given all the assistance to the traders and other undertakers of Scotland which it is possible 250