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Nature and Caiifes



VOL. 11.

Jirfm JoLouru


I N Q^ U I R Y


Nature and Caufes



By ADAM SMITH, LL. D. and F. R. S.

Formerly Profefibr of Moral Philofophy in the Univerfity of Glasgow.

V O L. II.





^''auams'^'J. (.

rt V"





Of Syflems of political Oeconomy.
IkTRODUCTio-N — — — Page I


Of the Principle of the Commercial or Mercantile Syjlem — 2


Of Rejlraints upon the Importation of fuch Goods from Foreign
Countries as can be produced at Home — — qi

CHAP. m.

Of 'the extraordiiiary Ref mints upon the Importation of Goods
ofahnojl all Kinds, from thofe Countries 'with -which the Ba-
Idfice is fuppofed to be dijadvantageous — — ey


Part I. Oj the Unreafonablenefs of thofe Ref raints, even upon
■ the Principles of the Commercial Syfem — _- ibid.

Digrefion concerning Banks of Depofit, particularly concerning
that of Amferdam — — — ^a


Part II. Of the Unreafonahknefs of thofe extraordinary Re-
flraints npon other Principles — — — Page 76


Of Dratvbacks — — -_ 88

C H A P. V.

Of Bounties — • — — 91

D'lgrefjion concerning the Corn Trade and Corn Laivs — 106


Of Treaties of Commerce — — , — ij2

Of Colonies — — — 148

Part I. Of the Motives for efahUJJring new Colonies ibid.

Part II. Caufes of the Profperity of neiv Colonies — ijg

Part III. Of the Ad^vantages 'which Europe has derived from
the Difcovcry of America., and from that of a Paffagc to the
Eaf Indies by the Cape of Good Hope — — 192


Of the Agricultural Sy ferns, or of thofe Sy ferns of political
Oeconomy luhich reprefent the Produce of Land, as either
thefole or the principal Source of the Revenue and Wealth of
every Country. 259


B O O K V.

©f'the Revenue of the Sovereign or Gommonwealth.

Of the Expences of the Sovereign or Commowwealth Page 293


Part 1. Of the Expence of Defence- ibid.

Part II. Of the Expence ofjujllce — — 315

Part 111. Of the Expence of public Works and public Inflitu-
tions — — — — 331.

Article ift. Of the public Works and Ifi/lltutions for faci~
litating the Commerce of Society — — 3^2

Article id. Of the Expence of the Jnjiitutions for the
Education of Youth — •— o^'Z-

Article 3d. Of the Expence of the Infitutions for the In-
Jlruflion of People of all jiges — — 376

Part IV. Of the Expence of fupporting the Dignity of the
Sovereign — — — . ^ i j

Conch fion of the Chapter — — — a\2


Ofihe Sources of the general or public Revenue of the Society * 414

CO xN T E N T S.

Part I. Of the Funds or Sources of Revenue tvh'ich may pc
culiarly belonging to the Sovereign or Commowwealth Page 414

Part 11. Of Faxes -r- — 424

AKTiCLE I ft. Taxes upon Rent — — .428

Taxes upon the Rent of Land '— — ibid.

Taxes ivhicb are proportioned, not io the Rent., but to the Pro~
duce of Land • — — — 440

Taxes upon the Rent ofHoufes — — 444

.Article 2c1. Taxes upon Profit, or upon the Revenue arifng
from Stock — ; — — 4_J4

'Taxes upon the Profit of particular Employment s — 461

Appendix to Articles ift and 2d. Taxes upon the Ca-
pital Value of Lands, Hoifes, and Stock ■— — 469

Article 3d. Taxes upon the Wages of Labour — 477

Article 4th. Taxes ivhich, it is int end e ^^ Jhould fall indif"
ferently upon every different Species of Revenue — 48 1

Capitation Taxes — — — ibid.

Taxes upon confumable Commodities — — 484

Of public Debts — "^ ^ SIS




I N (^ U I R Y




\v:ealth of nations.


of Syftems of political Oeconomy.


POLITICAL ceconomy, confidered as a branch of the fcience book
of a ftatefman or legiflator, propofes two diftind: objedts ; firfl, , ^'_
to provide a plentiful revenue or fubfiftence for the people, or Introduaion.
more properly to enable them to provide fuch a revenue or fubfift-
ence for themfelves; and fecondly, to fupply the ftate or common-
wealth with a revenue fufficient for the public fervices.. It propofes
to enrich both the people and the fovereign.

The different progrefs of opulence in different ages and nations,
has given occafion to two different fyftems of political oeconomy,
with regard to enriching the people. The one may be called
the fyftem of commerce, the other that of agriculture. I fhall
endeavour to explain both as fully and diflindlly as I can, and fhall
begin with the fyftem of commerce. \i is the modern fyflem, and
is befl underftood in our own country and in our own times.

Vol. n. B



Of the Principle of the commercial^ or mercantile Syflem.


BOOK ' I **HAT wealth confifts in monoy, or in gold and filver, is a
JL popular notion which naturally arifes from the double func-
tion of money, as the inflrument of commerce, and as the mea-
fure of value. In confequence of its being the inflrument of com-
merce, when we have money we can more readily obtain what-
ever elfe we have occafion for, than by means of any other com-
modity. The great affair, we always find, is to get money. When
that is obtained, there is no difficulty in making any fubfequent
purchafe. In confequence of its being the meafure of value, we
eftimate that of all other commodities by the quantity of money
which they will exchange for. We fay of a rich man that he is
worth a great deal, and of a poor man that he is worth very little
money. A frugal man, or a man eager to be rich, is faid to love
money ; and a carelefs, a generous, or a profufe man, is faid to be
indifferent about it. To grow rich is to get money; and wealth and
money, in fhort, are, in common language, confidered as in every
refpedl fynonymous.

A RICH country, in the fame manner as a rich man, is fup-
pofed to be a country abounding in money ; and to heap up gold
and filver in any country is fuppofed to be the readieft way to en-
rich it. For fome time after the difcovery of America, the firfl
enquiry of the Spaniards, when they arrived, upon any unknown
coaft, ufed to be, if there was any gold or filver to be found in
the neighbourhood. By the information which they received, they
judged whether it was worth while to make a fettlement there, or
if the country was worth the conquering. Piano Carpino, a monk
2 fent


fent ambafTador from the king of France to one of the fons of ^ "^'^ ''•
the famous Gengis Khan, fays that the Tartars ufed frequently
to afk hhn if there was plenty of fheep and oxen in the kingdom
of France. Their enquiry had the fame obje£t with that of the
Spaniards. They wanted to know if the country was rich enough
to be worth the conquering. Among the Tartars, as among all
other nations of fhepherds, who are generally ignorant of the
ufe of money, cattle are the inftruments of commerce and the
meafures of value. Wealth, therefore, according to them, con-
fifted in cattle, as according to the Spaniards it confifted in gold
and filver. Of the two, the Tartar notion, perhaps, was the
neareft to the truth.

Mr. Locke remarks a dlftindlon between money and other
moveable goods. All other moveable goods, he fays, are of fo
confumable a nature that the wealth which confifts in them cannot
be much depended on, and a nation which abounds in them one
year may, without any exportation, but merely by their own wafte
and extravagance, be in great want of them the next. Money, on
the contrary, is a fleady friend, which, though it may travel about
from hand to hand, yet if it can be kept from going out of the
country, is not very liable to be wafted and confumed. Gold and
filver, therefore, are, according to him, the moft folid and fub-
ftantial part of the moveable wealth of a nation, and to multiply
thofe metals ought, he thinks, upon that account, to be the great
objed: of its political oeconomy.

Others admit that if a nation could be feparated from all the
world, it would be of no confequence how much, or how little
money circulated in it. The confumable goods which were cir-
culated by means of this money, would only be exchanged for a
greater or a fmaller number of pieces ; but the real wealth or poverty

B 2 of


^ ^\P ^ °^ ^^^ country, they allow, would depend altogether upon th«
abundance or fcarcity of thofe confumable goods. But it is other-
wife, they think, with countries which have conneflions with fo-
reign nations, and which are obliged to carry on foreign wars, and
to maintain fleets and armies in diftant countries. This, they fay,
cannot be done, but by fending abroad money to pay them with ;
and a nation cannot fend much money abroad, unlefs it has a good
deal at home. Every fuch nation, therefore, muft endeavour in
time of peace to accumulate gold and filver, that, when occafion
requires, it may have wherewithal to carry on foreign wars.

In confequence of thefe popular notions, all the different nations
of Europe have fludied, though to little purpofe, every pofTible
means of accumulating gold and filver in their refpedlive countries.
Spain and Portugal, the proprietors of the principal mines which
fupply Europe with thofe metals, have either prohibited their ex-
portation under the feverefl penalties, or fubjedted it to a confiderable
duty. The like prohibition feems antiently to have made a part of
the policy of mofl; other European nations. It is even to be found,
where we fhould leaft of all expedt to find it, in fome old Scotch ads
of parliament, which forbid under heavy penalties the carrying
gold or {liver forth of the kingdom. The like policy antiently took
place both in France and England.

When thofe countries became commercial, the merchants found
this prohibition, upon many occafions, extremely inconvenient.
They could frequently buy moreadvantageoufly with gold and filver
than with any other commodity, the foreign goods which they
wanted, either to import into their own, or to carry to fome other
foreign country. They remonftrated, therefore, againft this prohi-
bition as hurtful to trade.




They reprefentcd, firfl:, that ihe exportation of gold and filver in ^ ^^ J^ ^'
order to purchafe foreign goods, did not always diminifh the quantity > — >
of thofe metals in the kingdom. That, on the contrary, it might
frequently increafe that quantity; becaufe if the confumption of fo-
reign goods was not thereby increafcd in the country, thofe goods
might be re-exported to foreign countries, and being there fold for
a large profit, might bring back much more treafure than was ori-
ginally fent out to purchafe them. Mr. Mun compares this opera-
tion of foreign trade to the feed-time and harveft of agriculture. " If
*' we only behold," fays he, " the adlions of the hufbandman in the
*' feed-time, when he cafteth away much good corn into the ground,
*' we fhall account him rather a madman than a hufbandman. But
•' when we confider his labours in the harveft, which is the end
*' of his endeavours, we fhall find the worth and plentiful increafe
*' of his adions."

They reprefented, fecondly, that this prohibition could not
hinder the exportation of gold and filver, which, on account of
the fmallnefs of their bulk in proportion to their value, could eafily
be fmuggled abroad. That this exportation could only be prevented
by a proper attention to, what they called, the balance of trade.
That when the country exported to a greater value than it imported,
a balance became due to it from foreign nations, which was necef-
farily paid to it in gold and filver, and thereby increafed the quan-
tity of thofe metals in the kingdom. But that when it imported
to a greater value than it exported, a contrary balance became
due to foreign nations, which was neceflarily paid to them in the
fame manner, and thereby diminifhed that quantity. That in this
cafe to prohibit the exportation of thofe metals could not prevent it,
but only, by making it more dangerous, render it more expenfive.
That the exchange was thereby turned more againft the country
which owed the balance, than it otherwife might have been ; the
merchant who purchafed a bill upon the foreign country being



obliged to pay the banker who fold it, not only for the natural
rifk, trouble and expence of fending the money thither, but for
the extraordinary rifk arifing from the prohibition. But that the
more the exchange was againft any country, the more the balance
of trade became neceffarily againft it ; the money of that country
becoming neceffarily of fo much lefs value, in comparifon with that
of the country to which the balance was due. That if the ex-
change between England and Holland, for example, was five per
cent, againft England, it would require a hundred and five
ounces of filver in England to purchafe a bill for a hundred ounces
of filver in Holland : that a hundred and five ounces of filver in
England, therefore, would be worth only a hundred ounces of
filver in Holland, and would purchafe only a proportionable quan-
tity of Dutch goods : but that a hundred ounces of filver in Hol-
land, on the contrary, would be worth a hundred and five ounces
in England, and would purchafe a proportionable quantity of
Englilh goods : That the Englifti goods which were fold to Holland
would be fold fo much cheaper ; and the Dutch goods which were
fold to England, fo much dearer, by the difference of the ex-
change ; that the one would draw fo much lefs Dutch money to
England, and the other fo much more Englifh money to Holland,
as this difference amounted to : and that the balance of trade,
therefore, would neceffarily be fo much more againft England,
and would require a greater balance of gold and filver to be ex-
ported to Holland.

Those arguments were partly folid and partly fophiftical. They
were folid fo far as they afferted that the exportation of gold and
filver in trade might frequently be advantageous to the country.
They were folid too in afferting that no prohibition could prevent
their exportation, when private people found any advantage in ex-
porting them. But they were iophiftical in fuppofing, that eiihcr



to preferve or to augment the quantity of thofe metals required CHAP.
more the attention of government, than to preferve or to augment
the quantity of any other ufeful commodities, which the freedom
of trade, without any fuch attention, never fails to fupply in the
proper quantity. They were fophiftical too, perhaps, in aflerting
that the high price of exchange neccflarily increafed, what they
called, the unfavourable balance of trade, or occafioned the ex-
portation of a greater quantity of gold and filver. That high
price, indeed, was extremely difadvantageous to the merchants
who had any money to pay in foreign countries. They paid fo
much dearer for the bills which their bankers granted them upon
thofe countries. But though the rifk arifing from the prohibition
might occafion fome extraordinary expence to the bankers, it would
not neceflarily carry any more money out of the country. This
expence would generally be all laid out in the country, in fmug-
gling the money out of it, and could feldom occafion the export-
ation of a fmgle fix-pence beyond the precife fum drawn for.
The high price of exchange too would naturally difpofe the mer-
chants to endeavour to make their exports nearly balance their im-
ports, in. order that they might have this high exchange to pay
upon as fmall a fum as poffible. The high price of exchange, be-
fideis, mud neceffarily have operated as a tax, in raifing the price of
foreign goods, and thereby diminifhing their confumption. It
would tend, therefore, not to increafe, but to diminifh, what they
called, the unfavourable balance of trade, and confequently the ex-
portation of gold and filver.

Such as they were, however, thofe arguments convinced the
people to whom they were addrefled. They were addrefled. by
merchants to parliaments, and to the councils of princes, to
nobles and to country gentlemen ; by thofe who were fuppofed to
underftand trade, to thofe who were confcious to themfelves that
they knew nothing about the matter* That foreign trade enriched;



BOOK, tlie country, experience demonftrated to the nobles and country

< ,/ gentlemen, as well as to the merchants ; but how, or in what

manner, none of them well knew. The merchants knew perfedly
in what manner it enriched themfelves. It was their bufinefs to
know it. But to know in what manner it enriched the country,
was no part of their bufinefs. This fubjedl never came into their
confideration, but when they had occafion to apply to their country
for fome change in the laws relating to foreign trade. It then
became neceflary to fay fomething about the beneficial efFeds of
foreign trade, and the manner in which thofe efFeds were obftruded
by the laws as they then flood. To the judges who were to decide
the bufinefs, it appeared a mofl: fatisfadory account of the matter,
when they were told that foreign trade brought money into the
country, but that the laws in queflion hindered it from bringing fo
much as it otherwife would do. Thofe arguments therefore pro-
duced the wiflied-for efFed. The prohibition of exporting gold and
filver was in France and England confined to the coin of thofe re-
fpedive countries. The exportation of foreign coin and of bullion
was made free. In Holland, and in fome other places, this liberty
was extended even to the coin of the country. The attention of
government was turned away from guarding againfl; the exportation
of gold and filver, to watch over the balance of trade, as the only
canfe which could occafion any augmentation or diminution of
thofe metals. From one fruillefs care it was turned away to an-
other care much more intricate, much more embarralFing, and jufl
equally fruitlefs. The title of Mun's book, England's Treafure
in Foreign Trade, became a fundamental maxim in the political
ceconomy, not of England onlV) but of all other commercial
countries. The inland or home trade, the mofl; important of all,
the trade in which an equal capital affords the greatefl revenue, and
creates the greatefl employment to the people of the country, was
confidered as fubfidiary only to foreign trade. It neither brought
money into the country, it was faid, nor carried any out of it.

3 The


The country therefore could never become either richer or poorer by C H A P.

means of it, except fo far as its profperity or decay might indirecftly v_— v 1

injfluence the rtate of foreign trade.

A COUNTRY that has no mines of its own mufl: undoubtedly
draw its gold and filver from foreign countries, in the fame manner
as one that has no vineyards of its own muft draw its wines. It
does not feem neceffary, however, that the attention of government
fliould be more turned towards the one than towards the other ob-
ject. A country that has wherewithal to buy wine, will always get
the wine which it has occafion for ; and a country that has where-
withal to buy gold and filver, will never be in want of thofe metals.
They are to be bought for a certain price like all other commodities,
and as they are the price of all other commodities, fo all other com-
modities are the price of thofe metals. We truft with perfed fecu-
rity that the freedom of trade, without any attention of govern-
ment, will always fupply us with the wine which we have occafion
for : and we may truft with equal fecurity that it will always fup-
ply us with all the gold and filver which we can afford to purchafe
or to employ, either in circulating our commodities, or in other

The quantity of every commodity which human induftry can
either purchafe or produce, naturally regulates itfelf in every country
according to the effectual demand, or according to the demand of
thofe who are willing to pay the whole rent, labour and profits which
muft be paid in order to prepare and bring it to market. But no
commodities regulate themfelves more eafily or more exadlly accord-
ing to this effed:ual demand than gold and filver ; becaufe on account
of the fmall bulk and great value of thofe metals, no commodities
can be more eafily tranfported from one place to another, from the
places where they are cheap, to thofe where they are dear, from the

Vol. II. C place*


BOOK places where they exceed, to thofe where they fall fhort of this ef-
fedlual demand. If there was In England, for example, an ef-
fedlual demand for an additional quantity of gold, a packet-boat
could bring from Lifbon, or from wherever elfe it was to be had,
fifty tuns of gold, which could be coined into more than five mil-
lions of guineas. But if there was an efFedlual demand for grain
to the fame value, to import it would require, at five guineas a
tun, a million of tuns of fhipping, or a thoufand fhips of a
thoufand tuns each. The navy of England would not be fufE-

When the quantity of gold and filver imported into any country^
exceeds the efFedual demand, no vigilance of government can
prevent their exportation. All the fanguinary laws of Spain and
Portugal are not able to keep their goW and filver at home. The
continual importations from Peru and Brazil exceed the efFedual
demand of thofe countries, and fink the price of thofe metals there
below that in the neighbouring countries. If, on the contrary^
in any particular country their quantity fell flaort of the effedual
demand, fo as to raife their price above that of the neighbouring
countries, the government would have no occafion to take any
pains to import them. If it was even to take pains to prevent
their importation, it would not be able to effeduate It. Thofe
metals, when the Spartans had got wherewithal to purchafe them,
broke through all the barriers which the laws of Lycurgus oppofed
to their entrance into Lacedemon. All the fanguinary laws of
the cuftoms are not able to prevent the importation of the teas
of the Dutch and Gottenburgh taft India companies ; becaufe
fomewhat cheaper than thofe of the Britifh company. A pound
of tea, however, is about a hundred times the bulk of one of
the higheft prices, fixteen fhillings, that is commonly paid for
it in filver, and more than two thoufand times the bulk of the



fame price In gold, and confequcntly jufl fo many times more dif- ^ H a p.
ficult to fmiJggle.

It Is partly owing to the eafy tranfportatlon of gold and filver
from the places where they abound to thofe where they are wanted,
that the price of thofe metals does not fluduate continually like that
of the greater part of other commodities, which are hindered by
their bulk from fhifting their fituation, when the market happens
to be either over or underftocked with them. The price of thofe
metals, indeed, is not altogether exempted from variation, but the
changes to which it is liable are generally flow, gradual, and uni-
form. In Europe, for example, it is fuppofed, without much
foundation, perhaps, that, during the courfe of the prefent and
preceding century, they have been conftantly, but gradually, fink-
ing in their value, on account of the continual importations from,
the Spanifh Weft Indies. But to make any fudden change in the
price of gold and filver, fo as to raife or lower at once, fenfibly
and remarkably, the money price of all other commodities, requires
fuch a revolution in commerce as that occafioned by the difcovery
of America.

If, notwithftanding all this, gold and filver fhould at any time
fall fhort in a country which has wherewithal to purchafe them,
there are more expedients for fupplying their place, than that of
almoft any other commodity. If the materials of manufadture
are wanted, induftry muft flop. If provifions are wanted, the
people muft ftarve. But if money is wanted, barter will fupply
its place, though with a good deal of inconveniency. Buying and
felling upon credit, and the different dealers compenfating their

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