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CHAPTER III

INTERCHANGE

section I

Nature of theAdvantageDerived from theInterchange ofCommodities, and thePrincipalAgentsEmployed in it

When two men have more than they need; one, for example, of food; another, of cloth; while the first desires more of cloth than he possesses, the second more of food; it is a great accommodation to both, if they can perform an exchange of a part of the food of the one for a part of the cloth of the other; and so in other cases.

In performing exchanges, there are two sets of persons, the intervention of whom is of great advantage: the first are Carriers, the second Merchants.

When the division and distribution of labour has been carried to any considerable extent, goods are produced at some, often at a very considerable, distance from the place where they are wanted for consumption. It is necessary that they should be conveyed from the one place to the other. Carriers are of two sorts: Carriers by Land, and Carriers by Water. For the business of carriage, both capital and labour are required. In carriage by land, the wagons or carts, the horses or other cattle, and the maintenance both of them and of the necessary number of men; in carriage by water, the ships, and the maintenance of the men who navigate them, constitute the capital required.

To procure articles, as men have occasion to consume them, it would be very inconvenient to repair, in each instance, to the respective manufacturers and producers, who may often live at a very considerable distance from one another. Great trouble is saved to consumers, when they find assembled in one place the whole, or any considerable portion, of the articles which they use. This convenience gives rise to the class of merchants, who buy from the manufacturers, and keep ready for use, all those articles for which they expect a profitable sale.

In small towns, where one or a few merchants can supply the wants of all the population, the shop or store of one merchant contains articles of all, or most of the kinds, in general demand. In places where the population is large, instead of a great number of shops, each dealing in almost all kinds of articles, it is found more convenient to divide the articles into classes, and that each shop should confine itself to a particular class: one, for example, to hats, another to hosiery; one to glass, another to iron; and so on.

section II

What Determines the Quantity in Which Commodities Exchange for One Another

When a certain quantity of one commodity is exchanged for a certain quantity of another commodity; a certain quantity of cloth, for example, for a certain quantity of corn; there is something which determines the owner of the cloth to accept for it such and such a quantity of corn; and, in like manner, the owner of the corn to accept such and such a quantity of cloth.

This is, evidently, the principle of demand and supply, in the first instance. If a great quantity of corn comes to market to be exchanged for cloth, and only a small quantity of cloth to be exchanged for corn, a great quantity of corn will be given for a small quantity of cloth. If the quantity of cloth, which thus comes to market, is increased, without any increase in the quantity of corn, the quantity of corn which is exchanged for a given quantity of cloth will be proportionally diminished.

This answer, however, does not resolve the whole of the question. The quantity in which commodities exchange for one another depends upon the proportion of supply to demand. It is evidently therefore necessary to ascertain upon what that proportion depends. What are the laws according to which supply is furnished to demand, is one of the most important inquiries in Political Economy.

Demand creates, and the loss of demand annihilates, supply. When an increased demand arises for any commodity, an increase of supply, if the supply is capable of increase, follows, as a regular effect. If the demand for any commodity altogether ceases, the commodity is no longer produced.

The connexion here, of causes and effects, is easily explained. If corn is brought to market, the cost of bringing it has been so much. If cloth is brought to market, the cost of bringing it has been so much. For the benefit of simplicity, the number of commodities in the market is here supposed to be two: it is of no consequence, with regard to the result, whether they are understood to be few or many.

The cost of bringing the corn to market has been either equal to that of bringing the cloth, or unequal. If it has been equal, there is no motive, to those who bring the cloth or the corn, for altering the quantity of either. They cannot obtain more of the commodity which they receive in exchange, by transferring their labour to its production. If the cost has been unequal, there immediately arises a motive for altering the proportions. Suppose that the cost of bringing the whole of the corn has been greater than that of bringing the whole of the cloth; and that the whole of the one is exchanged against the whole of the other, either at once, or in parts: the persons who brought the cloth have in that case possessed themselves of a quantity of corn at less cost, than that at which it was brought to market, by those who produced it; those, on the other hand, who brought the corn have possessed themselves of a quantity of cloth, at a greater cost than that at which it can be made and brought to market.

Here motives arise, to diminish the quantity of corn, and increase the quantity of cloth; because the men who have been producing corn, and purchasing cloth, can obtain more cloth, by transferring their means of production from the one to the other. As soon, again, as no more cloth can be obtained by applying the same amount of means to the production of cloth, then by applying them to corn, and exchanging it for cloth, all motive to alter the quantity of the one as compared with that of the other is at an end. Nothing is to be gained by producing corn rather than cloth, or cloth rather than corn. The cost of production on both sides is equal.

It thus appears that the relative value of commodities, or in other words, the quantity of one which exchanges for a given quantity of another, depends upon demand and supply, in the first instance; but upon cost of production, ultimately; and hence, in accurate language, upon cost of production, entirely. An increase or diminution of demand or supply, may temporarily increase or diminish, beyond the point of productive cost, the quantity of one commodity which exchanges for a given quantity of another; but the law of competition, wherever it is not obstructed, tends invariably to bring it to that point, and to keep it there.

Cost of production, then, regulates the exchangeable value of commodities. But cost of production is itself involved in some obscurity.

Two instruments are commonly combined in production; Labour and Capital.

It follows, either that cost of production consists in labour and capital combined; or that one of these may be resolved into the other. If one of them can be resolved into the other, it follows that cost of production does not consist in both combined.

The opinion, which is suggested by first appearances, undoubtedly is, that cost of production consists in capital alone. The capitalist pays the wages of his labourer, buys the raw material, and expects that what he has expended shall be returned to him, in the price, with the ordinary profits upon the whole of the capital employed. From this view of the subject, it would appear, that cost of production consists exclusively in the portion of capital expended, together with the profits upon the whole of the capital employed in effecting the production.

It is easy, however, to see, that in the term capital, thus understood, an ambiguity, and hence a fallacy, is involved. When we say that capital and labour, the two instruments of production, belong to two classes of persons; we mean that the labourers have contributed so much to the production, and the capitalists so much; and that the commodity, when produced, belongs in certain proportions to both. It may so happen, however, that one of these parties has purchased the share of the other, before the production is completed. In that case, the whole of the commodity belongs to the party who has purchased the share of the other. In point of fact, it does happen, that the capitalist, as often as he employs labourers, by the payment of wages, purchases the share of the labourers. When the labourers receive wages for their labour, without waiting to be paid by a share of the commodity produced, it is evident that they sell their title to that share. The capitalist is then the owner, not of the capital only, but of the labour also. If what is paid as wages is included, as it commonly is, in the term capital, it is absurd to talk of labour separately from capital. The word capital, as thus employed, includes labour and capital both. To say, therefore, that the exchangeable value of commodities is determined by capital, understood in this sense, is to say that it is determined by labour and capital combined. This, however, is returning to the point from which we set out. It is nugatory to include labour in the definition of the word capital, and then to say that, capital without labour, determines exchangeable value. If capital is understood in a sense which does not include the purchase money of labour, and hence the labour itself, it is obvious that capital does not regulate the exchangeable value of commodities.20

If labour were the sole instrument of production, and capital not required, the produce of one day's labour in one commodity would exchange against the produce of one day's labour in another commodity. In the rude state of society, if the hunter and the fisherman desired to vary their food, the one by a portion of game, the other by a portion of fish, the average quantity which they took in a day would form the standard of exchange. If it did not, one of the two would be placed in a more unfavourable situation than his neighbour, with perfect power, which he would of course employ, to pass from the one situation to the other.

In estimating equal quantities of labour, an allowance would, of course, be included for different degrees of hardness and skill. If the products of each of two days' labour of equal hardness and skill exchanged for one another, the product of a day's labour, which was either harder, or required a greater degree of skill, would exchange for something more.

All capital consists really in commodities. The capital of the farmer is not the money which he may be worth, because that he cannot apply to production. His capital consists in his implements and stock.

As all capital consists in commodities, it follows, of course, that the first capital must have been the result of pure labour. The first commodities could not be made by any commodities existing before them.

But if the first commodities, and of course the first capital, were the result of pure labour, the value of this capital, the quantity of other commodities for which it would exchange, must have been estimated by labour. This is an immediate consequence of the proposition which we have just established, that where labour was the sole instrument of production, exchangeable value was determined by the quantity of labour which the production of the commodity required.

If this be established, it is a necessary consequence, that the exchangeable value of all commodities is determined by quantity of labour.

The first capital, as has just been seen, being the result of pure labour, bears a value in proportion to that labour. This capital concurs in production. And it is contended that as soon as capital concurs in production, the value of the commodity produced is determined by the value of the capital. But the value of that capital itself, we have just observed, is determined by labour. To say, therefore, that the value of a product is determined by the value of the capital, is of no use, when you have to go beyond the value of the capital, and ask, what it is by which that value is itself determined. To say that the value of the product is determined by the value of the capital, but the value of the capital is determined by the quantity of labour, is to say that the value of the product is determined by the quantity of labour.

It thus undeniably appears, that not only the value of the first capital, but, by equal necessity, that of the commodities which are produced by the first capital, is determined by quantity of labour. Capital of the second stage must consist in the commodities which are produced by that of the first stage. It must, therefore, be estimated by the quantity of labour. The same reasoning applies to it in every subsequent stage. The value of the first capital was regulated by quantity of labour: the value of that which was produced by the first capital was regulated by the value of the first: that, however, was valued by labour: the last, therefore, is valued by labour; and so on, without end, as often as successive productions may be supposed to be made. But, if the value of all capital must be determined by labour, it follows, upon all suppositions, that the value of all commodities must be determined by labour.

To say, indeed, that the value of commodities depends upon capital, implies one of the most obvious of all absurdities. Capital is commodities. If the value of commodities, then, depends upon the value of capital, it depends upon the value of commodities; value in short depends upon value. This is not an exposition of value. It is an attempt clearly and completely abortive.

It thus appears, that quantity of labour, in the last resort, determines the proportion in which commodities exchange for one another.21

There is one phenomenon which is brought to controvert these conclusions, and which it is, therefore, necessary to explain.

It is said that the exchangeable value of commodities is affected by time, without the intervention of labour; because, when profits of stock must be included, so much must be added for every portion of time which the production of one commodity required beyond that of another. For example, if the same quantity of labour has produced in the same season a cask of wine, and 20 sacks of flour, they will exchange against one another at the end of the season: but if the owner of the wine places the wine in his cellar, and keeps it for a couple of years, it will be worth more than the 20 sacks of flour, because the profits of stock for the two years must be added to the original price. Here is an addition of value, but here it is affirmed, there has been no new application of labour; quantity of labour, therefore, is not the principle by which exchangeable value is regulated.

This objection is founded upon a misapprehension with respect to the nature of profits. Profits are, in reality, the measure of quantity of labour; and the only measure of quantity of labour to which, in the case of capital, we can resort. This can be established by rigid analysis.

If two commodities are produced, a bale of silk, for example, for immediate consumption, and a machine, which is an article of fixed capital; it is certain, that if the bale of silk and the machine were produced by the same quantity of labour, and in the same time, they would exactly exchange for one another, quantity of labour would clearly be the regulator of their value.

But suppose that the owner of the machine, instead of selling it, is disposed to use it, for the sake of the profits which it brings; what is the real character and nature of his action? Instead of receiving the price of his machine all at once, he takes a deferred payment, so much per annum: he receives, in fact, an annuity, in lieu of the capital sum; an annuity, fixed by the competition of the market, and which is therefore an exact equivalent for the capital sum. Whatever the proportion which the capital sum bears to the annuity, whether it be ten years’ purchase, or twenty years' purchase, such a proportion is each year's annuity of the original value of the machine. The conclusion, therefore, is incontrovertible: as the exchangeable value of the machine, had it been sold as soon as made, would have been the practical measure of the quantity of labour employed in making it, one-tenth or one-twentieth of that value measures also a tenth or a twentieth of the quantity of labour.

If a piece of machinery, which has cost 100 days' labour, is applied in making a commodity, and is worn out in the making of it; and if 100 days' pure labour are employed in making another commodity; the produce of the machine, and the produce of the labour, supposing no adjustment necessary for difference of time, will exchange against one another.

Make now a different supposition: that the machine is an article of fixed capital, and not worn out, and let us trace the consequences. It was correctly supposed, in the former case, that 100 days' labour were expended by wearing out the machine; but 100 days' labour have not been expended in the second, because the machine is not worn out. Some labour, however, has been expended, because 100 days' labour in a mass has been applied. How much of it shall we say has been expended? We have an exact measure of it in the equivalent which is paid. If the equivalent which was obtained when the machine was worn out, was a measure of 100 days' labour, whatever proportion of such equivalent is received as a year's use of the machine when not worn out, must represent a corresponding proportion of the labour expended upon the machine.

Capital is allowed to be correctly described under the title of hoarded labour. A portion of capital produced by 100 days' labour, is 100 days' hoarded labour. But the whole of the 100 days' hoarded labour is not expended, when the article constituting the capital is not worn out. A part is expended, and what part? Of this we have no direct, we have only an indirect measure. If capital, paid for by an annuity, is paid for at the rate of 10 per cent, one-tenth of the hoarded labour may be correctly considered as expended in one year.

The instance which is commonly adduced as exemplifying the supposed fact of an increase of value without increase of labour, is that of wine. Wine acquires a greater value by being merely deposited in the cellars of the merchant.

But they who would advance this, as an answer to the antecedent reasoning, do not perceive the force of their own objection. Their doctrine is, that exchangeable value is regulated by cost of production. Cost of production is the outlay necessary for completing the product. When the wine was put into the cellar, it was worth so much, according to the capital expended in its production. When it is placed in the cellar, no more capital is employed upon it, nor any more labour; and yet it acquires an additional value. The question, why it acquires more value, when there is not more capital, is just as difficult, as why it acquires more value, when there is not more labour.

It is no solution to say, that profits must be paid; because this only brings us to the question, why must profits be paid? To this there is no answer but one, that they are the remuneration for labour; labour not applied immediately to the commodity in question, but applied to it through the medium of other commodities, the produce of labour. Thus a man has a machine, the produce of 100 days' labour. In applying it, the owner undoubtedly applies labour, though in a secondary sense, by applying that which could not have been had but through the medium of labour. This machine, let us suppose, is calculated to last exactly 10 years. One tenth of the fruits of 100 days' labour is thus expended every year; which is the same thing in the view of cost and value, as saying that 10 days' labour have been expended. The owner is to be paid for the 100 days' labour which the machine costs him, at the rate of so much per annum, that is, by an annuity for ten years, equivalent to the original value of the machine. It thus appears that profits are simply remuneration for labour. They may, indeed, without doing any violence to language, hardly even by a metaphor, be denominated wages: the wages of that labour which is applied, not immediately by the hand, but mediately, by the instruments which the hand has produced. And if you may measure the amount of immediate labour by the amount of wages, you may measure the amount of secondary labour by that of the return to the capitalist. We surely have not occasion to add, that if this be the general account of profits, which seems undeniable, it is applicable to all particular cases, to that of wine in the cellar, as well as to every other. Suppose that 100 men make a machine in one day, that another 100 men employ this machine the next day, and wear it out; the first 100 men, and the second 100 men, will divide the produce equally between them. The share of the first 100 men is payment for capital, no doubt, but it is also, most obviously, payment for labour too; and in whatever degree labour is productive, that is, yields more than is consumed in effecting the product, to that degree an advantage is afforded beyond the replacing of the capital consumed, and constitutes profit.

The return which is made to capital employed upon the land, is that which determines the rate of annual profit from all other employments of capital; and, of course, for that which is employed in meliorating wine in a wine-cellar. The case of the wine in the cellar coincides exactly with that of a machine worn out in a year, which works by itself without additional labour. The new wine, which is one machine, is replaced by its produce, the old wine, with that addition of value which corresponds with the return to capital employed upon the land; and the account which is to be rendered of the one return, is also the true account of the other.22

section III

Effect Upon Exchangeable Values of a Fluctuation in Wages and Profits

In stating that commodities are produced by two instruments, Labour and Capital, of which the last is the result of labour, we, in effect, mean, that commodities are produced by two quantities of labour, differently circumstanced; the one, immediate, or primary labour, that which is applied at once by the hand of the labourer; the other, hoarded, or secondary labour, that which is the result of former labour, and either is applied in aid of the immediate labour, or is the subject matter upon which it is bestowed.

Of these two species of labour, two things are to be observed: First, that they are not always paid according to the same rate; that is, the payment of the one does not rise when that of the other rises, or fall when that of the other falls: And, secondly, that they do not always contribute to the production of all commodities in equal proportions.

If there were any two species of labour, the wages of which did not rise and fall in the same proportion, and which, contributing to the production of all commodities, did not contribute to them all in equal degrees, this circumstance, of their not contributing in equal degrees, would create a difference in exchangeable values, as often as any fluctuation took place in the rate of wages.

If all commodities were produced by a portion of skilled, and a portion of unskilled labour, but the ratio which these portions bore to one another were different in different commodities; and if, as often as the wages of skilled labour rose, the wages of unskilled labour rose twice as much: it is very obvious, that, upon a rise of wages, those commodities, to the production of which a greater proportion of unskilled labour was applied, would rise in value as compared with those to which a less proportion was applied. It is also obvious, that, though this difference in the ratios according to which the wages of the two kinds of labour had altered, and in the proportions in which they were applied to the production of different commodities, would, upon a rise or fall in wages, alter the relative value of the commodities, it would do so, without in the least degree affecting the truth of the proposition, that quantity of labour determined exchangeable values.23

The case is precisely the same when we consider that it is the two species of labour, called primary and secondary, which are applied in different proportions.

Three cases will conveniently exemplify the different degrees in which labour and capital respectively contribute to production. These are the two extreme cases, and the medium. The first is that of commodities which are produced by immediate labour alone without capital; the second, that of commodities produced, one half by capital, one half by immediate labour; the third, that of commodities produced by capital alone without immediate labour. There are perhaps no actual cases which perfectly coincide with either of the extremes. There are, however, cases which approximate to both; and when the most simple are illustrated as examples, allowance can easily and correctly be made for the differences of the rest.

If two species of labour are employed in the production of commodities; and if, when the payment of the one species of labour rises, that of the other falls; a commodity, in the production of which a greater proportion of the first species of labour is employed, will, upon a rise in the payment of that species of labour, rise in exchangeable value, as compared with a commodity in which less is employed. The degree however, in which it will rise, will depend upon two circumstances: first, upon the degree in which the payment of the one species of labour falls when the other rises; and, secondly, upon the degree in which the proportion of the labour of the first kind, employed in its production, exceeds the proportion of it which is employed in the production of the other commodity.

The first question then, is, what degree, when wages rise, do profits fall? And this is the only general question; for the degree in which the two species of labour combine in the production of different commodities, depends upon the circumstances of each particular case.

If all commodities corresponded with the first of the cases, assumed above as examples, and which we may, for the sake of abbreviation, designate, as No. 1, No. 2, No. 3; in other words, if all commodities were produced wholly by labour, capital being solely employed in the payment of wages; in that case, just as much as wages of labour rose, profits of stock would fall.

Suppose a capital of 1000l. to be thus employed, and profits to be 10 per cent., the value of the commodity would be 1100l., for that would replace the capital with its profits. The commodity may be regarded as consisting of 1100 parts, of which 1000 would belong to the labourers and 100 to the capitalist. Let wages, upon this, be supposed to rise 5 per cent.; in that case, it is evident, that instead of 100 parts of the 1100, the capitalist would receive only 50; his profits, therefore, instead of 10 would be only 5 per cent. Instead of 1000l. he would have to pay 1050l. in wages. The commodity would not rise in value to indemnify him, because we have supposed that all commodities are in the same situation; it would, therefore, be of the value of 1100l., as before, of which 50l. alone would remain for himself.

If all commodities corresponded with the case No. 2, profits would fall only half as much as wages rose. If we suppose that 1000l. were paid in wages, and 1000l. employed in fixed capital; that profits, as before, were 10 per cent., and this the whole expenditure; the value of the commodity would be 1200l. because that is the sum which would replace the capital expended and pay the profits of the whole. In this case the commodity might be considered as divided into 1200 parts, of which 200 would belong to the capitalist. If wages rose 5 per cent., and instead of 1000l. as wages, he paid 1050l. he would still retain 150l. as profits; in other words, he would sustain a reduction of only 2½ per cent.

The case would be precisely the same, if we supposed the 1000l. of capital, which is not employed in the payment of wages, to be employed in any proportion, in the shape of circulating capital consumed in the course of the productive process, and requiring to be replaced. Thus, while 1000l. were employed in the payment of wages, 500l. might be employed as fixed capital in durable machinery, 500l. in raw material and other expenses. If this were the state of the expenditure, the value of the article would be 1700l.; being the amount of the capital to be replaced, and 10 per cent. profits upon the whole. Of these 1700 parts, 1000 would be the share of the labourers, though paid in advance, and 700 the share of the capitalist, 200 being profits. If, now, wages were to rise 5 per cent., 1050 of the above 1700 parts would be the share of the labourers, and 650 only would remain to the capitalist, of which, after replacing his 500l. of circulating capital, 150 would remain as profits; a reduction of 2½ per cent. as before.

If all commodities corresponded with the third case, as no wages would be paid, profits could not be affected by the rise of them: and it is obvious, that, in proportion as commodities may be supposed to approach that extreme, profits would be less and less affected by such a rise.

If we suppose, what is most probable, that, in the actual state of things, as many cases are on the one side of the medium as on the other, the result would be, in consequence of the mutual compensations that would take place, that profits would be reduced exactly half as much as wages rose.

The steps may be traced as follows:

When wages rise, and profits fall, it is evident that all commodities, made with a less proportion of labour to capital, will fall in value, as compared with those which are made with a greater. Thus, if No. 1 is taken as the standard, that in which commodities are produced wholly by labour; all commodities belonging to that case will be said to remain of the same value; all belonging to any of the other cases will be said to fall in value. If No. 2 is taken as the standard, all commodities appertaining to that case will be said to remain of the same value; all, belonging to any case nearer the first extreme, will be said to rise in value; all, to any nearer the last extreme, to fall.

Those capitalists, who produce articles of case No. 1, sustain, when wages have risen 5 per cent., an additional cost of 5 per cent.; but they exchange their commodity against other commodities. If they exchange them against those of case No. 2, where the capitalists have sustained an additional cost of only 2½ per cent., they will receive 2½ per cent. additional quantity. Thus, in obtaining goods, produced under the circumstances of case No. 2, they obtain a certain degree of compensation, and sustain, by the rise of wages, a disadvantage of only 2½ per cent. In this exchange, however, the result, with respect to the capitalists who produce goods under the circumstances of case No. 2, is reversed. They have already sustained a disadvantage of 2½ per cent., in the production of their goods, and are made to sustain another disadvantage of 2½ per cent. in obtaining, by exchange the goods produced under the circumstances of case No. 1.

The result, then, upon the whole, is, that all producers, who possess themselves, either by production or exchange, of goods produced under the circumstances of case No. 2, sustain a disadvantage of 2½ per cent.; those who possess themselves of goods in cases approaching the first extreme, sustain a greater; those in cases approaching the last, a less disadvantage: that, if the cases on the one side are equal to those on the other, a loss of 2½ per cent. is sustained upon the whole; that this, accordingly, is the extent to which, in practice, it may be supposed that profits are reduced.

From these elements it is easy to compute the effect of a rise of wages upon price. All commodities are compared with money, or the precious metals. If money be supposed to correspond with case No. 2, or to be produced, which is probably not far from the fact, by equal proportions of labour and capital; then all commodities, produced under these medium circumstances, are not altered in price by a rise of wages; those commodities which approach nearer the first extreme, or admit a greater proportion of labour than capital in their formation, rise in price: those which approach the second, that is, have a greater portion of capital than labour, fall: and, upon the aggregate of commodities or all taken together, there is neither fall nor rise.

24 From the explanations, here afforded, it will be easy to see what is meant by the term ‘measure of value,’ and wherein it differs from that which we have already endeavoured to explain, the ‘regulator of value.’

Money, that is, the precious metals in coin, serves practically as a measure of value, as is evident from what has immediately been said. A certain quantity of the precious metal is taken as a known value, and the value of other things is measured by that value; one commodity is twice, another thrice the value of such a portion of the metal, and so on.

It is evident, however, that this can remain an accurate measure of value, only if it remains of the same value itself. If a commodity, which was twice the value of an ounce of silver, becomes three times its value, we can only know what change has taken place in the value of this commodity, if we know that our measure is unchanged.

But there is no commodity to be taken as a measure of value, which is not itself liable to alterations in value, or in its power of purchasing, from a change in the quantity of labour and capital required both for its own production, and that of other commodities, and also from a change in wages and profits.

The alteration of value, arising from a change in the quantity of labour required for production, is the most important; for if we could be sure, that the commodity chosen for our measure of value was itself always produced under the same circumstances, that is, by the same quantity of immediate, and the same quantity of hoarded, labour, it would always answer the following purposes: 1st, it would show, by every alteration in its power of purchasing a commodity produced by the same proportion of labour and capital, the alteration which had taken place in the cost of production of that commodity, or in that by which its value is regulated: and 2dly, it might be accommodated by calculation to the changes in value, produced by the alteration of wages and profits, in the case of commodities not produced by the same proportions of labour and capital.

Thus, if gold were produced under the circumstances of case No. 1, by mere labour, picked up, for example, by the hand, from the beds of rivers, and always in equal quantity, in return for an equal quantity of labour, it would always be a measure, exactly and immediately, of all commodities produced by pure labour. In the case, however, of a rise of wages, and a fall in the profits of stock, gold would in these circumstances rise as compared with commodities produced under the circumstances of case No. 2, though no alteration should have taken place in the amount of the labour and capital required for their production. It is evident, therefore, that in these circumstances, gold, fluctuating in value with every fluctuation in the wages of labour, would very imperfectly serve the purposes of a measure of value. If a contract, for example, were made, to pay an annuity of so much gold for twenty years, it might be 10 per cent. more, or 10 per cent, less, at the end of that period, than it was at the beginning. Of labour it would all the time command exactly the same quantity, but of all commodities produced by aid of capital it would command a different quantity, and that, in proportion to the degree in which capital, not labour, was the instrument of their production.

Though we can by strict analysis discover, that exchangeable value is proportioned to quantity of labour expended in production, there are three circumstances which prevent its application as the measure of value.

In the first place, there are two kinds of labour employed in production, and the degree in which the produce is shared between them often varies, and occasions, as we have seen, a corresponding variation in the exchangeable values of commodities produced by different proportions of these two kinds of labour. In the next place, we have no practical means of ascertaining before hand the exact quantity of hoarded labour which goes to production, since the only measure we have of its quantity is the price which it brings. In the third place, labour is not constant in its productive powers. If one day's labour produced always the same quantity of gold, but not the same quantity of corn, or of cloth, the exchangeable value of gold would alter in respect of corn and cloth.

From these explanations it also appears, that nothing else can be applied as an accurate measure of value.

Every commodity may be considered as produced under one of the three sets of circumstances specified above. If we take as our measure a commodity, produced under the circumstances No. 1, the gold, for example, picked up by the hand, this will always purchase the same quantity of pure labour, and of such commodities as are produced by the same quantity of that labour; but it will not purchase the same quantity of commodities which come to need more or less of labour, nor the same quantity of the produce of hoarded labour, but less of it in proportion as wages rise, more as wages fall. Could we take as our measure a commodity produced under the circumstances No. 3, that is, by hoarded labour alone, it would always purchase the same quantity of the produce of hoarded labour, when no alteration had taken place in its productive powers, but less or more of the produce of immediate labour, according as profits, the wages of hoarded labour, rose or fell. A commodity, produced under the medium circumstances, answers the purpose best; because by far the greater number of commodities are produced under circumstances more nearly approaching to the medium than any of the extremes. Gold, therefore, which is produced in these circumstances, and with less variation in the quantity of the two kinds of labour applied to its production, than almost any other commodity, has this recommendation among others, to be the medium of exchange, that it is less imperfect as a measure of value than almost any other commodity, which could be taken. Such aberrations as are obvious, and capable of being in some degree foreseen, practical sagacity corrects by the proper allowances. This cannot be done when great and unexpected changes take place; and much disorder is the consequence.

section IV

Occasions onWhich it is theInterest ofNations toExchangeCommodities withOneAnother

We have already seen, that the benefits, derived from the division and skilful distribution of labour, form part of the motives which give rise to the exchange of commodities. Men will not confine themselves to the production of one only of the various articles which contribute to the well-being of the individual, unless they can, by its means, provide themselves with others.

There is another circumstance, which very obviously affords a motive to exchange commodities. Some can be produced only in particular places. Metals, coals, and various other commodities of the greatest importance, are the product of certain spots. The same is the case with some vegetable productions, to which every soil and climate are not adapted. Certain commodities, though not confined to particular spots, can yet be more conveniently and cheaply produced in some places than in others; commodities, for example, which require a great consumption of fuel, in a coal country; commodities, the manufacture of which requires a strong moving power, where a sufficient fall of water can be obtained; commodities which require an extraordinary proportion of manual labour, where provisions, and consequently labour, are cheap.

These are all obvious causes. There is another cause, which requires rather more explanation. If two countries can both of them produce two commodities, corn, for example, and cloth, but not both commodities, with the same comparative facility, the two countries will find their advantage in confining themselves, each to one of the commodities, bartering for the other. If one of the countries can produce one of the commodities with peculiar advantages, and the other the other with peculiar advantages, the motive is immediately apparent which should induce each to confine itself to the commodity which it has peculiar advantages for producing. But the motive may no less exist, where one of the two countries has facilities superior to the other in producing both commodities.

By superior facilities, I mean, the power of producing the same effect with less labour. The conclusion, too, will be the same, whether we suppose the labour to be more or less highly paid. Suppose that Poland can produce corn and cloth with less labour than England, it will not follow that it may not be the interest of Poland to import one of the commodities from England. If the degree, in which it can produce with less labour, is the same in both cases; if, for example, the same quantity of corn and cloth which Poland can produce, each with 100 days' labour, requires each 150 days' labour in England, Poland will have no motive to import either from England. But if, at the same time that the quantity of cloth, which, in Poland, is produced with 100 days' labour, can be produced in England with 150 days' labour; the corn, which is produced in Poland with 100 days' labour, requires 200 days' labour in England; in that case, it will be the interest of Poland to import her cloth from England. The evidence of these propositions may thus be traced.

If the cloth and the corn, each of which required 100 days' labour in Poland, required each 150 days' labour in England, it would follow, that the cloth of 150 days' labour in England, if sent to Poland, would be equal to the cloth of 100 days' labour in Poland: if exchanged for corn, therefore, it would exchange for the corn of only 100 days' labour. But the corn of 100 days' labour in Poland was supposed to be the same quantity with that of 150 days' labour in England. With 150 days' labour in cloth, therefore, England would only get as much corn in Poland as she could raise with 150 days' labour at home; and she would, on importing it, have the cost of carriage besides. In these circumstances no exchange would take place.

If, on the other hand, while the cloth produced with 100 days' labour in Poland was produced with 150 days' labour in England, the corn which was produced in Poland with 100 days' labour could not be produced in England with less than 200 days' labour; an adequate motive to exchange would immediately arise. With a quantity of cloth which England produced with 150 days' labour, she would be able to purchase as much corn in Poland as was there produced with 100 days' labour; but the quantity, which was there produced with 100 days' labour, would be as great as the quantity produced in England with 200 days' labour. If the exchange, however, was made in this manner, the whole of the advantage would be on the part of England; and Poland would gain nothing, paying as much for the cloth she received from England, as the cost of producing it for herself.25

But the power of Poland would be reciprocal. With a quantity of corn which cost her 100 days' labour, equal to the quantity produced in England by 200 days' labour, she could in the supposed case purchase, in England, the produce of 200 days' labour in cloth. The produce of 150 days' labour in England in the article of cloth would be equal to the produce of 100 days' labour in Poland. If, with the produce of 100 days' labour, she could purchase, not the produce of 150, but the produce of 200,26 she also would obtain the whole of the advantage, and England would purchase corn, which she could produce by 200 days' labour, with the product of as many days' labour in other commodities. The result of competition would be to divide the advantage equally between them.

Suppose the following case: That 10 yards of broad cloth purchase 15 yards of linen in England; and 20 yards in Germany. In exchanging 10 yards of English broad cloth for the equivalent of German linen, a saving, to the amount of 5 yards of linen, is the result of the bargain; and it is evident that the advantage will be shared upon the following principles. In England linen will fall, in relation to cloth, from the knowledge that 10 yards of cloth will purchase more than 15 yards of linen in Germany; and in Germany linen will rise as compared with cloth, from a knowledge that 20 yards of linen, if sent to England, will purchase more than 10 yards of cloth. It is the inevitable effect of such an interchange to bring the relative value of the two commodities to a level in the two countries; that is, to make the purchasing power of linen in respect to cloth, and of cloth in respect to linen, the same in both; bating the difference in the cost of carriage, each country paying the cost of the carriage of the commodity which it imports, and the value of that article being so much higher in the country which imports than in that which exports it.27

To produce exchange, therefore, there must be two countries, and two commodities.

When both countries can produce both commodities, it is not greater absolute, but greater relative, facility, that induces one of them to confine itself to the production of one of the commodities, and to import the other.

When a country can either import a commodity or produce it at home, it compares the cost of producing at home with the cost of procuring from abroad; if the latter cost is less than the first, it imports.

The cost at which a country can import from abroad depends, not upon the cost at which the foreign country produces the commodity, but upon what the commodity costs which it sends in exchange, compared with the cost which it must be at to produce the commodity in question, if it did not import it.

If a quarter of corn is produced in England with 50 days' labour, it may be equally her interest to import corn from Poland, whether it requires, in Poland, 50 days' labour, or 60, or 40, or any other number. Her only consideration is, whether the commodity with which she can import a quarter costs her less than 50 days' labour.

Thus, if labour in Poland produce corn and cloth, in the ratio of eight yards to one quarter; but, in England, in the ratio of ten yards to one quarter, exchange will take place.

The practical conclusion may be commodiously and correctly stated thus:

Whenever the purchasing power of any commodity with respect to another is less, in one of two countries, than it is in the other, it is the interest of those countries to exchange these commodities with one another.

Unless the difference of purchasing power, which renders it the interest of nations to barter commodities with one another, be sufficiently great to cover the expense of carriage, and something more, no advantage is obtained.

section V

The Commodities Imported are the Cause of the Benefits Derived from a Foreign Trade

From what is stated in the preceding chapter, one general, or rather universal, proposition may be deduced. The benefit which is derived from exchanging one commodity for another, arises, in all cases, from the commodity received, not from the commodity given.28 When one country exchanges, in other words, when one country traffics with another, the whole of its advantage consists in the commodities imported. It benefits by the importation, and by nothing else.

This seems to be so very nearly a self-evident proposition, as to be hardly capable of being rendered more clear by illustration; and yet it is so little in harmony with current and vulgar opinions, that it may not be easy by any illustration, to gain it admission into certain minds.

When a man possesses a certain commodity, he cannot benefit himself by giving it away. It seems to be implied, therefore, in the very fact of his parting with it for another commodity, that he is benefited by what he receives. His own commodity he might have kept, if it had been valued by him more than that for which he exchanges it. The fact of his choosing to have the other commodity rather than his own, is a proof that the other is to him more valuable than his own.

The corresponding facts are evidence equally conclusive in the case of nations. When one nation exchanges a part of its commodities for a part of the commodities of another nation, the nation can gain nothing by parting with its commodities; all the gain must consist in what it receives. If it be said that the gain consists in receiving money, it will presently appear, from the doctrine of money, that a nation derives no advantage, but the contrary, from possessing more than its due proportion of the precious metals.

In importing commodities which the country itself is competent to produce, as in the case, supposed above, of trade with Poland, we saw that England would import her corn from Poland, if she thus obtained, with the produce of so many days' labour in cloth, as much corn as it would have required a greater number of days' labour to produce in England. If it so happened, that she could procure in Poland with the cloth, only as much corn as she could produce with the same quantity of labour at home, she would have had no advantage in the transaction. Her advantage would arise, not from what she should export, but wholly from what she should import.

The case in which a country imports commodities, which she herself is incompetent to produce, is of still more simple investigation. That country, or, more properly speaking, the people of that country, have certain commodities of their own, but these they are willing to give for certain commodities of other countries. They prefer having those other commodities. They are benefited, therefore, not by what they give away; that it would be absurd to say; but by what they receive.

section VI

Convenience of aParticularCommodity, as aMedium ofExchange

In exchanging commodities for one another directly, or in the way of barter, the wants of individuals could not be easily supplied. If a man had only sheep to dispose of; and wanted bread, or a coat; he might find himself subject to either of two difficulties: first, the man possessing the article which he wished to obtain, might be unwilling to accept of a sheep; or, secondly, the sheep might be of more value than the article which he wished to obtain, and could not be divided.

To obviate these difficulties, it would be fortunate if a commodity could be found, which every man, who had goods to dispose of, would be willing to receive, and which could be divided into such quantities, as would adapt themselves to the value of the articles which he wished to obtain. In this case, the man who had the sheep, and wanted bread or a coat, instead of offering his sheep to obtain them, would first exchange it for the equivalent quantity of this other commodity, and with that he would purchase the bread and other things for which he had occasion.

This, then, is the true idea of a medium of exchange. It is some one commodity, which, in order to effect an exchange between two other commodities, is first received in exchange for the one, and then given in exchange for the other.

Certain metals, gold, for example, and silver, were found to unite, in a superior degree, all the qualities desired in a medium of exchange. They were commodities which every man, who had goods to dispose of, was willing to receive in exchange. They could be divided into such portions as suited any quantity of other commodities which the purchaser desired to obtain. They possessed the further recommendation, by including a great value in a small bulk, of being very portable. They were also very indestructible; and less than almost any other commodities liable to fluctuations of value. From these causes, gold and silver have formed the principle medium of exchange in all parts of the globe.

The precious metals were liable to be mixed with baser metals in a manner which it was not easy to detect; and thus a less value was apt to be received than that which was understood to be so. It was also found inconvenient to perform the act of weighing every time that a purchase was to be made. An obvious expedient was calculated to remedy both inconveniences. Metal might be prepared to a determined fineness; it might be divided into portions adapted to all sorts of purchases; and a stamp might be put upon it, denoting both its weight and its fineness. It is obvious, that the putting of this stamp could only be entrusted to an authority in which the people had confidence. The business has generally been undertaken by governments, and kept exclusively in their own hands. The business of putting the precious metals in the most convenient shape, for serving as the medium of exchange, has been denominated coining; and the pieces into which they are divided have obtained the appellation of money.

section VII

WhatRegulates theValue ofMoney

By value of money, is here to be understood the proportion in which it exchanges for other commodities, or the quantity of it which exchanges for a certain quantity of other things.

It is not difficult to perceive, that it is the total quantity of the money in any country, which determines what portion of that quantity shall exchange for a certain portion of the goods or commodities of that country.

If we suppose that all the goods of the country are on one side, all the money on the other, and that they are exchanged at once against one another, it is obvious that one-tenth, or one-hundredth, or any other part of the goods, will exchange against one-tenth, or any part of the whole of the money; and that this tenth, &c. will be a great quantity or small, exactly in proportion as the whole quantity of the money in the country is great or small. If this were the state of the facts, therefore, it is evident that the value of money would depend wholly upon the quantity of it.

It will appear that the case is precisely the same in the actual state of the facts. The whole of the goods of a country are not exchanged at once against the whole of the money; the goods are exchanged in portions, often in very small portions, and at different times, during the course of the whole year. The same piece of money which is paid in one exchange to-day, may be paid in another exchange to-morrow. Some of the pieces will be employed in a great many exchanges, some in very few, and some, which happen to be hoarded, in none at all. There will, amid all these varieties, be a certain average number of exchanges, the same which, if all the pieces had performed an equal number, would have been performed by each; that average we may suppose to be any number we please; say, for example, ten. If each of the pieces of the money in the country perform ten purchases, that is exactly the same thing as if all the pieces were multiplied by ten, and performed only one purchase each. As each piece of the money is equal in value to that which it exchanges for, if each performs ten different exchanges to effect one exchange of all the goods, the value of all the goods in the country is equal to ten times the value of all the money.

If the quantity of money, instead of performing ten exchanges to exchange all the goods once, were ten times as great, and performed only one exchange, it is evident that whatever addition were made to the whole quantity, would produce a proportional diminution of value, in each of the minor quantities taken separately. As the quantity of goods, against which the money is all exchanged at once, is supposed to be the same, the value of all the money is no more, after the quantity is augmented, than before it was augmented. If it is supposed to be augmented one-tenth, the value of every part, that of an ounce for example, must be diminished one-tenth. Suppose the whole quantity 1,000,000 ounces, and augmented by one-tenth; the loss of value to the whole must be communicated proportionally to every part; but what one-tenth of a million is to a million, one-tenth of an ounce is to an ounce.

If the whole of the money is only one-tenth of the above supposed sum, and performs ten purchases in exchanging all the goods once, it of course exchanges each time against one-tenth of the goods. But if the tenth which exchanges against a tenth is increased in any proportion, it is the same thing as if the whole which exchanges against the whole were increased in that proportion. In whatever degree, therefore, the quantity of money is increased or diminished, other things remaining the same, in that same proportion, the value of the whole, and of every part, is reciprocally diminished or increased. This, it is evident, is a proposition universally true. Whenever the value of money has either risen or fallen, (the quantity of goods, against which it is exchanged, and the rapidity of circulation, remaining the same,) the change must be owing to a corresponding diminution or increase of the quantity; and can be owing to nothing else. If the quantity of goods diminish, while the quantity of money remains unaltered, it is the same thing as if the quantity of money had been increased; and if the quantity of goods be increased, while the quantity of money remains unaltered, it is the same thing as if the quantity of money had been diminished.

Similar changes are produced by any alteration in the rapidity of circulation. By rapidity of circulation is meant, of course, the number of times the money must change hands to effect one sale of all the commodities.

The whole of the goods, which fall to be exchanged in the course of the year, is the amount contemplated in the above propositions. If there is any portion of the annual produce, which is not exchanged at all, as what is consumed by the producer; or which is not exchanged for money; any such portion is not taken into account, because what is not exchanged for money is in the same state, with respect to the money, as if it did not exist. If there is any part of what falls to be exchanged in the course of the year, which is exchanged two, or three, or more times, that also is not taken into account, because the effect is the same, with respect to the money, as if the goods had been increased to the amount of these multiplications, and exchanged only once.

section VIII

WhatRegulates theQuantity ofMoney

When we have ascertained, that quantity determines the value of money, we still have to inquire what it is that regulates quantity.

The quantity of money may seem, at first sight, to depend upon the will of the governments, which assume to themselves the privilege of making it, and may fabricate any quantity they please.

Money is made under two sets of circumstances; either when government leaves the increase or diminution of it free; or when it endeavours to control the quantity, making it great or small as it pleases.

When the increase or diminution of money is left free, government opens the mint to the public at large, making bullion into coins for as many as require it.

It is evident that individuals, possessed of bullion, will desire to convert it into coins, only when it is their interest to do so; that is, when their bullion, converted into coins, will be more valuable to them than in the shape of bullion.

As the value of the coins depends upon the quantity of them, it is only when the quantity is to a certain degree limited, that they have this value. It is the interest of individuals, when coins are thus high in value, to carry bullion, to be coined; but by every addition to the number of the coins, the value of them is diminished; and at last the value of the metal in the coins, above the bullion, becomes too small to afford a motive for carrying bullion to be coined. If the quantity of money, therefore, should at any time be so small as to increase its value above that of the metal of which it is made, the interest of individuals operates immediately, in a state of freedom, to augment the quantity.

It is also possible for the quantity of money to be so large as to reduce the value of the metal in the coin, below its value in the state of bullion; in that case, the interest of individuals operates immediately to reduce the quantity. If a man has possessed himself of a quantity of the coins, containing, we shall say, an ounce of the metal, and if these coins are of less value than the metal in bullion, he has direct motive to melt the coins, and convert them into bullion: and this motive continues to operate till by the reduction of the quantity of money, the value of the metal in that state is so nearly the same with its value in bullion, as not to afford a motive for melting.

Whenever the coining of money, therefore, is free, its quantity is regulated by the value of the metal, it being the interest of individuals to increase or diminish the quantity, in proportion as the value of the metal in coins is greater or less than its value in bullion.

But if the quantity of money is determined by the value of the metal, it is still necessary to inquire what it is which determines the value of the metal. That is a question, however, which may be considered as already solved. Gold and silver are in reality commodities. They are commodities, for the attaining of which labour and capital must be employed. It is cost of production, therefore, which determines the value of these, as of other ordinary productions.

We have next to examine the effects which take place by the attempts of government to control the increase or diminution of money and to fix the quantity as it pleases. When it endeavours to keep the quantity of money less than it would be, if things were left in freedom, it raises the value of the metal in the coin, and renders it the interest of every body, who can, to convert his bullion into money. By supposition, the government will not so convert it. He must, therefore, have recourse to private coining. This the government must, if it perseveres, prevent by punishment. On the other hand, were it the object of government to keep the quantity of money greater than it would be, if left in freedom, it would reduce the value of the metal in money, below its value in bullion, and make it the interest of every body to melt the coins. This, also, the government would have only one expedient for preventing, namely, punishment.

But the prospect of punishment will prevail over the prospect of profit, only if the profit is small. It is well known, that, where the temptation is considerable, private coinage goes on, in spite of the endeavours of government. As melting is a more easy process than coining, and can be performed more secretly, it will take place by a less temptation than coinage.

It thus appears, that the quantity of money is naturally regulated, in every country, by the value, in other words, by the productive cost, in that country, of the metals of which it is made; that the government may, by forcible methods, reduce the actual quantity of money to a certain, but an inconsiderable extent, below that natural quantity; that it can also, but to a still less extent, raise it above that quantity.

When it diminishes the quantity below what it would be in a state of freedom, in other words, raises the value of the metal in the coins, above its value in bullion, it in reality imposes a seignorage. In practice, a seignorage is commonly imposed by issuing coins which contain rather less of the metal than they profess to contain, or less than that quantity to which they are intended to be an equivalent. By coining upon this principle, government makes a profit of the difference between the value of the metal in the coins, and that in bullion. Suppose the difference to be five per cent., the government obtains bullion at the market price, and makes it into coins which are worth five per cent. more than the bullion. Coins, however, will retain this value, only, if, as we have shown in the preceding section, they are limited in amount. To be able to limit them in amount, it is necessary that seignorage should not be so high as to compensate for the risk of counterfeiting; in short, that it should not greatly exceed the expense of coining.

section IX29

The Effect ofEmployingTwoMetalsBoth asStandardMoney, and ofUsingSubsidiaryCoins, atLessThan theMetallicValue

Some nations have made use of two metals, gold and silver, both, as standard money, or legal tender to any amount.

For this purpose it was necessary to fix a certain relative value between them. A certain weight of the one was taken to be equal in value to a certain weight of the other.

If the proportion thus fixed for the coins were accurately the proportion which obtained in the market, and continued so invariably, there would be no inconvenience in the two standards. The value of any sum would always be the same in either set of coins.

The relative value, however, of the two metals in the market is fluctuating.

Suppose that the value fixed for the coins is that of 15 to 1; in other words, that one piece of gold is equal to 15 pieces of silver of the same weight. A change takes place in the market, and this value becomes as 16 to 1. What follows?

A man who had a debt to pay, equal, let us say, to 100 of the gold pieces, or 1500 of the silver, finds it his interest to pay his debt not with gold. With his 100 pieces of gold he can go into the market and purchase as much silver as may be coined into 1600 pieces, with 1500 of which he may pay his debt, and retain 100 to himself. In this manner silver coins would be multiplied; and the quantity of the currency would be increased; its value would, therefore, be diminished; the gold in coins would thus become of less value than in bullion; hence the gold coins would be melted and would disappear.

After a fluctuation in one direction, it may take place in another. Silver may rise, instead of falling, as compared with gold. The relative value may become as 14 to 1. In this case it would be the interest of every man to pay in gold, rather than silver; and in this case it would be the silver coins which would disappear.

Two inconveniences are therefore incurred by the double standard. First, the value of the currency, instead of being rendered as steady in value as possible, is subjected to a particular cause of variation. And, secondly, the country is put to the expense of a new coinage, as often as a change takes place in the relative value of the metals.

The case would be exactly the same, if a seignorage existed. Suppose that 10 per cent, were imposed as seignorage; it would be equally true, that the 100 pieces of gold; were the proportion changed, from 15 to 1, to 16 to 1; would purchase as much silver as would be exchanged at the mint for 1600 pieces of silver. While the market value of the two metals was the same as the mint value, one piece of gold purchased not only as much silver as was contained in 15 pieces of silver, but one-tenth more; after the change which we have just supposed, it purchases in the proportion of 16 to 15, that is, as much as will be contained in 16 pieces, and a tenth more.

The use of silver coins, for the purpose of small payments, or change, as it is called, of the more valuable coins, if they are legal tender only to a small amount, is not liable to the objections which apply to a double standard.

It has, indeed, been affirmed, that if they are issued, at a higher value than that of the metal contained in them, they will occasion the exportation of the gold coins. But it is easy to see that this is a mistake.

Suppose that our silver coins in this country are 10 per cent. above the value of the metal, but legal tender only to the extent of 40 shillings; every man, it is affirmed, has hence an interest in sending gold to Paris to buy silver.

The relative value of gold to silver in Paris and England is naturally pretty nearly the same; let us say as 15 to 1. An ounce of gold, therefore, will in Paris purchase 15 oz. of silver. But so it will in England. Where then is the advantage in going to France to purchase it?

You propose to coin it because it is 10 per cent. more valuable as coin.

But 10 per cent. of it is taken from you, and hence to you the advantage of the high value is lost.

Your silver coin with 10 per cent. added to them, would make the coins of full weight.

Suppose the price of silver to have sunk below the mint proportion, it would then be your interst to pay in silver if you could; but you can only pay to the extent of 40 shillings it is therefore worth nobody's to surcharge the market.

Besides, government reserves to itself the right of refusing to coin silver, when it pleases; it can therefore retain it of a high value.

Subsidiary coins cannot send the standard coins out of the country, unless the increased amount of them sink the value of the currency. The standard coins will not go in preference to bullion, unless they can be purchased cheaper than bullion.

section X

Substitutes forMoney

The only substitute for money, of sufficient importance to require explanation, in this epitome of the science, is that species of written obligation to pay a sum of money, which has obtained the appellation of paper money.

The use of this species of obligation, as a substitute for money, seems to have originated in the invention of bills of exchange, ascribed to the Jews, in the feudal and barbarous ages.

When two countries, as England and Holland, traded with one another; when England, for example, imported Dutch goods, and Holland imported English goods, the question immediately arose, how payment was to be made for them. If England was under the necessity of sending gold and silver for the goods which she had brought from Holland, the expense was considerable. If Holland was under the necessity of sending gold and silver to England, the expense was also considerable. It was very obvious, however, that if there were two individuals, one of whom owed to the other 100l., and the other to him 100l., instead of the first man's taking the trouble to count down 100l. to the second, and the second man's taking the same trouble to count down 100l. to the first, all they had to do was to exchange their mutual obligations. The case was the same between England and Holland. If England had to pay a million of money to Holland, and had an equal sum to receive from Holland, instead of sending the money from England to Holland, it would save expense and trouble to consign to her creditors, in Holland, the money due to her in Holland; and those merchants in Holland, who owed money to England, and must have been at the expense of sending it would be well pleased to be saved from that expense, by obeying an order to pay, in Holland, what they owed to a merchant in England. A bill of exchange was, literally, such an order. The merchant in England wrote to the merchant in Holland, who owed him a sum of money, ‘Pay to such and such a person, such and such a sum;’ and this was called drawing a bill upon that person. The merchants in Holland acted in the same manner, with respect to the persons in England, from whom they had money to receive, and to whom they had money to pay. When it so happened, that the money which the two countries owed to one another, was equal, the payments balanced one another, and each country paid for the goods, which it had received, free, altogether, from the expense of transmitting money. Even when it happened that one of the two owed more than it had to receive, it had only the balance to discharge, and was relieved from all the rest of the expense.

The advantage, therefore, derived from the invention and use of bills of exchange, was very considerable. The use of them was recommended by a still stronger necessity, at the period of the invention, because the coarse policy of those times prohibited the exportation of the precious metals, and punished with the greatest severity any infringement of that barbarous law.

Bills of exchange not only served the purpose of discharging debts between country and country, but very often acted as a substitute for money, in the country to which they were sent. When a bill was drawn, payable after a certain time, the merchant to whom it was sent, if he had a debt to pay, or purchase to make, without having money ready for the purpose, paid with the bill, instead of money. One of these bills would often pass through several hands, and be the medium of payment in a number of transactions, before it was finally discharged by the person on whom it was drawn. To this extent, it performed the precise functions of paper money, and led the way to the further use of that important substitute.

As soon as it was discovered, that the obligation of a merchant of credit, to pay a sum of money, was, from the assurance that it would be paid as soon as demanded, considered of equal value with the money itself, and was without difficulty received in exchanges, as the money itself would have been received, there was motive sufficient to extend the use of the substitute. Those persons who had been accustomed to perform the functions of bankers in keeping the money of individuals, and exchanging against one another the coins of different countries, were the first who issued promises to pay certain sums of money, in the expectation that they would operate, as substitutes for money, in the business of purchase and sale. As soon as the use of such a substitute for money has begun, nothing is wanting but freedom, and the confidence of the public in the written promises, to enable the paper to supersede the use of the metal, and operate, almost exclusively, as the medium of exchange.

It remains to inquire what are the advantages derived from the use of this substitute; and what are the inconveniences to which it is liable.

section XI

AdvantagesDerived from theUse ofPaperMoney

The precious metals which are necessary to perform the functions of a medium of exchange, are bought with the commodities of the country. Manufactures, and the produce of the land, are exported; and instead of other commodities, to be turned to use, gold and silver, to be employed as the medium of exchange, are imported for them. The value of the gold and silver, when they alone perform the business of exchange, always bears a considerable proportion,—in countries but little advanced in the arts of exchange, a large proportion, to the whole of the annual produce of the country. If each piece performs a hundred purchases in once exchanging the goods which fall to be exchanged in a year, the value of the money required is equal to a hundredth part of the whole of such goods, which, though not exactly corresponding with the annual produce, correspond with it so nearly, that we need not scruple to speak of them under that name. In countries in which money does not pass rapidly from hand to hand, it may be equal to a tenth of the whole of the annual produce.

It is evident that whatsoever part of the national property goes to provide the medium of exchange, is wholly inoperative with regard to production. Nothing produces, but the immediate instruments of production; the food of the labourer, the tools or machinery with which he labours, and the raw material, which he fabricates. If the whole, therefore, of the national property, which goes in this manner to provide a medium of exchange, equal to one-tenth, or one-hundredth part of the annual produce, could be taken from that employment, and converted into food, tools, and the materials of production, the productive powers of the country would receive a corresponding increase.

If it be considered, that the annual produce is equal, not only to the whole of the net revenue of the country, but, along with this, to the whole of the capital, excepting the part which is fixed in durable machinery,30 it may be easily understood how vast an accession is made to the means of production, by providing a substitute for the precious metals, as a medium of exchange.

Paper is also far more convenient, as a medium of exchange. A large sum in the shape of gold or silver is a cumbrous commodity. In performing exchanges of considerable value, the very counting of gold and silver is a tedious operation. By means of a bank note, the largest sum is paid as quickly as the smallest.

section XII

Inconveniences toWhich theUse ofPaperMoney isLiable

The inconveniences to which paper money is liable, seem all to be comprehended under three heads.

First,—The failure of the parties, by whom the notes are issued, to fulfil their engagements.

Secondly,—Forgery.

Thirdly,—The alteration of the value of the currency.

1. The failure of the parties, by whom notes are issued, is an evil against which, under good institutions, the most powerful securities are spontaneously provided.

If competition were allowed to operate freely, and if no restriction were imposed on the number of the partners, who might be engaged in a bank, the business of banking, and of issuing notes, would naturally place itself on a footing, which would render paper currency very secure.

The number of banks would of course be multiplied; and no one bank would be able to fill with its circulation more than a certain district.

As little risk, where the partners were numerous, would be incurred by each of them, as the profits would be very sure, and the importance of having a good currency would be sensibly felt; there would be motive sufficient, to all the principal noblemen and gentlemen of the county, or other district, to hold shares in the local bank, and add to the security of the public.

In competition with such an establishment, any bank, of doubtful credit, would vainly endeavour to introduce its notes into circulation. The sense of interest keeps the attention sufficiently awake, and where education and knowledge are tolerably advanced, and the press is free, intellect is not wanting to guide the most ignorant to the proper conclusions. The people may be trusted to reject the notes of a suspected party, when they may have those of a party in whom they confide.

Another great advantage is gained, by the scheme of numerous banks, each supplying, under the safeguard of freedom and competition, a limited district; that if one of them fails, the evil is limited, and produces inconvenience to but a small portion of the community.

The interest, also, which banks, where numerous, have in supplanting one another, places them on the watch to discover any symptom of deficiency on the part of a rival; and each of them, knowing that it is vigilantly watched, is careful to avoid any fault, which can lead to a diminution of its credit.

In Scotland, where banking is nearly placed upon this desirable footing, and where paper money spontaneously filled the channels of circulation, long before the suspension of cash payments at the Bank of England, there have been few failures in the numerous banks which issued paper, notwithstanding all the fluctuations in the value of money, produced by that suspension, and all the convulsions of credit of which those fluctuations were the cause.

Such are the securities which the interest and intelligence of the parties would provide, without the intervention of the legislature. Of the securities which might be provided by the legislature, the following are among those which most obviously present themselves.

It might be rendered imperative upon every bank to transmit to some organ of government two monthly statements, one of the amount of its notes, another of the securities with which it was provided to meet the demands to which it was liable; while appropriate powers might be granted, for taking the necessary steps to protect the public where proper securities might appear to be wanting.

As a great profit attends the issuing of notes in favourable circumstances, it is desirable that the benefit, if unattended with preponderant evil, should accrue to the public. The profit, it is observable, arising from the interest upon the notes as they are lent, is altogether distinct from the other benefit, arising from the conversion of a costly medium of exchange into instruments of production.

The issuing of notes is one of that small number of business, which it suits a government to conduct; a business which may be reduced to a strict routine, and falls within the compass of a small number of clear and definite rules. If the public were its own banker, as it could not fail in payments to itself, the evils, liable to arise from the failure of the parties who issue notes to fulfil their engagements, could not possibly have place. The people, in this case, would provide the funds to fulfill the engagements, and the people would receive them.31 Political Economy does not contemplate the misapplication of the funds provided by the people. The cases of national bankruptcy, and of the nonpayment of a government paper, by which the people of various countries have suffered, have all been cases in which the Many have been plundered for the benefit of the Few. When the people, as a body, are to receive the payment, which the people, as a body, provide the funds to make, it would be absurd to speak of their loss by a failure.

The chance of evil, then, from a failure in discharging the obligations contracted by the issue of paper money, is capable of being so much reduced, as to constitute no valid objection against an expedient, the benefits of which are great and indisputable. There are persons, however, who say, that if the benefits derived from paper money did surpass the chance of evil in quiet and orderly times, the case is very different in those of civil war or foreign invasion.

Civil war, and foreign invasion, are words which raise up vague conceptions of danger; and vague conceptions of danger are too apt to exert undue influence on the understanding.

In the first place, there is, in the present state of the civilised world, so little chance of civil war, or foreign invasion, in any country having a good government, and a considerable population, that, in contriving the means of national felicity, small allowance can be rationally required for it. To adopt a course of action, disadvantageous at all but times of civil war and foreign invasions, only because it were good on those occasions, would be as absurd, as it would be, in medicine, to confine all men continually to that species of regimen which suits a violent disease. If the advantages, which arise from the use of paper money, are enjoyed, without any considerable abatement, at all times, excepting those of civil war and foreign invasion, the utility of paper money is sufficiently proved.

To save ourselves from the delusion which vague conceptions of danger are apt to create, it is proper to inquire, what are the precise evils which may arise from paper money, during those rare and extraordinary times.

A civil war, or a foreign invasion, is attended with a great derangement of the circulating medium, when it is composed of gold and silver. At such a period there is a general disposition to hoard: a considerable proportion, therefore, of the medium of exchange is withdrawn from circulation, and the evils of a scarcity of money are immediately felt; the prices of commodities fall; the value of money rises; those who have goods to sell, and those who have debts to pay, are subject to losses; and calamity is widely diffused.

From the evils of hoarding, the community would be, in a great measure, secured, by the prevalence of paper money. And there are many reasons which may draw us to conclude, that those arising from the diminution of credit would be very little to be feared.

If the paper were issued by a government, which deserved the confidence of the people, a foreign invasion, which would concentrate the affections of the people towards the government, would not destroy the credit of its notes.

It would not be the interest of the invaders to destroy their credit, even in that part of the country, of which they might be in possession; because it would not be their interest to impair its productive powers.

Nobody would lose, ultimately; because, even if the circulation of the notes were prevented in the districts possessed by the enemy, they would recover their value the moment the enemy were expelled.

The effects would not be very different, if the circulation were provided by a well-conducted system of private banking. It would be the interest of all parties to preserve the circulating medium in credit. It would be the interest of the enemy to preserve it in the districts which he possessed. At most, he could only prevent the circulation for a time; for, after his expulsion, the notes would be redeemed; either by the responsible parties who had issued them; or, if they had lost their property through the operations of the enemy, out of the compensation money which the government would allow.

It is not probable, that, even in a civil war, any considerable discredit should attend a well-established paper currency. The country is, of course, divided between the hostile parties, in portions more or less nearly equal. It is evidently not the interest of the government, in that part of the country which it commands, to discredit the paper currency, whether it had been issued by itself, or by private bankers. As little is it the interest of the opposite party, to do any thing which shall disorder the regularity of transactions, in that part of the country, where it governs, and from which all its means of prevailing over its opponents must be drawn. If the circulating medium consists of the notes of private bankers, situated within that part of the country, it is the interest, on a double account, of the party to protect them. It is its interest to protect them, even if they are paper of the government. For whom would it injure, as the holders of them, but its own people? Whose business would it disturb by the want of a circulating medium, but the people upon whose means and affections it wholly depends? By protecting the paper of the government, it makes it, in reality, its own.

Experience is in favour of all these conclusions; since it has been repeatedly found, that the presence of hostile armies, and even internal commotions, have occasioned little disturbance to a paper currency, the value of which was but tolerably secured.

2. Forgery, to which bank notes are exposed, is an evil of the same sort as counterfeiting. This, though an evil of great magnitude, under so imperfect a system of banking as that, which is created by the existence of a great monopolizing establishment, like the Bank of England, would, under such a system of banking, as that which we have been just contemplating, be inconsiderable. Where one great bank supplied the circulation of a great part of the country, there is opportunity for the circulation of a great amount of forged notes, and motive to incur both a great risk and a great expense. But if every bank supplied only a small district, a small amount of the forged notes of such a bank could find their way into the circulation. Banks, too, which are subject to the useful principle of competition, are afraid to discredit their own notes and render the people shy of taking them, by refusing payment of such as are forged; they rather choose to pay them in silence, to detect as well as they can the authors of the forgery, and circumscribe its amount. In this manner individuals severally are exempted from loss; and if a loss is willingly sustained by the banks, it is only because they find compensation.

3. The last of the three inconveniences, liable to arise from the use of paper money, is an alteration in the value of the currency.

This alteration is always an act of the government; and is not peculiar to paper money.

We have already seen, that the value of a metallic currency is determined by the value of the metal which it contains. That of a paper currency, therefore, exchangeable at pleasure, either for coins or for bullion, is also determined by the value of the metal which can be obtained for it. The reason is obvious. If the paper should at any time be reduced below the value of the metal, every person who held a bank note, the less valuable commodity, would demand for it the more valuable commodity, the metal. If the promise were, as in England, to pay an ounce of gold for 3l. 17s. 10½d. of paper, it would be the interest of the holders of the notes to demand gold in exchange, the moment 3l. 17s. 10½d. in paper became of less value than an ounce of gold; that is, the moment gold rose above the mint price.

But in these circumstances, it would be the interest of those who issued the notes to raise their value by reducing their quantity. If they endeavoured to maintain the high quantity, they would be condemned perpetually to issue and perpetually to withdraw; because every man who became possessed of any of their notes would have an interest in bringing them back again for gold; and on each of these occasions the issuers would sustain a loss. They would issue the notes at the rate of 3l. 17s. 10½d.; that is they would receive a value of 3l. 17s. 10½d. when they issued them; but when they received them back, they would be obliged to pay an ounce of gold, for 3l. 17s. 10½d. of their notes; and that ounce might cost them 4l., or any greater sum.

If the currency were supplied by paper, without coins, the issuers of the paper could, by lessening its quantity, and thereby enhancing its value, reduce the price of gold. Suppose, by this means, they were to reduce it to 3l. per ounce. They might fill their coffers with gold at this price; and having done so, they might raise its price by increasing their issues till it became the interest of the holders of their notes to demand it of them at 3l. 17s. 10½d. They would make a profit of 17s. 10½d. on every ounce of gold thus trafficked; and they might continually repeat the operation. A simple expedient, however, would be an effectual security against this danger. As the obligation to sell gold at a fixed price renders it the interest of those who issue paper not to increase their notes in such a manner as to raise gold above that price, so an obligation on them to buy gold at a fixed price would render it their interest not to reduce the amount of their notes in such a manner as to sink below that price. The value of the notes might thus be kept very steadily conformable to that of the metallic standard.32

In the case of a metallic currency, government can reduce the value of the coins, only by lessening the quantity of the precious metal contained in them; otherwise, as soon as it reduced the value of the coins sufficiently to afford a motive for melting them, they would, as fast as issued, disappear.33 In the case of a paper currency, it is only necessary for government to withdraw the obligation to pay metal for it on demand, when the quantity may be increased, and thereby the value diminished, to any amount.

Paper currency is issued without obligation to pay for it, in two ways: either, when government is the issuer, and renders its paper legal tender, without obligation to give metal for it in exchange; or when the paper currency is regulated by one great establishment, as the Bank of England, and government suspends its obligation to pay for its notes.

The effects of an increase of the quantity, and consequent diminution of the value of the currency in any particular country, are two: first, a rise of prices; secondly, a loss to all those persons who had a right to receive a certain sum of money of the old and undiminished value.

By the term price, I always understand the quantity of money which is given in exchange. An alteration in the value of money, it is obvious, alters the relative value of nothing else. All things—bread, cloth, shoes, &c. rise in value as compared with money; but not one of them rises in value as compared with any other.

This difference of price is, in itself, of no consequence to any body. The man who has goods to sell gets more money for them, indeed; but this money will purchase him just the same quantity of commodities as he was enabled to purchase with the price he obtained before. The man who has goods to purchase has more money to give for them; but he is enabled to do so, by getting just as much more for the commodities he has to sell.

With respect to the second effect of a degradation in the value of money, it is to be observed, that there exists at all times, in civilized countries, a number of obligations to pay certain sums of money to individuals: either all at once, as debts; or in succession, as annuities. It is very obvious, that the individual who has contracted with a man to receive 100l. sustains a loss when the currency is reduced in value and he receives no more than 100l. It is equally obvious that the party who has to pay the sum, is benefitted to the same amount. These circumstances are reversed when the alteration which has taken place is an increase of the value. In that case the man who has to pay sustains the loss; the man who receives payment makes the gain. These losses are evils of great magnitude, as far as men's feelings and happiness are concerned; and they imply a gross violation of those rules for the guardianship of that happiness, which are comprehended under the term justice. It is, however, no destruction, and consequently no loss, of property.

Hume has supposed that certain other effects are produced by the increase of the quantity of money. When an augmentation of money commences, individuals, more or fewer, go into the market with greater sums. The consequence is, that they offer better prices; and Hume affirms, that the increased prices give encouragement to producers, who are incited to greater activity and industry, and that an increase of production is the consequence.34

This doctrine implies a want of clear ideas respecting production. The agents of production are the commodities themselves, not the price of them. They are the food of the labourer, the tools and machinery with which he works, and the raw materials which he works upon. These are not increased by the increase of money: how then can there be more production? This is a demonstration that the conclusion of Hume is erroneous. It may be satisfactory also to unravel the fallacy of his argument.

The man who goes first to market with the augmented quantity of money, either raises the price of the commodities which he purchases, or he does not.

If not, he gives no additional encouragement to production. The supposition, therefore, must be, that he does raise prices. But exactly in proportion as he raises prices, he sinks the value of money. He therefore gives no additional encouragement to production.

It will perhaps be said, by a persevering objector, that the man who first goes to market with the additional quantity of money, raises the price of the commodities which he immediately purchases: that the producers of those commodities are therefore encouraged to greater industry, because the price of other commodities, namely, of all those which they have occasion to purchase, has not risen. But this he is not allowed to say. The first man who came with an additional quantity of money into the market to purchase the commodities of those producers, raised the price of those commodities. And why? Because he came with an additional quantity of money. They go into the market to purchase another set of commodities, and go with an additional quantity of money. They raise, therefore, the price of those commodities. And in this manner the succession goes on. Of all those commodities with which no additional quantity of money has yet come in contact the price remains unaltered. The moment an additional quantity of money comes in contact with them, the price is proportionally raised.

The whole of the business of any country may be considered as practically divided into a great number of little markets, some in one place, some in another, some of one sort of commodity, some of another: the money, of course, distributed proportionally among them. Into each of these markets, in the ordinary state of things, there comes, on the one side, a certain quantity of commodities; on the other side a certain quantity of money; and the one is exchanged against the other. Wherever any addition takes place in the quantity of goods, without any addition to the quantity of money, the price falls, and of necessity in the exact proportion of the addition which has been made. If this is not clear to every apprehension already, it may be rendered palpable by adducing a simple case. Suppose the market to be a very narrow one; of bread solely, on the one side; and money on the other. Suppose that the ordinary state of the market is 100 loaves on the one side, and 100 shillings on the other; the price of bread, accordingly, a shilling a loaf. Suppose, in these circumstances, that the quantity of loaves is increased to 200, while the money remains the same: it is obvious that the price of the bread must fall one half, or to sixpence per loaf. It would not be argument to say, that part of the bread would not be sold, but taken away unsold. If it is taken away unsold, it is the same thing, with respect to the market, as if it had never been brought. These conclusions, with respect to an increase in the quantity of commodities, no man disputes. Is it not obvious that the same conclusions are true with respect to an increase in the quantity of the opposite commodity-the money?

All the consequences, therefore, of altering the value of money, whether by raising or depressing it, are injurious.34 There is no security, however, against it, as it is a deed of government, but that which is the sole security against the misdeeds of government; its dependence upon the people. The obligation of paying the notes in the metal is a necessary security, where they are issued at pleasure by private bankers. If they were issued by a government strictly responsible to the people, it would not be indispensible; for in that case the utility of keeping gold at the mint price, or, in other words, the currency of the same value as if it was metallic, might be so distinctly understood, that it would not be the interest of those intrusted with the powers of government to allow it to vary.

We have already seen, in treating of the properties which recommend the precious metals for the instrument of exchange, that they are less than almost any other commodity subject to fluctuation of value. They are not, however, exempt from changes, partly temporary and partly permanent. The permanent changes take place, chiefly in consequence of a change in the cost of procuring them. The greatest change of this kind, recorded in history, is that which took place on the discovery of the mines of America, from which, with the same quantity of labour a greater quantity of metals was obtained. The temporary changes take place, like the temporary changes in the value of other commodities, by a derangement of the balance of demand and supply. For the payment of troops in a foreign country, or subsidies to foreign governments and other operations, a great quantity of gold or silver is sometimes bought up, and sent out of the country. This enhances the price, till the balance is restored by importation. The profit which may be acquired operates immediately as a motive to restore it. In the interval, however, an advantage may be derived from a paper money not convertible immediately into the metals. If convertible, gold will be demanded, paper will be diminished, and the value of the currency will be raised. If not convertible, the currency may be retained of the same, or nearly the same value as it was before. This, indeed, can scarcely be done, and the remedy applied with safety, unless where the whole is paper, and government has the supply in its own hands. In that case the sameness in the quantity of the currency, as it would be perfectly known, would be a sufficient index and security.36 If the price of gold rose suddenly above the mint price, or, in other words, above the rate of the bank notes, without any alteration in the quantity of the currency, the sameness in the quantity of currency would be a sufficient index that the rise was owing to a sudden absorption of the gold; which, after a time, would return. If in such circumstances the obligation of keeping up the value of the paper to that of the gold were suspended for a short time, a sufficient security against any considerable alteration in the value of the currency would be found in the obligation of keeping the quantity of it the same; because, during any short period of time, there can be no such diminution or increase of the quantity of business to be done by it, as to require any material alteration. That in the hands of an irresponsible government such power of suspension would be dangerous, is true. But an irresponsible government involves all kinds of danger, and this among the rest.

section XIII

The Value of thePreciousMetals in eachCountryDeterminesWhether it shallExport orImport

Metallic money, or more generally speaking, the precious metals, are nothing more, considered strictly, and in their essence, than that commodity which is the most generally bought and sold, whether by individuals, or by nations.

In ordinary language, it is immediately acknowledged, that those commodities alone can be exported, which are cheaper in the country from which, than in the country to which, they are sent; and that those commodities alone can be imported, which are dearer in the country to which, than in the country from which, they are sent.

According to this proposition, if gold is cheaper in any one country, as in England, for example, it will be exported from England. Again, if gold is dearer in England than in other countries, it will be imported into England. But, by the very force of the terms, it is implied, that in any country where gold is cheap, other commodities are dear. Gold is cheap, when a greater quantity of it is required to purchase commodities; and commodities are dear, for the same reason; namely, when a greater quantity of gold is required to purchase them. When the value of gold, therefore, in England, is low, gold will be exported from England, on the principle that all commodities which are free to seek a market, go from the place where they are cheap to the place where they are dear. But as, in the fact that gold is cheap, is implied the correlative and inseparable fact, that other commodities, at the same time are dear, it follows, that, when gold is exported, less of other commodities can be exported, if the value of gold is so low as to raise the price of all of them above the price in other countries; and that a diminished quantity alone can be exported, if the value of gold is only reduced so far as to raise the price of some of them above the price in other countries.

It is evident, therefore, that a country will export commodities, other than the precious metals, only when the value of the precious metals is high. It is equally evident, that she will import, only when the value of the precious metals is low. The increase, therefore, of the quantity of the precious metals, which diminishes the value of them, gradually diminishes and tends to destroy the power of exporting other commodities; the diminution of the quantity of the precious metals which increases their value, increases, by a similar process, the motive to exportation of other commodities, and, of course, in a state of freedom, the quantity exported.

section XIV

The Valueof thePreciousMetal, orMediumofExchange, whichDeterminesExportation,is not the same in allCountries

When we speak of the value of the precious metal, we mean the quantity of other things for which it will exchange.

But it is well known that money is more valuable, that is, goes farther in the purchase of commodities, not only in one country than another, but in one part than another of the same country.

In some of the more distant places of Wales, for example, money is more valuable than in London; in common language, we say, that living is more cheap; in other words, commodities may be purchased with a smaller quantity of money: and this state of things is habitual, money having no tendency to go from London where its value is low, to increase its quantity in Wales where its value is high. This phenomenon requires explanation.

The fact is, that the whole of such difference as is habitual, and has no tendency to produce a transit of the metals, resolves itself into cost of carriage. Corn, butchers'-meat, and other commodities, which are produced in Wales, are cheaper than in London, because the supply of London comes from a distance, and the original price is enhanced by cost of carriage. But as there are certain commodities which thus are cheaper in Wales than in London, so there are others which are cheaper in London than in Wales. Such are all the commodities which are either manufactured in London, or imported into London from abroad. Just as the corn and other commodities, which come from Wales to London, are enhanced by the cost of carriage; so those commodities which are sent from London to Wales, are dearer in Wales than in London, by the whole of the cost which is incurred in transporting them. The fact, therefore, is, that in Wales some commodities are cheaper, and some are dearer, than in London; but those which are cheaper are the articles of principal importance; they are the necessaries of life, the articles the consumption of which constitutes the principal part of almost every man's expenditure. What is more, they are the articles the money-value of which determines the money-value of labour; every thing which a man has done for him, therefore, is done cheaper than it is in London. And, lastly, the gross commodities, which are the produce of Wales, cost much more carriage, in proportion to their value, than the fine commodities which are received from London: the cost of the gross commodities in London is much more raised above the price of them in Wales, than the price of the fine commodities in Wales is raised above the price of them in London. The cost of living, therefore, is greater in London than in Wales, for this reason, solely, because people in London pay more for carriage. If the value of the metal in Wales rose ever so little above that limit, a profit equal to that rise would immediately operate as a motive for sending it to Wales.

From two places in the same country, let us transfer the consideration to two different countries. The cost of living is higher; in other words, the value of the precious metals is lower in England, than in Poland. The difference here, also, resolves itself wholly into the cost of carriage. Let us suppose that England receives a considerable portion of her supply of corn from Poland, and sends her the whole, or the greater part, of her fine manufactures: corn, it is evident, will be dearer in England; but fine manufactures will be dearer in Poland. For the same reasons that money, as we have shown, goes farther in Wales, than in London, it is easy to see that it will, in this case, go farther in Poland than in England; in other words, the value of gold in Poland will be greater than in England, just so much as to compensate for the greater cost of carriage which England sustains. The moment it rises above that value, a profit may be made by sending it to England.

Section XV

Mode in which thePreciousMetal, orMedium ofExchange, Distributes itselfAmong theNations of theGlobe

In the country of the mines, whence gold distributes itself to the rest of the world, gold is in relative plenty. As an addition is constantly making to the quantity already possessed, there is a constant tendency in the gold of that country to fall in relative value; in other words, a constant tendency in the price of other things to rise. As soon as any commodities have risen sufficiently high to enable them to be imported, they will come in from that country, be it what it may, from which, prime cost and cost of carriage taken together, they come the cheapest; and gold will go out in exchange.

By this importation of gold into that second country, it becomes relatively plentiful there, and prices rise. Some commodity, or commodities, become there at last so dear, that they can be imported, with profit, from another country: commodities, as in the previous instance, come in, and gold goes out. It is unnecessary to trace the operation farther. In this manner gold proceeds from country to country, through the whole connected chain of the commercial world.

In a preceding section we found, that it is the interest of two nations to exchange with one another two sorts of commodities, as often as the relative cost of producing them is different in the two countries. If four quarters of corn, for example, and 20 yards of cloth, cost, each, the same quantity of labour in England, but not the same quantity in Poland, it would be the interest of the two countries, the one to produce corn, the other to produce cloth, and to exchange them with one another.

Suppose, while four quarters of corn and 20 yards of cloth required the same quantity of labour in England; that in Poland 20 yards of cloth required twice as much labour as four quarters of corn. In these circumstances, cloth, as compared with corn, would be twice as dear in Poland as in England; in other words, four quarters of corn, which in England would be of equal value with 20 yards of cloth, would in Poland be equal to no more than 10 yards. In a traffic of these commodities, between England and Poland, there would be a value of 5 yards of cloth to be gained by each upon every repetition of the transaction.37

Supposing, as we have done, that in Poland, if she produced corn and cloth herself, four quarters of corn would have the same value as 10 yards of cloth, it follows, that if she had the use of money, the price of four quarters of corn, and 10 yards of cloth, would be the same. In England, according to the supposition, the price of four quarters of corn and that of 20 yards of cloth would be the same.

There are two supposeable cases. The price of one of the two commodities, corn, for example, is either—1. equal in the two countries, or—2. it is not equal. The illustration of any one of these cases will suffice for both.

Let us suppose that, in the two countries, the price of corn is equal. If it is, the price of a yard of cloth must in Poland be twice as great as it is in England. In these circumstances, what will happen is obvious: the cloth, which is cheap in England, will go to Poland, where it is dear; and there it will be sold for gold, because there can be no counter importation of corn, which, by supposition, is already as cheap in England as in Poland.

By the importation, in this manner, of English cloth into Poland, gold goes out of Poland, and comes into England. The consequence is, that gold becomes more plentiful in England, less plentiful in Poland. From this first consequence, a second ensues; that prices gradually rise in England, fall in Poland: the price of corn, for example, and, along with it, the price of cloth, rise in England, fall in Poland. If when we suppose the traffic to begin, the price of corn in each country is 1l. per quarter, the price of cloth being, by consequence, in Poland 8s., in England 4s. per yard; the supposed exchange of cloth for gold will gradually, in England, raise the price of corn above, in Poland sink it below, 1l. per quarter; raise the price of cloth in England above 4s. per yard, sink it below 8s. per yard in Poland. In this manner, the price of corn in the two countries gradually recedes from equality, the price of cloth gradually approaches it. At a certain point in this progress, corn becomes so dear in England, and cheap in Poland, that the difference of price will pay for the cost of carriage. At that moment a motive arises for the importation of corn into England; and prices regulate themselves in such a manner, that in England corn is dearer than in Poland, by the expense of carrying corn; cloth is dearer in Poland than in England, by the expense of carrying cloth, from the one country to the other. At this point, the value of the cloth imported into the one country, and that of the corn imported into the other, balance one another. The exchange is then at par, and gold ceases to pass.

From the consideration of the same circumstances, it will farther be seen, that no alteration can take place in the interchange of commodities between the two countries, without a new distribution of the precious metal; that is, a change in the relative quantities which they previously possessed.

Let us suppose that, in England, some new commodity is produced, which Poland desires to obtain. A quantity of this commodity is imported into Poland; and it can be paid for only in gold, because we have supposed that at this time, the corn and cloth, respectively imported, pay for one another. In this case, as in that which I have previously explained, the price of commodities soon begins to rise in England, fall in Poland. In proportion as prices rise in England, and fall in Poland, a motive is produced to import a greater quantity of Polish goods into England, a less quantity of English goods into Poland. And again the balance is restored.

section XVI

MoneyTransactions betweenNations—Bills ofExchange

The moneys of different countries are different; that is to say, they consist of different portions of the precious metals, and go by different names. The pound sterling, for example, is the money of England, the dollar is the money of certain other countries; the pound sterling containes one quantity of the precious metal, the dollar contains a less quantity; and so of other varieties.

The purchases which are made by one country in another country, are, like other purchases, made by money. If the Dutch merchant, for example, purchase goods in England, he buys them at so many pounds sterling. If the English merchant buys goods in Holland, he buys them at so many guilders. To pay the pound sterling, the Dutch merchant must either send the English money, or an equivalent. The direct equivalent is a quantity of the precious metal equal to what is contained in the pounds sterling due. If the Dutch merchant has no other medium but guilders, he must send as many guilders as contain an equal quantity of the precious metals.

When the language now used by the merchants of Europe was established, a computation was made of the quantity of one currency which contained the same quantity of the precious metal, as a certain given quantity of another. This was called the par of exchange. The guilder contained not quite so much of the metal as two shillings English; but to simplify our language, let us suppose that it contained just as much. The par of exchange was then, 10 guilders to 1l.; or, in the abridged language of the merchants, 10.

The business of exchange, however, between country and country, is carried on, not by transmitting currency, or the metals, but, in a much greater degree, by the instrumentality of bills. The language, which the merchants have adopted for carrying on the traffic of bills, is very elliptical and abridged; and being, in several respects, not well chosen, is a source of obscurity and misapprehension.

The simple transaction is this. The merchant in London, to whom a merchant in Amsterdam owes a sum of money, writes a line to the merchant in Amsterdam, directing him to pay the money. The writing of this line is called drawing; the line itself is called a bill; and the person whom the line is written to, is said to be drawn upon. If the merchant in London, at the same time that he has money to receive from Amsterdam, has money to pay in Amsterdam, he draws his bill upon his debtor in Amsterdam, to the order of his creditor; or, in other words, his line written to the person who owes him money in Amsterdam, is a line directing him to pay the amount to that other person to whom he is indebted. If the sum to be received is equal to the sum to be paid, the bill discharges the debt; if it is less, it pays as far as it goes, and the difference constitutes a balance.

It so happens, in the course of business, that the individuals who import goods from Holland, for example, are not the same individuals who export goods to Holland. The merchants who import corn, or butter, or tallow, from Holland, are one set of merchants; the merchants who export cottons and hardware to Holland, are merchants of another description; the individuals, therefore, who have money to receive from Holland, have nothing to do with any payments in Holland; they make a demand for their money, and expect it shall be paid. There are other individuals, however, who have money to pay in Holland, and who, to save themselves the expense of sending money, are desirous of obtaining from the individuals, who have money to receive from Holland, orders upon their debtors, that is, bills drawn upon them for the sum. The English exporters, who have money to receive from Holland, therefore, draw bills, upon their correspondents in Holland, and, without needing to wait for the return from Holland, receive the money in England from the English importers.

There are thus two sets of persons in England: one, who have money to receive from Holland; another, who have money to send to Holland. They who have money to send, are desirous of meeting with the persons who have money to receive, and bills to draw; the persons, again, who have bills to draw, and money to receive, are desirous of meeting with the persons who have money to pay, and who would give it them immediately, and save them the delay of waiting the return from Holland. But these two sets of men do not always know how to find one another. This gives rise to a set of middle men, who, under the name of bill-brokers and exchange-brokers, perform the function of bringing them together, or rather act as the medium between them.

When it so happens that the amount, for which bills are drawn, is the same with that, for which bills are wanted; in other words, when those, who have money to receive abroad, are equal to those, who have money to pay; the amount of bills to be bought, and the amount to be sold, will be exactly the same. For each man desirous to purchase a bill on Holland, there will be another man, equally desirous to sell one. There will be neither premium, therefore, on the one side, nor discount on the other; the bills, or in the language of the merchants, the exchange, will be at par.

When it happens, however, that the debts and credits are not equal; that England, for example, has more money to pay, than she has to receive; in other words, has imported to a greater amount than she has exported, there are more persons who want to purchase bills on Holland, than there are persons to sell them. Those who cannot obtain bills to discharge their debts in Holland must send the metals. That, however, is an operation, attended with a considerable cost. There is, therefore, a competition for bills; and the merchants give for them rather more than they are worth. A bill, for example, drawn on Holland, for 10,000 guilders, (the 10,000 guilders being, by supposition, equal to 1,000l.) will be willingly purchased for something more than 1,000l. In this case, the exchange is said to be in favour of Holland, and against England. It is against England, because in Holland, when bills are drawn upon England, there are more people who have bills to sell, than people who have any occasion to buy. There is a competition, therefore among the people who wish to sell, and the price falls. A bill on England for 1,000l., instead of selling for 10,000 guilders, will sell for something less. This, it is evident, is a discouragement to the Dutch merchant who exports goods to England. It is also a discouragement to the English merchant who imports goods from Holland, and who, in addition to the 10,000 guilders, which his goods have cost, must pay something more than 1000l., or 10,000 guilders, for a bill to pay them. On the other hand, there is an encouragement to the English merchant, who exports goods to Holland, inasmuch as he receives for his bill of 10,000 guilders on Holland, rather more than 1,000l., which is the value of his goods; he is, therefore, stimulated, by this increase of profit, to increase the quantity of his trade.

It is very easy to see, what is the limit to this variation in the price of bills, called in the language of merchants, the exchange. The motive to the purchase of a bill is the obligation of paying a debt. The merchant, however, on whom it is incumbent to pay a debt in Holland, can pay it without a bill, by sending the metal. To send the metal is attended with a certain cost. If he can obtain the bill without paying beyond this cost, he will purchase the bill. This cost, therefore, is the utmost amount of the premium which he will pay for a bill, and the limit to the rise of its price. As the cost of sending the metal, which is a great value in a small bulk, is never considerable, the exchange can never vary from par to a considerable amount.

It is well known in commerce, how a balance is transferred from one country to another, by means of bills of exchange.

If a balance is due by England to Holland, and by Hamburgh to England, the holder of a bill at Amsterdam for 1,000l. upon England, will not send his bill to England, where it will fetch him only 1,000.; if by sending it to Hamburgh, it will fetch him something more; (i.e.) if he has a debt to pay at Hamburgh, when bills upon England are there at a premium, or if the premium will exceed the cost of transporting the gold from Hamburgh to Amsterdam.38 A debt, which owed to Holland, is thus paid by a credit which it had at Hamburgh. In England, the merchants who have imported from Holland, pay for the goods which they have imported, by paying the merchants, who have exported to Hamburgh, for the goods which they have exported.

Such are the transactions between country and country, by means of bills of exchange; and such is the language in which they are expressed. There are two states of things, in which these operations take place: The First, when the currency of both countries remains the same as at the time when the par of exchange was originally computed; when 10 guilders of Holland, for example, contained as much of the precious metal as 1l. sterling; and the par of exchange, of course, was said to be 10: The Second, when the relative value of the two currencies does not remain the same; as, for example, when 1l., instead of being equal to 10 guilders, becomes equal to 12, or to no more than 8.

If we suppose the quantity of the precious metal in the pound sterling to be diminished in such a degree, that it contains no greater quantity than that which is contained in 8 guilders, the par of exchange, in this case, would really be 8, instead of 10. The merchants, however, from the time at which the par of exchange appears to have been originally computed, never altered their language. If the par of exchange between the guilder and the pound sterling was 10, it continued to be called 10, though the relative value of the currencies might be changed; though the pound sterling, for example, might become equal to 8 guilders only, instead of 10. Notwithstanding this the value of the bills was regulated according to the real value of the currencies; a bill for so many pounds sterling was not when such a change took place equal to a bill for as many times 10 guilders, but for as many times 8. As the par of exchange, however, still was called 10, though really 8, the exchange was said to be against England, in the proportion of 10 to 8, or 20 per cent. This 20 per cent. of unfavourable exchange was altogether nominal; for when there was this 20 per cent. of discount on the English bill, the exchange was really at par. The language, therefore, was improper and deceptious; but if, in such case, it is born in mind, that 20 per cent. against England means the same as par, it will then be easy to see that everything which we demonstrated, in the preceding pages, as true with respect to the par, will, in this case, be true with respect to the 20 per cent. Every thing which raises the exchange above par, according to the proper language, makes it as much less than 20, according to the improper; every thing which reduces it below par, according to the proper, makes it as much more than 20, according to the improper. All the effects which follow from what is called the rise above, or fall below par, in the one case, follow from the same things, but called by different names, in the other. On this, therefore, I have no occasion to enlarge.

When the currencies of two countries are metallic, a change in their relative value beyond the fluctuations which are limited by the expense of transmiting the metals, and continually corrected by their transmission39 can only happen by a change in the relative quantity of the metal they contain; there being checks, as we have already seen, which prevent any considerable difference between the value of a metallic currency and that of the metal which it contains. There is, however, another case, namely, that of paper money, not convertible into the metallic. This requires to be considered by itself.

Let us resume the former supposition, that the pound sterling contains as much of the precious metal as 10 guilders; and let us suppose that a paper money, not payable in the metals, is issued in England, in such quantity, that a pound in that money is reduced 20 per cent. below the value of the metal contained in a pound sterling; it is easy to see that a bill for 100l. sterling, in this case, is of the same value exactly as a bill for 100l. sterling when the currency was degraded by losing 20 per cent. of its metal. A bill for 100l. in both cases, is equal not to 100 times 10 guilders, but 100 times 8 guilders. The reason is, that the bill will in England buy only as much of the metal as is contained in 100 times 8 guilders. It will exchange, therefore, of course, only for a bill of 800 guilders.

The facts may be expressed in the form of a general rule. The value of a bill drawn upon any country is equal, when it arrives, to all the precious metal which the money for which it is drawn can purchase in the market: a bill for 100l., for example, is equal to all the metal which it can purchase, whether it is the same quantity which would be purchased by 100l. sterling, or less. To whatever amount the portion which it can purchase is less than what could be purchased by 100l. of the coins, the paper money is degraded below what would be the value of the coins, if they circulated in its stead. The exchange, therefore, against any country, can never exceed the amount of two sums; First, the difference between the value of the degraded and the undegraded currency, or that between the nominal amount of the currency, and the quantity of the precious metal which it can purchase; secondly, the expense of sending the metal, when purchased. It thus appears, how perfectly unfounded is the opinion of those (and some political economists of great eminence are included in the number) who conceive that the real, not merely the nominal, exchange, may exceed the expense of transmitting the precious metals. They say, that when, by some particular cause, a great absorption of the precious metals has taken place, creating a scarcity in consequence of which goods must be sent from the country where it is scarce, to bring it back from the countries where it abounds, bills, 40 drawn by the country in which it is scarce, upon the countries where it abounds, may bear a premium, equal to the cost of sending goods which may fetch in the foreign market the value of the bill; and this, in certain cases, may greatly exceed the cost of sending the precious metals.

If the facts are traced, the answer will be seen to be conclusive.

When the exchange between two countries (call them A and B) is at par, it is implied, that the exports and imports of both are equal: that each receives from the other as much as it sends. In this case the goods which A sends to B must be so much cheaper in A than they can be made in B, that they can there be sold with all the addition required on account of the cost of carriage: in like manner the goods which B sends to A must be so much cheaper in B, that the cost of carriage is covered by the price which they fetch in A. This cost of carriage, it is obvious, does not affect the exchange, any more than an item in the cost of production.

Next, let us observe what happens, when the state of the exchange is disturbed. Let us suppose that a demand is suddenly created in A, for the means of making payments in B, greatly beyond the value of the former exportations. The demand for bills on B is consequently increased beyond the supply, and the price rises. The question is, what is the limit to that rise in the price of bills? At first it is evident the rise of price is limited to the cost of sending the precious metal. As the metal, however, departs, the value of it rises. If the currency is paper, and its value stationary, the gold will rise, and rise equally, both in currency and commodities. The final question, then, is, what is the limit to the rise in the value of gold?

Before the premium on the bills commenced, goods in A were so cheap, that a portion of them could be sent to B, and sold, with all the addition of the cost of carriage, and of course with the ordinary profits of stock. The whole of the premium on the bills, therefore, is an addition to the ordinary profits of stock.

If A be taken for England, and B for the continent of Europe, the case will be, that English goods, when the interchange is at par, go abroad, and are sold at a price which includes both profits and cost of carriage; when the premium on bills rises only so high as to equal the cost of sending bullion, it is to that extent an additional profit on the sending of goods.

It is evident that, in proportion as this premium should rise, it would not only enhance the motive to increase the exportation of the goods which could be exported with a profit before the rise of the bills, but that it would render many other kinds of goods exportable, which before could not be exported. Thus, when the exchange was at par, there were certain kinds of goods in England, which, after paying cost of carriage, could be sold abroad with a profit; there were certain other kinds which, on account of their high price in England, could not be thus exported; some might thus be 1 per cent. too high to be exported, other 2 per cent. too high, others 3 per cent., and so on. It is obvious that a premium of 1 per cent. on bills would enable the first kind to be exported; a premium of 2 per cent. would enable the second; and a premium of 10 per cent. would enable two or three kinds to be exported, which could not have been exported before. As the counter operation would be of the same kind and the same power, viz. to prevent the importation of foreign goods into England, exportation would be exceedingly increased, importation nearly prevented. The two operations together would be so powerful, that any great deviation from the real par of exchange could never be of long duration. A deviation equal to the cost of sending the precious metal, permanent circumstances might render permanent. If England, for example, sent every year a large amount of the precious metal to India, and received it from Hamburgh, the exchange would be to the extent of the cost of sending the metals, permanently favourable with Hamburgh, unfavourable with India.

If bills of exchange were always drawn for so much weight of gold, the case would be simple. Suppose a bill in London drawn upon Paris for 100 ounces of gold, no man would pay for that bill more gold beyond the 100 ounces than the cost of sending the 100 ounces. He might purchase the 100 ounces at one time with 390l. of currency, at another with 410l. of currency, but that would be entirely owing to changes in the relative value of the currency and the gold. These changes, it is said, may in certain circumstances, take place from a rise in the value of the gold, the currency remaining of the same value. This implies that gold can become more valuable in one country than in the neighbouring countries; in England, for example, than on the Continent. But this it cannot do without increasing the exports in England, and diminishing, almost to nothing, the imports. Suppose the rise in the value of gold to be 1 per cent., 2 per cent., or to amount to 10 per cent.; at this last rate the goods which could be sent abroad with the ordinary profit, could be now sent abroad with 10 per cent. more than the ordinary profit, which all the other kinds of goods, those 1 per cent., those 2 per cent., those 3 per cent., 4 per cent. 5 per cent., and so on, too dear to have been sent before, would now all be sent; at the same time that the counter operation would be equally strong to prevent foreign goods from being imported. These are the necessary effects of a high value of gold in one country as compared with other countries; and they are evidently such as to render it impossible that a high value of the precious metal in one country, compared with the neighbouring countries, can ever in a state of freedom be of long duration.

section XVII

Bounties andProhibitions

Under this title I include all encouragements and discouragements, of whatsoever sort, the object of which is, to make more or less of production or exchange to flow in certain channels, than would go into them of its own accord.

The argument, on this subject, I trust, will be clear and conclusive, without a multiplicity of words.

If it should appear, that production and exchange fall into the most profitable channels, when they are left free to themselves; it will necessarily follow that, as often as they are diverted from those channels, by external interpositions of any sort, so often the industry of the country is made to employ itself less advantageously.

That production and exchange do, when left to themselves, fall into the most profitable channels, is clear by a very short demonstration.

The cases of production and of exchange require to be considered separately; for, in the case of production, there is hardly any difference of opinion. If a country had no commercial intercourse with other countries, and employed the whole of its productive powers exclusively for the supply of its own consumption, nothing could be more obviously absurd, than to give premiums for the production of one set of commodities, and oppose obstructions of any sort to the production of another; I mean, in the view of Political Economy, or, on account of production: for if any country opposes obstructions to certain commodities, as spirituous liquors, because the use of them is hurtful; this regards morality, and has, for its end, to regulate not production, but consumption. Wherever it is not intended to limit consumption, it seems admitted, even in practice, that the demand will always regulate the supply, in the manner in which the benefit of the community is best consulted. The most stupid governments have not thought of giving a premium for the making of shoes, or imposing a preventive tax upon the production of stockings, in order to enrich the country by making a greater quantity of shoes, and a less quantity of stockings. With a view to the internal supply, it seems to be understood that just as many shoes, and just as many stockings, should be made, as there is a demand for. If a different policy were pursued; if a premium were bestowed upon the production of shoes, a tax or other burthen imposed upon the production of stockings, the effect would only be, that shoes would be afforded to the people cheaper, and stockings dearer, than they otherwise would be: that the people would be better supplied with shoes, worse supplied with stockings, than they would have been if things had been left to their natural course, that is, if the people had been left to consult freely their own convenience; in other words, if the greatest quantity of benefit, from their labour, had been allowed to be obtained.

All that regulation of industry, therefore, the object of which has been, to increase the quantity of one sort of commodities, lessen the quantity of another, has been directed to the purpose of regulating the exchange of commodities with foreign countries; of increasing, or diminishing, most commonly diminishing, the quantity of certain commodities, which would be received from abroad.

Now it is certain, as has been already abundantly proved, that no commodity, which can be made at home, will ever be imported from a foreign country, unless it can be obtained by importation with a smaller quantity of labour, that is, cost, than it could be produced with at home. That it is desirable to have commodities produced with as small a cost of labour as possible seems to be not only certain, but admitted. This is the object of all the improvements that are aimed at in production, by the division and distribution of labour, by refined methods of culture applied to the land, by the invention of more potent and skilful machines. It seems, indeed, to be a self-evident proposition, that whatever the quantity, which a nation possesses of the means of production, the more productive they can possibly be rendered, so much the better; for this is neither more nor less than saying, that to have all the objects we desire, and to have them with little trouble, is good for mankind.

Not only is it certain, that in a state of freedom no commodity, which can be made at home, will ever be imported, unless it can be imported with a less quantity, or cost, of labour than it could be produced with at home; but, whatever is the country from which it can be obtained with the smallest cost of labour, to that recourse will be had for obtaining it; and whatever the commodity, by the exportation of which, it can be obtained with the smallest quantity of home labour, that is the commodity, which will be exported in exchange. This results, so obviously, from the laws of trade, as not to require explanation. It is no more than saying, that the merchants, if left to themselves, will always buy in the cheapest market, and sell in the dearest.

It seems, therefore, to be fully established, that the business of production and exchange, if left to choose its own channels, is sure to choose those, which are most advantageous to the community. It is sure to choose those channels, in which the commodities, which the community desires to obtain, are obtained with the smallest cost. To obtain the commodities, which man desires, and to obtain them with the smallest cost, is the whole of the good which the business of production and exchange, considered simply as such, is calculated to yield. In whatever degree, therefore, the business of production and exchange is forced out of the channels into which it would go of its own accord, to that degree the advantages arising from production and exchange are sacrificed; or, at any rate, postponed to something else. If there is any case, in which they ought to be postponed to something else, that is a question of politics, and not of political economy.

There is no subject, upon which the policy of the restrictive and prohibitive system has been maintained with greater obstinacy, and with a greater quantity of sophistry, than that of the trade in corn. There can, however, be no doubt, that corn never will be imported, unless when it can be obtained from abroad with a smaller quantity of labour than it can be produced with at home. All the good, therefore, which is obtained from the importation of any commodity, capable of being produced at home, is obtained from the importation of corn. Why should that advantage which, in the case of corn, owing to the diversities of soil and extent of population, is liable to be much greater than in the case of any other commodity, be denied to the community?

The reasons, upon which the advocates for a restriction of the corn trade chiefly support themselves, are two; neither is of any value.

The first is, That unless the nation derive its corn from its own soil, it may, by the enmity of its neighbours, be deprived of its foreign supply, and reduced to the greatest distress. This argument implies an ignorance both of history, and of principle: Of history, because, in point of fact, those countries which have depended the most upon foreign countries for their supply of corn, have enjoyed beyond all other countries, the advantage of a steady and invariable market for grain: Of principle, because it follows unavoidably, if what, in one country is a favourable, is in other countries an unfavourable season, that obtaining a great part of its supply from various countries is the best security a nation can have against the extensive and distressing fluctuations which the variety of seasons is calculated to produce. Nor is the policy involved in this argument better than the political economy. It sacrifices a real good, to escape the chance of a chimerical evil: an evil so much the less to be apprehended, that the country, from which another derives its supply of corn, is scarcely less dependent upon that other country for a vent to its produce, than the purchasing country is for its supply. It will not be pretended, that a glut of corn, in any country, from the loss of a great market, with that declension of price, that ruin of the farmers, and that depression of rents, which are its unavoidable consequences, is an immaterial evil.

The second reason, upon which the advocates of the corn monopoly support themselves, is, That, if the merchants and manufacturers enjoy in certain cases the monopoly of the home supply, the farmers and landlords are subject to injustice, when a similar monopoly is not bestowed upon them. In the first place, it may be observed, that, if this argument is good for the growers of corn, it is good for every other species of producers whatsoever; if, because a tax is imposed upon the importation of woollens, a tax ought to be imposed upon the importation of corn, a tax ought also to be imposed upon the importation of every thing, which the country can produce; the country ought, in short, to have no foreign commerce, except in those articles alone, which it has not the means of producing.

The argument moreover supposes, that an extraordinary gain is obtained by the manufacturer, in consequence of his supposed protection; and that a correspondent evil is sustained by the corn grower, unless he is favoured by a similar tax. The ignorance of principle is peculiarly visible in those suppositions, in neither of which is there a shadow of truth.

The man who embarks his capital in the woollen, or any other manufacture, with the produce of which that of the foreign manufacturers is not allowed to come into competition, does not, on that account derive a greater profit from his capital. His profit is no greater than that of the man whose capital is embarked in trades open to the competition of all the world. All that happens is, that a greater number of capitalists find employment in that branch of manufacture; that a portion, in short, of the capitalists of the country employ themselves in producing that particular species of manufacture, who would otherwise be employed in producing some other species, probably in producing something for the foreign market, with which that commodity, if imported from the foreign manufacturer, might be bought.

As the man who has embarked his capital in the trade, which is called protected, derives no additional profit from the protection: so the grower of corn sustains not any peculiar loss or inconvenience.41 Nothing, therefore, can be conceived more groundless than his demand of a compensation on that account. The market for corn is not diminished because a tax is laid upon the importation of woollens; nor would that market be enlarged if the tax were taken off. His business, therefore, is not in the least degree affected by it.

It would be inconsistent with the plan of work, confined to the exposition of general principles, to lay open all the fallacies, which lurk in the arguments for restraining the trade in corn.42 One or two, however, of the sources of deception, cannot be left altogether unnoticed.

The landlord endeavours to represent his own case, and that of the manufacturer, as perfectly similar; though, in the circumstances which concern this argument, they are not only different, but opposite. The landlord also endeavours to mix up his own case with that of the farmer; and upon the success of that endeavour almost all the plausibility of his pretensions depends. That no pretensions are more unfounded, may be seen by a very short process of reasoning. The farmer, as a producer, requires, like every other producer, that all his outgoings be returned to him, with the due profit upon the capital which he employs. The surplus, which the land yields, over and above this return and profit, is what he pays to his landlord; and his interest is not affected by the quantity of that surplus, whether it be great or small. His interest, however, is very much affected by wages; because, in proportion as wages are low, his profits, like all other profits, are high. Wages cannot be low, if corn is dear. The interest, therefore, the permanent interest, of the class of farmers, consists, in having corn cheap. This or that individual in the class may, that is, during the currency of a lease, have an interest in high prices; and the reason of the exception shows the truth of the general rule. The individual, who, during the currency of a lease, has an interest in high prices, is, by his lease, converted, to a certain extent, into a receiver of rent. During the continuance of his lease, if prices rise, he gets, not only his due return of profits as a farmer, but something more, namely, a portion of what is truly rent, and which, but for his lease, would have gone to the landlord.

This, then, is the grand distinction. The receivers of rent are benefited by a high price of corn; the producers of corn, as such are not benefited by it, but the reverse. The case of the farmer corresponds with that of the manufacturer, not with that of the landlord. The farmer is a producer and capitalist; the manufacturer is a producer and capitalist; and they both received all that belongs to them, when their capital is replaced with its profits. The landlord is not a producer, nor a capitalist. He is the owner of certain productive powers in the soil; and all which the soil produces belongs to him, after paying capital which is necessary to put those productive powers in operation. It thus appears that the case of the landlord is peculiar; that a high price of corn is profitable to him, because, the higher the price, the smaller a portion of the produce will suffice to replace, with its profits, the capital of the farmer, and all the rest belongs to himself. To the farmer, however, and to all the rest of the community, it is an evil, both as it tends to diminish profits, and as it enhances the charge to consumers.

Section XVIII

Colonies

Among the expedients which have been made use of, to force into particular channels a greater quantity of the means of production, than would have flowed into them of their own accord; colonies are a subject of sufficient importance to require a particular consideration.

The only point of colonial policy, which it is here necessary to consider, is that of trade with the colonies. And the question is, whether any peculiar advantage may be derived from it.

With respect to colonies, as with respect to foreign countries, the proposition will, doubtless, be admitted, that whatever advantage is derived from trading with them, consists in what is received from them, not in what is sent; because that, if not followed by a return, would be altogether loss.43

The return from them is either money or commodities. The reader is by this time fully aware that a country derives no advantage from receiving money, more than from receiving any other species of commodity. It is also plain that where the colony has not mines of the precious metal, it cannot, under the monopoly of the mother country, have money, or anything else, beside its own productions, to send.

It is needless to consider the case of free trade with a colony, because that falls under the case of trade with any foreign country.

The monopoly, which a mother country may reserve to herself, of the trade with her colonies, is of two sorts.

First of all, she may trade with her colonies, by means of an exclusive company. In this case, the colony has no purchaser, to whom she is allowed to sell any thing, but the exclusive company; and no other seller, from whom she is allowed to buy any thing. The company, therefore, can make her buy, as dear as it pleases, the goods which the mother country sends to her, and sell, as cheap as it pleases, the goods which she sends to the mother country. In other words, the colony may, in these circumstances, be obliged to give for the produce of a certain quantity of the labour of the mother country, a much greater quantity of goods than the mother country could obtain, with the same quantity, from any other country, or from the colony in a state of freedom.

The cases of a trade in these circumstances are two: the first, where the colony receives from the mother country, luxuries, comforts: the other, where she receives necessaries; either the necessaries of life, or the necessaries of industry, as iron, &c.

In that case, in which the colony receives luxuries and comforts only from the mother country, there is a limit to the degree in which the mother country is enabled to profit by the labour of the colony. The colony may decline receiving such luxuries or comforts, if obliged to sacrifice for them too great a quantity of the produce of her labour, and may think it better to employ that great proportion of her labour, in providing such luxuries and comforts as she herself is capable of producing.

If, however, the colony is dependent for necessaries upon the mother country, the exclusive company exercises over the colony a power altogether despotic. It may compel her to give the whole produce of her labour, for no more of the necessaries in question, than what is just sufficient to enable the population of the colony to live. If it is the necessaries of life, which the colony receives, the conclusion is obvious. If it is commodities, such as iron, and instruments of iron, without which her labour cannot be productively employed, the result is precisely the same. She may be made to pay for these articles so much of the whole produce of her labour, that nothing but what is necessary to keep the population alive may remain. It would be the interest of the mother country, not to lessen the population; because, with the population, the produce would be lessened, and hence the quantity of commodities which the mother country could receive.

Instead, however, of trading with her colonies by means of an exclusive company, the mother country may leave the trade open to all her own merchants, only prohibiting the colony from trading with the merchants of any other country. In this case, the competition of the merchants in the mother country reduces the price of all the articles received by the colony, as low as they can be afforded—in other words, as low as in the mother country itself, allowance being made for the expense of carrying them. If it be said that the colonies afford a market; I reply, that the capital, which supplies commodities for that market, would still prepare commodities, if the colonies were annihilated; and those commodities would still find consumers. The labour and capital of a country cannot prepare more than the country will be willing to consume. Every individual has a desire to consume, either productively or unproductively, whatever he receives. Every country, therefore, contains within itself a market for all that it can produce. This will be made still more evident, when the subject of consumption, the cause and measure of markets, comes under consideration. There is, therefore, no advantage whatsoever derived, under freedom of competition, from that part of the trade with a colony which consists in supplying it with goods, since no more is gained by it, than such ordinary profits of stock as would have been gained if no such trade had existed. It is nevertheless true that the colony may lose by such a traffic, if the goods, which she is thus compelled to purchase of the mother country, might have been purchased cheaper in other countries.44

If there be any peculiar advantage, therefore, to the mother country, it must be derived from the cheapness of the goods, with which the colony supplies her. It is evident, that if the quantity of goods, sugar, for example, which the colony sends to the mother country, is so great as to glut the mother country; that is to supply its demand beyond the measure of other countries, and make the price of them in the mother country lower than it is in other countries, the mother country profits by compelling the colony to bring its goods exclusively to her market, since she would have to pay for them as high as other countries, if the people of the colony were at liberty to sell wherever they could obtain the greatest price.

This advantage, if drawn by the mother country, would be drawn at the expense of the colony. In free trade, both parties gain. In the advantage produced by forcing, whatever is gained by the one party is lost by the other. The mother country, in compelling the colony to sell goods cheaper to her than she might sell them to other countries, merely imposes upon her a tribute; not direct, indeed, but not the less real because it is disguised.

If any advantage is derived from restraining, any otherwise than by an exclusive company, the trade with the colonies, it must consist in forcing the colonies to sell to none but the mother country, not in forcing them to buy from none but the mother country. A great improvement, therefore, in colonial policy would be, to throw open the supply of the colonies, permitting them to purchase the goods which they want, wherever they could find the most favourable market, only restraining them in the sale of their goods: allowing them to buy wherever they pleased, permitting them to sell to none but the mother country.

It is at the same time to be observed, that if the merchants of the mother country have freedom to export the goods which are derived from the colonies, the price of these goods will be raised in their own country to the level of the price in other countries. The competition of the merchants will, also, raise the price of the goods to a correspondent height in the colonies; and thus the benefit to the mother country is lost.

Treaties of commerce are sometimes concluded, for the purpose of limiting the freedom of trade. One country can be limited to another in but two ways; either in its purchases, or its sales. Suppose that Great Britain binds some other country to purchase certain commodities exclusively from her; Great Britain can derive no advantage from such a treaty. The competition of her merchants will make them sell those commodities as cheap to the merchants of that country, as to their own countrymen. Their stock is not more profitably employed than it would be if no such trade existed. There are cases in which a country may gain by binding another country to sell to none but itself. If one country is bound to sell no commodities whatsoever, except to another particular country; this is the same case, exactly, with that of a colonny bound to sell to none but the mother country. As no free country, however, is likely to bind itself to sell none of its commodities except to one other, this is not a case which we need to regard as practicable or real.

One country may bind itself to sell exclusively to another particular country, not all the articles it has for foreign sale, but only some of them.

These may be articles which yield nothing, even in a state of freedom, but the ordinary profits of stock; as cloth, hardware, hats, &c.: or they may be articles which yield something over and above the ordinary profits of stock; as corn, wine, minerals, &c. which are the source of rent.

One country can derive no advantage from compelling another to sell to it, exclusively, articles of the first sort. If the price which the favoured country pays for the goods is not sufficient to afford the ordinary profits of stock, they will not be produced. If the price which it pays is sufficient to afford the ordinary profits of stock, it would at that price obtain the goods, without any treaty of restriction.

The case is different, where the goods yield something, as rent, or the profits of a monopoly, over and above the profits of stock. The quantity which may be sent in this case to the favoured country, may sink there the price of the restricted commodity lower than it is in the neighbouring countries; and lower than the restricted country would, if not under restriction, be enabled to sell it in those countries. To this extent, and to this only, can one country benefit, by confining the trade of another to itself. The restriction may operate to a diminution of the profits of a monopolized commodity, or a diminution of rent.

There is one mode of presenting this subject, which is apt to puzzle a mind not accustomed to trace the intricacies of this science.

Suppose two countries, A and B, of which A is bound by treaty, or otherwise, to receive all its shoes from B, and to sell to B all its sugars: Suppose, also, that A could, if left at liberty, obtain its shoes 50 per cent. cheaper from some other country; in that case, it may for a moment appear, that B obtains the sugars which it buys of A, with 50 per cent. less of its own labour, than it would if A were allowed to purchase where it pleased.

If B paid for the supposed sugars in shoes, it would, no doubt, pay 50 per cent. more in the case of a free trade.

But if there were any other article with which it could purchase those sugars, and which it could afford as cheap as any other country, it would lose nothing in the case of a free trade; it would purchase the same quantity of sugar with the produce of the same quantity of labour as before; only, that produce would be, not shoes, but some other article.

That there would be articles which B could afford as cheap as any other country, is certain, because otherwise it could have no foreign trade.

It may be said, however, that though B might have articles which it could sell as cheap as other countries, they might not be in demand in the country which produced the sugars. But if shoes only were in demand in the colonies, those other articles could purchase shoes where they were cheapest; and thus obtain the same quantity of sugar, in the free, as in the restricted state of the trade.

[20][This paragraph was intended to refute the capital theory of value which had been advanced by Torrens. A reply by Torrens to Mill's dismissal of his theory appeared in The Traveller, 2 Dec. 1822. John Stuart Mill defended his father's position in the same journal on 6 and 13 Dec. On the whole episode see L. Robbins, Robert Torrens and the Evolution of Classical Economics, Macmillan, London, 1958, pp. 60-72.]

[21][In the 1st edition the section ended here and Ricardo's comment was: ‘I see the same difficulty, in this section, that I have seen in my own, on the same subject, of laying down a general and positive rule with respect to quantity of labour realised in commodities being the rule and measure of their exchangeable value. The exceptions will be opposed to you as they have been to me.’ Works, vol. IX, p. 127. See also the related comment cited below, p. 264n.]

[22][The idea of treating profits simply as the wages of ‘stored-up’ labour derives from McCulloch, who put forward this solution in his article ‘Political Economy’ for the Supplement to the Encyplopaedia Britannica, 1824, vol. VI, pp. 313-19. The solution was not accepted by Ricardo himself, see Works, vol. IX, p. 377.]

[23][Ricardo commented: ‘If a watch and a common Jack altered in relative value without any more or less labour being required for the production of either of them, could we say that the proposition “that quantity of labour determines exchangeable value” was universally true? What I call exceptions and modifications of the general rule you appear to me to say come under the general rule itself.’ Works, vol. IX, p. 127.]

[24][The rest of this section was added in the 2nd edition.]

[25][This sentence was inserted in the 3rd edition and replaces the conclusion that: ‘England, therefore, would obtain her corn with her labour, through the medium of her cloth’.]

[26][In the 1st and 2nd editions this paragraph ended with the conclusion that Poland ‘gains to the amount of 50 days' labour; in other words a third’. In the earlier edition Mill had spoken as though each country trades at the internal exchange ratio of the other, and had thereby imputed the whole of the gain due to differences of comparative costs to both countries simultaneously. The error was pointed out by John Stuart Mill and was discovered as a result of discussions of the Elements by the younger utilitarians; see J. S. Mill's Autobiography, pp. 84-85.]

[27][This paragraph, a modified version of one which appeared in the 2nd edition, was inserted in the 3rd edition to correct the error mentioned in the previous note.]

[28][Ricardo commented: ‘I cannot agree in the distinction here taken, that the advantage in commerce is derived to all countries from what they receive, and not from what they send out. They in fact never receive any thing without sending something to pay for it, and it is the exchange which is beneficial. It is no exchange unless a commodity be given as well as received. I do not see how such a transaction can be separated into two parts and how it can be justly said that one part only is beneficial. What we get in exchange for our commodity really constitutes the price or value for which we sell it.’ Works, vol. IX, pp. 127-8. Mill made no attempt to alter the statement in subsequent editions.]

[29][This section was added in the 2nd edition.]

[30][In the 1st edition this qualification read: ‘excepting only that part, comparatively small, which is fixed in durable machinery’. It was altered to meet Ricardo's comment: ‘Can this part be called justly comparatively small? It consists not only of durable machinery but of ships, canals, roads, bridges, workshops etc. etc.’ Works, vol. IX, p. 128.]

[31][This proposal for a national bank derives from Ricardo (see his Principles, Works, vol. I, pp. 361-3); the augmented political overtones belong to Mill. The idea may have originated with Ricardo, but there is little doubt that Mill encouraged him in this line of thought. The first hints of this proposal appear in Ricardo's Economical and Secure Currency (1816), Works, vol. IV, p. 114; and it has been suggested by Mr Sraffa (ibid., p. 46n) that the passage concerned shows evidence of Mill's hand.]

[32][The whole of this paragraph and the ending of the preceding one was modified in the 2nd edition to remove a minor obscurity pointed out by Ricardo, Works, vol. IX, p. 128 (comment on pp. 119-20 of 1st edition).]

[3][Ricardo commented: ‘There is a little ambiguity in this passage. Government could not diminish the value of the currency taken as a whole, they could diminish the value of each particular coin of which that currency was composed.’ Works, vol. IX, p. 128. No alteration was made by Mill.]

[34][See David Hume's essay ‘Of Money’ in his Economic Writings (ed. E. Rotwein), Nelson, 1955, p. 38.]

[34][Mill was always anxious to suppress ‘unorthodox’ popular views on the subject of money, particularly those based on the idea that production and employment could be stimulated by an increase in the quantity of money. He considered such views to be thoroughly subversive; they could only lead to ‘robbery’ by depreciation. See e.g. his letter to Brougham 3 Sep. 1831 (Bain, op. cit., pp. 364-5) in which he says that ‘hanging, a thousand times repeated, would be too small a punishment’ for those advocating depreciation. John Stuart Mill took up this theme more temparately in his Principles; see pp. 550-1 (Ashley edition) where he criticises the Birmingham currency school for advocating an increase of paper currency.]

[36][Ricardo commented: ‘I should be very unwilling to allow government to keep the same quantity of paper in circulation under the circumstances supposed. By what criterion should we be able to distinguish a real demand for gold, from a diminished capital and circulation from improvements in the art of economising the use of money etc. etc?’ Works, vol. IX, p. 128.]

[37][In the 1st edition Mill committed the same error here of imputing the whole gain to both countries as he had earlier when dealing with the gains from trade. (See p. 272 above.) The passage was suitably modified in the 3rd edition.]

[38][The wording of this sentence was slightly modified to meet a technical point raised by Ricardo, Works, vol. IX, p. 129 (comment on p. 145 of 1st edition).]

[39][This phrase was inserted in the 2nd edition at the suggestion of Ricardo who had said: ‘This should be qualified a little, for without any alteration in the quantity of metal in either, the relative value of their currencies may undergo a change, within the range of the expences of sending the metal from one to the other. If 10000 guilder were of the same intrinsic value as £1000, and the expence of sending money 2 pct., £1000 might for a considerable length of time purchase a bill for 10200 guilders at one period, and at another, for a considerable length of time also, it might only purchase a bill for about 9800.’ Works, vol. IX, p. 129.]

[40][The rest of the section, from this point to the end, was rewritten for the 2nd edition. See the Preface to 2nd edition reprinted above.]

[41][Ricardo commented: ‘should not this be qualified by saying that he sustains only the general loss sustained by all other consumers in being forced to pay more for the protected commodity?’ Works, vol. IX, p. 130.]

[42][For a fuller exposition of Mill's views on this topic see Eclectic Review, Jul. 1814, vol. II, n.s., pp. 1–17.]

[43][Ricardo commented: ‘I object again to the doctrine that all advantage in trade is derived from the commodities received and not by those which are sent.’ Works, vol. IX, p. 130.]

[44][This sentence was added in the 2nd edition to meet the following criticism made by Ricardo: ‘Is not a colony more injured by being obliged to buy of the mother country than by being obliged to sell to it? The produce of the colony though sent to the mother country, and therefore liable to more charges than if sent to the country where it is finally to be sold, is nevertheless diffused generally to all places where it is in demand, and therefore finally obtains the best price, deduction being always made for the increased charges. But the colony is obliged to obtain its commodities from one single market, and is obliged to buy in that market altho’ she might possibly buy the same goods much cheaper elsewhere. It is evident, I think, that she not only bears the increased charges, but also the increased cost, on the commodities she purchases.’ Works, vol. IX, pp. 130–1.]