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[V.ii.a] part i: Of the Funds or Sources of Revenue which may peculiarly belong to the Sovereign or Commonwealth - Adam Smith, Glasgow Edition of the Works and Correspondence Vol. 2b An Inquiry Into the Nature and Causes of the Wealth of Nations, Vol. 2 [1776]

Edition used:

An Inquiry Into the Nature and Causes of the Wealth of Nations, Vol. I and II, ed. R. H. Campbell and A. S. Skinner, vol. II of the Glasgow Edition of the Works and Correspondence of Adam Smith (Indianapolis: Liberty Fund, 1981).

Part of: The Glasgow Edition of the Works and Correspondence of Adam Smith, 7 vols.

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part i

Of the Funds or Sources of Revenue which may peculiarly belong to the Sovereign or Commonwealth

1The funds or sources of revenue which may peculiarly belong to the sovereign or commonwealth must consist, either in stock, or in land.

2 The sovereign, like any other owner of stock, may derive a revenue from it, either by employing it himself, or by lending it. His revenue is in the one case profit, in the other interest.

3The revenue of a Tartar or Arabian chief consists in profit. It arises principally from the milk and increase of his own herds and flocks, of which he himself superintends the management, and is the principal shepherd or herdsman of his own horde or tribe. It is, however, in this earliest and rudest state of civil government only that profit has ever made the principal part of the publick revenue of a monarchical state.1

4Small republicks have sometimes derived a considerable revenue from the profit of mercantile projects. The republick of Hamburgh is said to do so from the profits of a publick wine cellar and apothecary’s shop* .2 The state cannot be very great of which the sovereign has leisure to carry on the trade of a wine merchant or apothecary. The profit of a publick bank has been a source of revenue to more considerable states. It has been so not only to Hamburgh, but to Venice and Amsterdam.3 A revenue of this kind has even by some people been thought not below the attention of so great an empire as that of Great Britain. Reckoning the ordinary dividend of the bank of England at five and a half per cent.4 and its capital at ten millions seven hundred and eighty thousand pounds,5 the neat annual profit, after paying the expence of management, must amount, it is said, to five hundred and ninety–two thousand nine hundred pounds. Government, it is pretended, could borrow this capital at three per cent. interest, and by taking the management of the bank into its own hands, might make a clear profit of two hundred and sixty–nine thousand five hundred pounds a year. The orderly, vigilant, and parsimonious administration of such aristocracies as those of Venice and Amsterdam, is extremely proper, it appears from experience, for the management of a mercantile project of this kind. But whether such a government as that of England; which, whatever may be its virtues, has never been famous for good œconomy; which, in time of peace, has generally conducted itself with the slothful and negligent profusion that is perhaps natural to monarchies; and in time of war has constantly acted with all the thoughtless extravagance that democracies are apt to fall into; could be safely trusted with the management of such a project must at least be a good deal more doubtful.6

5The post office is properly a mercantile project.7 The government advances the expence of establishing the different offices, and of buying or hiring the necessary horses or carriages, and is repaid with a large profit by the duties upon what is carried. It is perhaps the only mercantile project which has been successfully managed by, I believe, every sort of government. The capital to be advanced is not very considerable. There is no mystery in the business. The returns are not only certain, but immediate.

6Princes, however, have frequently engaged in many other mercantile projects, and have been willing, like private persons, to mend their fortunes by becoming adventurers in the common branches of trade. They have scarce ever succeeded. The profusion with which the affairs of princes are always managed, renders it almost impossible that they should. The agents of a prince regard the wealth of their master as inexhaustible; are careless at what price they buy; are careless at what price they sell; are careless at what expence they transport his goods from one place to another. Those agents frequently live with the profusion of princes, and sometimes too, in spite of that profusion, and by a proper method of making up their accounts, acquire the fortunes of princes. It was thus, as we are told by Machiavel, that the agents of Lorenzo of Medicis, not a prince of mean abilities, carried on his trade. The republick of Florence was several times obliged to pay the debt into which their extravagance had involved him. He found it convenient, accordingly, to give up the business of merchant, the business to which his family had originally owed their fortune, and in the latter part of his life to employ both what remained of that fortune, and the revenue of the state of which he had the disposal, in projects and expences more suitable to his station.8

7No two characters seem more inconsistent than those of trader and sovereign. If the trading spirit of the English East India company renders them very bad sovereigns; the spirit of sovereignty seems to have rendered them equally bad traders. While they were traders only, they managed their trade successfully, and were able to pay from their profits a moderate dividend to the proprietors of their stock. Since they became sovereigns, with a revenue which, it is said, was originally more than three millions sterling, they have been obliged to beg the extraordinary assistance of government in order to avoid immediate bankruptcy. In their former situation, their servants in India considered themselves as the clerks of merchants: In their present situation, those servants consider themselves as the ministers of sovereigns.9

8A state may sometimes derive some part of its publick revenue from the interest of money, as well as from the profits of stock. If it has amassed a treasure, it may lend a part of that treasure, either to foreign states, or to its own subjects.10

9The canton of Berne derives a considerable revenue by lending a part of its treasure to foreign states; that is, by placing it in the publick funds of the different indebted nations of Europe, chiefly in those of France and England.11 The security of this revenue must depend, first, upon the security of the funds in which it is placed, or upon the good faith of the government which has the management of them; and, secondly, upon the certainty or probability of the continuance of peace with the debtor nation. In the case of a war, the very first act of hostility, on the part of the debtor nation, might be the forfeiture of the funds of its creditor. This policy of lending money to foreign states is, so far as I know, peculiar to the canton of Berne.

10The city of Hamburgh* has established a sort of publick pawn–shop, which lends money to the subjects of the state upon pledges at six per cent. interest. This pawn–shop or Lombard, as it is called, affords a revenue, it is pretended, to the state of a hundred and fifty thousand crowns, which, at four–and–sixpence the crown, amounts to 33,750l. sterling.

11The government of Pensylvania, without amassing any treasure, invented a method of lending, not money indeed, but what is equivalent to money, to its subjects. By advancing to private people, at interest, and upon land security to double the value, paper bills of credit to be redeemed fifteen years after their date, and in the mean time made transferable from hand to hand like bank notes, and declared by act of assembly to be a legal tender in all payments from one inhabitant of the province to another, it raised a moderate revenue, which went a considerable way towards defraying an annual expence of about 4,500l. the whole ordinary expence of that frugal and orderly government.12 The success of an expedient of this kind must have depended upon three different circumstances; first, upon the demand for some other instrument of commerce, besides gold and silver money; or upon the demand for such a quantity of consumable stock, as could not be had without sending abroad the greater part of their gold and silver money, in order to purchase it; secondly, upon the good credit of the government which made use of this expedient; and, thirdly, upon the moderation with which it was used, the whole value of the paper bills of credit never exceeding that of the gold and silver money which would have been necessary for carrying on their circulation, had there been no paper bills of credit. The same expedient was upon different occasions adopted by several other American colonies: but, from want of this moderation, it produced, in the greater part of them, much more disorder than conveniency.

12The unstable and perishable nature of stock and credit, however, render them unfit to be trusted to, as the principal funds of that sure, steady and permanent revenue, which can alone give security and dignity to government. The government of no great nation, that was advanced beyond the shepherd state, seems ever to have derived the greater part of its publick revenue from such sources.

13 Land is a fund of a more stable and permanent nature; and the rent of publick lands, accordingly, has been the principal source of the publick revenue of many a great nation that was much advanced beyond the shepherd state.13 From the produce or rent of the publick lands, the ancient republicks of Greece and Italy derived, for a long time, the greater part of that revenue which defrayed the necessary expences of the commonwealth. The rent of the crown lands constituted for a long time the greater part of the revenue of the ancient sovereigns of Europe.

14War and the preparation for war, are the two circumstances which in modern times occasion the greater part of the necessary expence of all great states. But in the ancient republicks of Greece and Italy every citizen was a soldier, who both served and prepared himself for service at his own expence. Neither of those two circumstances, therefore, could occasion any very considerable expence to the state.14 The rent of a very moderate landed estate might be fully sufficient for defraying all the other necessary expences of government.15

15In the ancient monarchies of Europe, the manners and customs of the times sufficiently prepared the great body of the people for war;16 and when they took the field, they were, by the condition of their feudal tenures, to be maintained, either at their own expence, or at that of their immediate lords, without bringing any new charge upon the sovereign. The other expences of government were, the greater part of them, very moderate. The administration of justice, it has been shown, instead of being a cause of expence, was a source of revenue.17 The labour of the country people, for three days before and for three days after harvest, was thought a fund sufficient for making and maintaining all the bridges, highways, and other publick works which the commerce of the country was supposed to require. In those days the principal expence of the sovereign seems to have consisted in the maintenance of his own family and houshold. The officers of his houshold, accordingly, were then the great officers of state. The lord treasurer received his rents. The lord steward and lord chamberlain looked after the expence of his family. The care of his stables was committed to the lord constable and the lord marshal. His houses were all built in the form of castles, and seem to have been the principal fortresses which he possessed. The keepers of those houses or castles might be considered as a sort of military governors. They seem to have been the only military officers whom it was necessary to maintain in time of peace. In these circumstances the rent of a great landed estate might, upon ordinary occasions, very well defray all the necessary expences of government.18

16In the present state of the greater part of the civilized monarchies of Europe, the rent of all the lands in the country, managed as they probably would be if they all belonged to one proprietor, would scarce perhaps amount to the ordinary revenue which they levy upon the people even in peaceable times. The ordinary revenue of Great Britain, for example, including not only what is necessary for defraying the current expence of the year, but for paying the interest of the publick debts, and for sinking a part of the capital of those debts, amounts to upwards of ten millions a year. But the land–tax, at four shillings in the pound, falls short of two millions a year.19 This land–tax, as it is called, however, is supposed to be one–fifth, not only of the rent of all the land, but of that of all the houses, and of the interest of all the capital stock of Great Britain, that part of it only excepted which is either lent to the publick, or employed as farming stock in the cultivation of land. A very considerable part of the produce of this tax arises from the rent of houses, and the interest of capital stock. The land–tax of the city of London, for example, at four shillings in the pound, amounts to 123,399l. 6s. 7d. That of the city of Westminster, to 63,092l. 1s. 5d. That of the palaces of Whitehall and St. James’s, to 30,754l. 6s. 3d. A certain proportion of the land–tax is in the same manner assessed upon all the other cities and towns corporate in the kingdom, and arises almost altogether, either from the rent of houses, or from what is supposed to be the interest of trading and capital stock. According to the estimation, therefore, by which Great Britain is rated to the land–tax, the whole mass of revenue arising from the rent of all the lands, from that of all the houses, and from the interest of all the capital stock, that part of it only excepted which is, either lent to the publick, or employed in the cultivation of land, does not exceed ten millions sterling a year, the ordinary revenue which government levies upon the people even in peaceable times. The estimation by which Great Britain is rated to the land–tax is, no doubt, taking the whole kingdom at an average, very much below the real value; though in several particular counties and districts it is said to be nearly equal to that value. The rent of the lands alone, exclusive of that of houses, and of the interest of stock, has by many people been estimated at twenty millions, an estimation made in a great measure at random, and which, I apprehend, is as likely to be above as below the truth.20 But if the lands of Great Britain, in the present state of their cultivation, do not afford a rent of more than twenty millions a year, they could not well afford the half, most probably not the fourth part of that rent, if they all belonged to a single proprietor, and were put under the negligent, expensive, and oppressive management of his factors and agents. The crown lands of Great Britain do not at present afford the fourth part of the rent, which could probably be drawn from them, if they were the property of private persons. If the crown lands were more extensive, it is probable, they would be still worse managed.

17The revenue which the great body of the people derives from land is in proportion, not to the rent, but to the produce of the land. The whole annual produce of the land of every country, if we except what is reserved for seed, is either annually consumed by the great body of the people, or exchanged for something else that is consumed by them. Whatever keeps down the produce of the land below what it would otherwise rise to, keeps down the revenue of the great body of the people, still more than it does that of the proprietors of land. The rent of land, that portion of the produce which belongs to the proprietors, is scarce any where in Great Britain supposed to be more than a third part of the whole produce. If the land, which in one state of cultivation affords a rent of ten millions sterling a year, would in another afford a rent of twenty millions; the rent being, in both cases, supposed a third part of the produce;21 the revenue of the proprietors would be less than it otherwise might be by ten millions a year only; but the revenue of the great body of the people would be less than it otherwise might be by thirty millions a year, deducting only what would be necessary for seed. The population of the country would be less by the number of people which thirty millions a year, deducting always the seed, could maintain, according to the particular mode of living and expence which might take place in the different ranks of men among whom the remainder was distributed.

18Though there is not at present, in Europe, any civilized state of any kind which derives the greater part of its publick revenue from the rent of lands which are the property of the state; yet, in all the great monarchies of Europe, there are still many large tracts of land which belong to the crown. They are generally forest; and sometimes forest where, after travelling several miles, you will scarce find a single tree; a mere waste and loss of country in respect both of produce and population. In every great monarchy of Europe the sale of the crown lands would produce a very large sum of money, which, if applied to the payment of the publick debts, would deliver from mortgage a much greater revenue than any which those lands have ever afforded to the crown. In countries where lands, improved and cultivated very highly, and yielding at the time of sale as great a rent as can easily be got from them, commonly sell at thirty years purchase; the unimproved, uncultivated, and low–rented crown lands might well be expected to sell at forty, fifty, or sixty years purchase. The crown might immediately enjoy the revenue which this great price would redeem from mortgage. In the course of a few years it would probably enjoy another revenue. When the crown lands had become private property, they would, in the course of a few years, become well–improved and well–cultivated.22 The increase of their produce would increase the population of the country, by augmenting the revenue and consumption of the people. But the revenue which the crown derives from the duties of customs and excise, would necessarily increase with the revenue and consumption of the people.

19The revenue which, in any civilized monarchy, the crown derives from the crown lands, though it appears to cost nothing to individuals, in reality costs more to the society than perhaps any other equal revenue which the crown enjoys. It would, in all cases, be for the interest of the society to replace this revenue to the crown by some other equal revenue, and to divide the lands among the people, which could not well be done better, perhaps, than by exposing them to publick sale.

20Lands, for the purposes of pleasure and magnificence, parks, gardens, publick walks, &c. possessions which are every where considered as causes of expence, not as sources of revenue, seem to be the only lands which, in a great and civilized monarchy, ought to belong to the crown.

21Public stock and publick lands, therefore, the two sources of revenue which may peculiarly belong to the sovereign or commonwealth, being both improper and insufficient funds for defraying the necessary expence of any great and civilized state; it remains that this expence must, the greater part of it, be defrayed by taxes of one kind or another; the people contributing a part of their own private revenue in order to make up a publick revenue to the sovereign or commonwealth.

[1 ]The constitution of the Tartar state is described in V.i.b.7.

[* ]See Memoires concernant les Droits & Impositions en Europe: tome i. page 73. This work was compiled by the order of the court for the use of a commission employed for some years past in considering the proper means for reforming the finances of France. The account of the French taxes, which takes up three volumes in quarto, may be regarded as perfectly authentic. That of those of other European nations was compiled from such informations as the French ministers at the different courts could procure. It is much shorter, and probably not quite so exact as that of the French taxes.

[Mémoires concernant les impositions et droits en Europe (Paris, 1768–9), by J. L. Moreau de Beaumont. Smith mentions this book in Letter 196 addressed to Sir John Sinclair, dated 24 November 1778. In this letter Smith stated that he had had frequent occasion to study a book which had never been properly published, and that he had obtained it ‘by the particular favour of Mr. Turgot’. At the same time Smith expressed himself as being unwilling to send the book out of Edinburgh, since ‘if any accident should happen to my book, the loss is perfectly irreperable’. Smith believed that there were as few as three copies in Britain at the time.]

[2 ]‘La Cave de ville & l’Apothicairerie forment encore un objet de revenu tres considerable’. De Beaumont, Mémoires, i.73.

[3 ]The Bank of Amsterdam is described above, IV.iii.b.

[4 ]The same figure is cited at II.ii.84.

[5 ]The same figure is cited at V.i.e.18.

[6 ]On the extravagance of government, a frequent theme, see for example II.iii.31, 36, V.iii.8, 49, 58.

[7 ]See above, V.i.d.3.

[8 ]‘In his commercial affairs he [Lorenzo de Medici] was very unfortunate, from the improper conduct of his agents, who in all their proceedings assumed the deportment of princes rather than of private persons; so that in many places, much of his property was wasted, and he had to be relieved by his country with large sums of money. To avoid similar inconvenience, he withdrew from mercantile pursuits, and invested his property in land and houses, as being less liable to vicissitude.’ (N. Machiavelli, History of Florence, book VIII, translated (London, 1851), 400–1.)

[9 ]On this point see IV.vii.b.11 and generally IV.vii.c.101–8, V.i.e.26–30.

[10 ]See above, IV.i.25, where it is pointed out that treasures are of little importance in modern times.

[11 ]De Beaumont, Mémoires, i.155. See above, V.i.g.41 and below, V.iii.3 where Smith comments on the treasure amassed by the canton. Smith also mentioned Dutch holdings in English and French funds at I.ix.10.

[* ]See aMemoires concernant les Droits & Impositiones en Europe; tome i. p. 73a [‘Par ce moyen elle procure à ses point onéreuses, & elle se ménage un gain considérable, qui passeroit aux usuriers qui, avant cet établissement, exigeoient des intérêts outrés, tels que Soixante ou Quatre–vingt pour cent.’ (De Beaumont, Mémoires, i.73.)]

[12 ]The issue of colonial paper money is discussed above, II.ii.102, V.iii.81. See generally II.ii. The same figure for the expence of colonial government is cited at IV.vii.b.20.

[13 ]The point is made with reference to Bengal at IV.vii.c.102.

[14 ]The expence of war in the modern, as compared to the classical state, is discussed at V.i.a.12–14 and 43. See generally V.i.a.

[15 ]The example of Greece is given in LJ (B) 309, ed. Cannan 238, and the comment made that: ‘In all barbarous countries we find lands appropriated to the purposes of sovereignty, and therefore little occasion for taxes and customs. We shall shew that this is a bad police, and one cause of the slow progress of opulence.’

[16 ]See above, V.i.a.6.

[17 ]Above, V.i.b.13.

[18 ]Smith also comments on the limited expence of such government at V.iii.2.

[19 ]In the year ended 10 October 1776, the land and assessed taxes, and duties on pensions, offices, and personal estates yielded net income of £1,875,057 13s. Public Income and Expenditure, Part I, 174. British Parliamentary Papers, 1868–69. XXV.

[20 ]In LJ (B) 289, 309, ed. Cannan 224 and 238, the land rent of England is given as 24 millions. The expenses of government are stated to be 3 millions at p. 309 and the conclusion reached that ‘a land rent to serve all these purposes would be the most improper thing in the world’ (310, ed. Cannan 239).

[21 ]The same figure is cited above, II.iii.9, I.xi.c.20.

[22 ]See above, III.iv.3. In commenting on the inadequacy of the land tax to meet Britain’s fiscal needs, Smith remarked that the crown lands were unlikely to be even ‘half as well cultivated as the rest’ (LJ (B) 309, ed. Cannan 239).

[* ]See aMemoires concernant les Droits & Impositiones en Europe; tome i. p. 73a [‘Par ce moyen elle procure à ses point onéreuses, & elle se ménage un gain considérable, qui passeroit aux usuriers qui, avant cet établissement, exigeoient des intérêts outrés, tels que Soixante ou Quatre–vingt pour cent.’ (De Beaumont, Mémoires, i.73.)]

[aMemoires concernant les Droits & Impositiones en Europe; tome i. p. 73a]id. ibid. 1–2