Skip to main content

Full text of "The students' edition of the "Wealth of Nations", Bks. 1 and 2 abridged;"

See other formats


■SJ*^&b^--'vr ■■•'^■-■i'- 



^B 00 




^H o 


^H :^=CM 


l^^^l ^ T^ 


I^B 1-^ 



Eh -==c£) 


^H — '^ 
SB ^ 

^H -' o 

^H CO 

























Digitized by tine Internet Arciiive 

in 2011 witin funding from 

University of Toronto 


mteilffO LISTJUN 1 1925 




The style of Adam Smith is very diffuse, and his great 
work notoriously abounds with repetitions and digressions. 
It is therefore a book that may be advantageously studied 
in an abridgement. My object in this volume has been to 
give a careful statement of all the principles of Political 
Economy laid down by Adam Smith, and also, by means of 
foot notes, to supply such corrections and explanations, as 
khe developement of the science since the days of Adam 
Smith render necessary. 

My chief difficulty has arisen from the present unsettled 
state of Political Economy. Professor Fawcett's Manual, 
and most of the books that come into the hands of students 
are based on the "Principles " of J. S. Mill. But many of 
Mill's most important doctrines can no longer be regarded 
as tenable. For instance, his theory of wages, (known as the 
Wages-fund theory) was abandoned by Mill himself before 
his death, and is rejected by most of the economists of the 
present day. It still, however, appears in Professor 
Fawcett^s Manual ; and it was the theory generally ac- 
cepted by the upper and middle classes in England, until 
its death blow was given it in the famous work of Mr. 
Henry George. In my note on Wages I have endeavoured 
to give an account of the matter, which I venture to think 
is more consistent than Mill's with the general body of 
economic principles which Mill inherited from Ricardo. 
irhen again, a considerable part of Mill's theory of value 
was demolished by the late Professor Cairnes ; and the 


unsatisfactory character of the distinction he draws between 
productive and unproductive labour has often been pointed 
out. I have, therefore, been obliged to deal with these 
matters rather more at length in notes at the end of the 
volume. In another note I have pointed out the cause of 
Adam Smith's erroneous notions as to the local value of 
money, and have noticed the bearing of the true principles 
which govern the value of money on Mr. Goschen^s theory 
of the recent appreciation of gold. 

A. W. R. 



Editor's Introduction 

Introduction and Plan of the Work 


of the causes of improvement in the productive powers of 
labour, and ov the order according to which its pro- 
duce is n.^turally distributed among the different 
Ranks of the people. 

Of the division of Labour ..... 3 

Of the principle which gives occasion to the division of Labour 5 

That the division of Labour is limited by the extent of the 

market . . . . . 6 

Of the origin and use of Money .... 7 

Of the real and nominal price of Commodities, or of their price 

in Labour, and their price in Money . . .10 

Of the component parts of the price of Commodities . . 17 

Of the natural, and market price of Commodities . . 21 

Of the wages of Labour . . . . 26 ». 


Of the profits of Stock ••••'• 37 

Of Wages and Profits in the different employments of Labour 

and Stock . . . . . . 44 . 

Part I. Of inequalities arising from the Nature of the Em- 
ployments themselves . . . . -45 

Part II. Inequalities occasioned by the policy of Europe . 53 

Of the Rent of Land ...... 63 

Part I. Of the produce of Land which always affords Rent . 64 


Part II. Of the produce of I.and which sometimes does, and 
sometimes does not, afford Rent .... 

P.\RT III. Of the variations in the proportion between the re- 
spective values of that sort of produce which always affords 
Rent, and of that which sometimes does, and sometimes 
does not, afford Rent ..... 

Digression concerning the yalue of Silver during the last four 
centuries — First Period ..... 

Second Period ....... 

Third Period . . . 

\'ariations in the proportion between the respeective values of 
Gold and Silver ...... 

Different effects of the progress of improvement upon three 
different sorts of rude produce . • . . 

Conclusion of the Chapter ..... 











Of the division of Stock ...... 

Of money considered as a particular branch of the genera! stock 
of the Society, or of the expense of maintaining the general 
capital ....... 

Of the accumulation of Capital, or of productive and unproduc- 
tive Labour ....... 

Of Stock lent at interest ..... 

Of the different employments of Capital 


Real and Relative Value 
Wages .... 

Rent ..... 
The Local Value of Money . 
Productive and Unproductive Labour 
The meaning of the term Capital 
Selkcted Examination Questions . 






The reader will be assisted by keeping in view the object 
withSvhich Adam Smith wrote the Wealth of Nations, and 
the principal defects of his system of political economy. 

His primary object is to expound the causes of the in- 
crease of the wealth of a nation, or what are now known as 
the Laws of Production, but early in the first book he 
passes on, without notice t^^ the reader, to consider the 
laws which govern the Exchange of commodities and the 
distribution of wealth among the three co nstitu e nt orders nf 

s ociety. I-Hp 1ahniirpr<;^ rapifali^fg, and lanHnvynprg, The 

theory of Production is not treated separately from the 
theory of Exchange and Distribution, as it is in most 
modern treatises. The theory of Production occupies the 
first four chapters of the first book and the whole of the 
second book ; the treatment of the theory of Exchange and 
Distribution is begun at the end of the fourth chapter of 
the first book, and occupies the rest of that book. 

In the first four chapters oT the first book Adam Smith ] 
deals with the causes that increase the nel|t revenue or sur- 
plus wealth of a nation by rendering its labour more effec- 
tive ; in the second book he deals with the causes which 
increase the gross revenue of a nation through the increase 
of its capital and of the number of its productive labourers. 

Money and banks are treated under the head of Produc- 
tion, because money is regarded as a principal instrument 
for facilitating the division of labour, while banks turn 
' dead stock into active and productive stock," and thereby 
increase the funds for the support of productive labour. 
Principal Defects of the " Wealth of Nations." 

1. Through his failure to grasp the law of diminishing 
returns from the soil, Adam Smith's account of the causes 
of Rent is erroneous, and for the same reasons his theory of 
Wages and Profits is imperfect. 

2. In his exposition of the laws of Value he confuses the 
two opposed ideas of cost and remuneration, Ricardo, 
therefore, found it necessary to entirely reconstruct the 
theory of value. 

3. He looks at economic problems too much from the 
point of view of the capitalist. In consequence of this his 
account of the nature of Capital and of Productive Labour 
is wanting in clearness and consistency. 



4. He had no adequate conception of the causes which 
govern International Trade, and, therefore, failed to under- 
stand trie causes which regulate the Local Value of Money. 
The true principles which determine International Trade 
were first pointed out by Colonel Torrens and Ricardo early 

^A the present century. 

' The exposition of the absurdities of the Mercantile Sys- 
tem has been supposed by most people to be the chief ser- 

i^- vice which Adam Smith has rendered to his countrymen. 
It may seem a bold thing to say that Adam Smith did not 
understand the system which he is supposed to have demo- 
lished. Yet this, to a certain extent, is a fact. No one 
can understand the Mercantile System without first under- 
standing the laws which determine values, and especially 
the laws which determine international values. But no one 
since Ricardo's days will venture to assert that Adam Smith 
properly understood the problem of value, much less that 
he understood the more abstract problem of international 
values. I do not mean to say that the founders of the Mer- 
cantile System consciously based their regulations on any 
theory of value, but they found out by experience what re- 
gulations were suitable to the end they proposed. The end 
they proposed was to raise the value of the capital and 
labour of England relatively to the capital and labour of 
other countries, to get more money for the products of 
English labour, and to give less money for the products of 
foreign labour ; and they found out that regulations which 
artificially increased the demand for the commodities of 
England in foreign countries, or which decreased the de- 
mand in Elngland for foreign commodities would bring 
about this result. Adam Smith showed that such regula- 
tions are detrimental to the welfare of the whole civilized 
world, inasmuch as they lead to an improper distribution of 
labour and capital. But he did not show that the commer- 
cial gains, i.e., the gain on the exchange, might not in any 
particular country more than counterbalance the industrial 
loss, i.c.y the loss caused by an improper distribution of la- 
bour. The industrial loss will no doubt very much exceed the 
commercial gain, except in those cases where a country 
has almost a monopoly of a particular commodity for which 
there is a great demand in the markets of the commercial 
world. Still, in estimating the effects of the Mercantile Sys- 
tem, we must take account of both circumstances ; and this 
Adam Smith has, for the most part, failed to do. 


The wealth^ of a nation consists in the annual produce 
of its labour, or in what is purchased with that produce from 
other nations. 

According, therefore, as this produce or what is pur- 
chased with it, bears a greater or smaller proportion to the 
number of those who are to consume it, the nation will be 
better or worse supplied with all the necessaries and con- 
veniences of life. 

This proportion must in every nation be regulated by two 
circumstances, (i) by the skill, dexterity, and judgment, 
tifith which its labour is applied^ and (2) by the proportion 
between those who are employed in useful labour, and those 
•who are not so employed. 

The former of these circumstances seems to be the more 
important. For in barbarous nations, among whom labour 
is applied with little skill, we find the greatest poverty, 
although nearly every individual is accustomed to some form 
of labour. But in civilized nations, among whom labour is 
applied with much skill, we find the greatest wealth, although 
a great number of the people have no useful employment. 

The first book, then, will treat of the former of these cir- 
cumstances, or of the cause of the improvements in the pro- 
ductive powers of labour. It will also treat of the order 
according to which its produce is distributed into Rent, 
Profits, and Wages, that is, among the landlords, the owners 
of stock, and the labourers of a country. 

The second book will treat of the latter of these circum- 

' Adam Smith nowhere exactly defines " wealth." He generally 
speaks of it as consisting of the "annual produce of land and labour," 
This definition obviously does not include accumulated wealth, that is, 
such articles as houses, furniture, and the precious metals. But in 
order to include accumulated wealth in the definition, we need only 
leave out the word annual. By modern economists wealth is defined 
as "all useful thin^^s which possess cxchantrt- v.-iliip."~.Mill , p 6; 
Pawcctt, I., i,, p. 6. 

> % 

cumstances. But the number of useful and productive 
labourers is everywhere in proportion to the quantity of 
capital stock employed in setting them to work. The second 
book, therefore, will treat of the nature of capital stock, of 
the manner in which it is accumulated, and of the different 
quantities of labour which it puts into motion, according to 
the way in which it is employed. 

The third book will treat of the national progress of 
opulence, and of the discouragement given to agriculture by 
the policy of Modern Europe. 

The fourth book will treat of the different theories of Poli- 
tical Economy, and especially of the Mercantile System, 
and of the particular encouragement given by it to com- 
merce and manufactures. 

The fifth book will treat of the public revenue, and the 
principles of taxation, and of the public or national debts. 


Of the causes of improvement in the productive powers oj 
labour, and of the order according to mhich its pro- 
duce is naturally distributed among the different ranks 
of the people. 

Chap. I. — Of the Division of Labour.'^ 
The greater part of the skill, dexterity, and judgment 
with which labour is anywhere applied, and the greatest 
improvements in its productive powers, seem to have been 
the effect of the division of labour. Its advantages may be 
illustrated by an example taken from a very trifling manu- 
facture — that of the pin maker. In the manufacture of 
pins there are i8 distinct operations, each performed by a 
separate workman. If each man worked independently, 
ID men would hardly make 200 pins in a day, but by each 
man attending to one or two distinct operations, 10 men 
will make 48,000 pins in a day. 

The division of labour, however, cannot be carried so far 
in agriculture' as in manufactures Fewer improvements, 

* Mill, following Gibbon Wakefield, says that "a more fundamental 
principle lies beneath the principle of the division of labour, and 
comprehends it." This is the co-operation or co mbination of 
jabour. He accordingly treats of the " division of labour " under 
* the head of " combination of labour." The combination of labour 
may be classified as either simple or complex. Two men assist- 
ing one another to cut down a tree is an instance of simple 
r/^mhinatinn . The weaver assisting to clothe the butcher and 
baker, and the butcher and baker assisting to feed the weaver, 
is an instance of rnmplfy rnmhinatinn . In complex combina- 
tion the co-operators are generally, as Mr. Mill points out, uncon- 
scious of the combination, whereas in simple combination the co-opera- 
tion " is obvious to the most ignorant and vulgar eye." — Mill, I., viii., 
p. 72 ; Gibbon Wakefield's note on this chapter; Fawcett, I., v., p. 60. 

' It is true that the division of labour cannot be carried so far in 
agriculture as in manufaptures, but this is not the principal reason why 
manufactures have a lower value relatively to corn in an improved 
country than in an unimproved country. In an unimproved country 
only the most productive lands, and those in the best situations, are 

therefore, have been made in agriculture than in manufac 
tures. So it happens, too, that the corn of a rich and im- 
proved country is no cheaper that the corn of a poor and 
unimproved country, but the manufactures of an. improved 
country are always cheaper. 

The division of labour facilitates production in three 

(i) By reducing every man's business to some one simple 
operation, and by making this operation the sole employ- 
ment of his life, it necessarily increases very much the dex- 
terily of the workman. Thus a smith, who also makes 
nails, can hardly make 800 or 1000 ia a day, but a boy 
under 20 3'ears of age, whose sole employment is to make 
nails, will make 2300 in a day. 

(2) It saves the time that is commonly lost in passing 
from one sort of work to another. ' 

(3) It leads to the invention of a great number of 
machines, which facilitate and abridge labour, and enable 
one man to do the work of many. For men are much more 
likely to discover easier and readier methods of attaining 
any object, when the whole attention of their minds is 
directed towards that single object. But in consequence of 
the division of labour, the whole of every man's attention 

cultivated. As the country is improved and population increases, 
more soils at a greater distance from the central markets aie brought 
under cultivation. If, therefore, improvements were made by equal 
steps in agriculture and manufactures, the price of corn and agricultural 
produce would still gradually rise relatively to the price of manufac- 
tures, in consequence either of the greater cost of producing corn on 
the inferior soils, or the greater cost of bringmg it to market from dis- 
tant places. In other words the inc reased value of corn in improve d 
countries is a consequence of what is known as " the Ia\vof diminishing 
returns from the soil." .\<l.ini Smith recognises this law in account- 
ing for the fall of profits in new colonies, but he failed to perceive that 
it is the basis of a true theory of rent. — see I., ix., p. 

' Mill thinks that Adam Smith has here given a most ex.ig- 
gerated description of the inefficiency and loss of time occasioned by 
{massing from one sort of work to another. — Mill I., viii., p. 78; Faw- 
crtt, I., v., p. 55. 

Tomes naturally to be directed towards some one very 
simple object. . Accordingly we find that a great part of the 
machines used in those manufactures, in which labour is 
most subdivided, were originally the invention of common 
workmen, who being each of them employed in some very 
simple operation, naturally turned their thoughts towards 
finding out easier and readier methods of performing it. ^ 
Other improvements have been the inventions of those 
whose peculiar business it is to make machines, and others 
have been the inventions of philosophers or men of specula- 
tion, whose trade it is not to do anything, but to observe 
everything ; and who on that account, are often capable of 
combining together the powers of the most distant and dis- 
similar objects. ' It is this division of labour which gives 
rise to the opulence of a well-governed society, an opulence 
which extends itself to the lowest ranks of the people, so 
that an English workman will often be provided with con- 
veniences unattainable by an African king.* 

Chap. II. — Of the principle which gives occasion to the 
Division of Labour. 
This division of labour is a very slow and gradual conse- 
quence of a certain propensity in human nature, to truck, 
barter, and exchange one thing for another.' This propen- 

* There is another important advantage resulting from the division 
of labour which Adam Smith has omitted to notice. This is, "ihe 
more economical distribution of labour by classing work people accord- 
ing_tD their capacity." In a large manufactory, men, women, and 
boys, skilled and unskilled labourers, can be confined to that particu- 
lar work which they are best qualified to perform. Men are not 
obliged to waste time on work which can be done equally well by boys, 
and the skilled labourer is never put to do work which can be done 
equally well by the unskilled labourer. There is in this way a great 
saving of the more expensive kinds of labour. — cf. Mill, I., viii., p. 80 ; 
Fawcett, I., v., p. 57. 

' Adam Smith here assumes that the propensity to exchange is 
anterior to the division of labour. But the first great division of>our, that between the men and women of the tribe or family, is 

sity is probably the natural consequence of those faculties 
of reason and speech which belong to the human race only. 
There are no signs of its existence among the lower 
animals. In almost every other race of animals, each indi- 
vidual, when it is grown to maturity, is entirely indepen- 
dent, and in its natural state has occasion for the assistance 
of no other living animal. But man has almost constant occa- 
sion for the help of his brethren. This help, he can, as a rule, 
obtain only by exchanging his goods or services for the goods 
or services of other men. The disposition to exchange 
leads to the division of labour, in this way. Among a tribe 
of hunters one man is more skilful than others in shaping 
bows and arrows, another in making huts, another in work- 
ing metals, and a fourth in dressing hides. Each of these 
finds that he gets a better living by confining himself to the 
work in which he excels, and exchanging the products of 
his labour for the cattle or venison brought home by the 
hunters. The different talents which distinguish men of 
different professions are very much the effect of this division, 
of labour. 

Chap. III. — That the Division of Labour is limited by the 
extent of the market. 
As it is the power of exchanging that gives occasion to 
the division of labour, so the extent of this division must 
always be limited by the extent of that power, or in other 
words, by the extent of the market. The division of labour, 
therefore, will be carried nTuch further in a great town than 
in a country village. A porter, for instance, can only exist 
in a large town. A country carpenter is often obliged to 
be not only a carpenter, but a joiner, a cabinet maker, a 

certainly prior to any idea of exchange in the economic sense of the 
word. Like most of the economic forces at work in a society, the 
principle of the division of labour and the principle of exchange, act 
and react upon one another. The division of labour gives rise to ex- 
change, and new opportunities of exchange result in turn in a further 
division of labour. 

wheelwright, a plough wright, a cart and wagon maker, and 
even a carver in wood. In a lone farm house, the farmer 
must at times be baker, butcher, and brewer for his own 

Exchange is greatly facilitated by water carriajje, which 
is very much cheaper than land carriage.^ Only goods 
containing great value in small bulk could be exchanged 
between London and Calcutta, or even between London 
and Edinburgh, if it were necessary to convey them by 
land. Hence the first improvements of arts and industry 
have generally been made among people who dwell either 
close to the sea, or on the banks of navigable rivers ; 
among the Egyptians, for example, and the people who 
lived on the coast of the Mediterranean Sea, in ancient 
times, and among the Dutch in modern times. Europe and 
Asia, with their numerous inlets of the sea, have advan- 
tages in this respect which are not possessed by Africa. 

Chap. IV. — Of the origin aiid use of money. 
When the division of labour has been once thoroughly 
established, a man can supply but a very small part of his 
wants by the produce of his own labour. Every man must 
live by exchanging the surplus produce of his own labour 
for such parts of the produce of other men's labour as he 
has occasion for. But this power of exchanging must at 
first have been very much clogged by the want of some 
medium of exchan;,fe. One man might have more meat 
than he required, another more bread, but they could not 
deal with one another, unless the one happened to be in 
want of something which the other possessed, llciice every 
prudent man must liavc naturally endeavoured to provide 

' Water carriage is still cheaper than land carriage, but the impor- 
tance of water carriage has been greatly lessened since Adam Smith's 
time by the introduction of railways. It is still advantageous to send 
bulky commodities, such as coals, iron, timber, and even corn by water 
rather than by railway, l)'.it rm less bulky commodilics the dillcrcnjc 
of cost is not great, and is compensated by the saving in time. 


himself with some one commodity or other, such as he 
imagined few people would be likely to refuse in exchange 
for their labour. In rude ages cattle were used for this 
purpose, salt was used in Abyssinia, tobacco in Virginia, 
and sugar in the West Indies. But eventually in all coun- 
tries the preference was given to metals. There are cer- 
tain qualities belonging to metals which made them more 
suitable to be used as money than any other commodities, 
(i) They are less perishable than most other commoditieSj 
and (2) they can be divided into any 7iumber of parts, and 
again united by fusion. Different metals have been used as 
money by different nations, iron by the Spartans, copper by 
the Romans, gold and silver by all rich and commercial 
nations. At first these metals seem to have been used in 
rude bars without stamp or coinage. But their use in this 
rude state was attended with two very considerable incon- 
veniences, (i) by the trouble of weighing them, and (2) by 
the trouble of assaying them. In weighing the precious 
metals, especially gold, a small mistake in quantity makes 
a great difference in value, and therefore very accurate 
weights and scales are required. The operation of assaying 
is still more difficult. To get rid of these difficulties and to 
prevent fraud, it has been found necessary in all countries 
to afhx a public stamp on certain quantities of the particular 
metals used as money. Hence the origin of coined money, 
and of the public offices called mints. The first public 
stamps of this kind seem to have been intended only to as- 
certain the fineness and goodness of the metal, just as the 
marks of the aulnagers and stamp masters ascertained the 
fineness and goodness of linen and woollen cloth. But the 
inconvenience of weighing the metal afterwards led to the 
institution of coins, of which the stamp covering both sides 
of the piece, and sometimes the edges too, was supposed to 
ascertain not only the fineness, but also the weight of the 
metal. Such coins were received by tale, and no longer by 

The denomination of the coin originaIlx-expresse,d„Jj>e 

quan tity of metal con tained i n th em. The Roman a§ of 
Pondo contained a Roman pound of good copper ; the 
English pound sterling contained in the time of Edward I. 
a pound Tower weight of silver. English, Scotch and 
French pennies, too, all contained originally a pennyweight 
of silver, that is, the twentieth part of an ounce, and the 
two hundred and fortieth part of a pound. The shilling too, 
seems originally to have been a denomination of weight. 
The French livre, too, originally contained a pound Troyes 
weight of silver. But the avarice and injustice of princes 
have by degrees diminished the real quantity of metals 
originally contained in their coins. At present the English 
pound and penny contain about a third only, the French 
pound and penny about a sixty-sixth part of their original 
value. By thus depreciating the coinage, princes were en- 
abled in 'appearance to pay their debts with a smaller 
quantity of silver, than would otherwise have been requisite. 
Such depreciation inflicted a loss upon all creditors, and con- 
ferred an undue benefit upon all debtors. 

Thus money has become the universal instrument of 
commerce, by means of which all kinds of goods are ex- 
changed for one another. 

I now proceed to examine what are the rules which de- 
termine the relative or exchangeable value of goods. The 
word value has two different meanings. Sometimes it ex- 
presses the utility of a particular object, sometimes it ex- 
presses the power of purchasing goods, which the possession 
of that object conveys. The one may be called value in 
use, the other value in exchange. Things which have most 
value in use frequently have little value in exchange, and 
on the contrary, things which have the greatest value in ex- 
change have frequently little or no value in use. Nothing 
is more useful than water, but it will purchase scarce any- 
thing ; a diamond on the contrary has scarce any value in 
use,* but a very great quantity of other goods may fre- 
quently be had in exchange for it. 

' Here Adam Smith appears to attach a meaning to the term value 


I shall endeavour to show 

(i) What is the real measure of this exchangeable value. 

(?) What are the difierent parts of which this measure 
or real price is made up. 

(3) What are the different circumstances which at times 
raise some, or all, of these different parts of price above, and 
at times sink them below, their ordinary or natural rate ; or 
what are the causes which sometimes hinder the market 
price, that is the actual price of commodities, from coincid- 
ing exactly with what may be called their natural price. 

This is a subject in its own nature extremely abstracted, 
and it is necessary to bring both patience and attention to 
it, in order to understand it. 

Chap. V. — Of the real and nominal price^ of commodities, 
or of their price in labour and their price in money. 
Every man is rich or poor according to the degree in 
which he can afford to enjoy ihe necessaries, conveniences^ 
and amusements of life. But after the division of labour 
has been established the greater part of these he must de- 
rive from the labour of other people ; and he must be rich 
or poor according to the quantity of that labour which he 
can afford to purchase.'^ The value, therefore, of any com- 

in use or utility somewhat different from that given it by modern 
economists. When an economist of the present day says that a thing 
has utility, he means that it has the capacity of satisfying some human 
want or desire. In this sense tobacco is a useful commodity whether 
it benefits or injures the health of the man who smokes it. In ordi- 
nary language we distinguish between the useful and the beautiful, 
but in the language of economists the useful includes the beautiful. 
Thus diamonds have very considerable utility by reason of their great 
beauty. Their value depends not altogether on their scarcity, but also 
on their beauty. 

' The word "price" seems throughout this chapter to be used by 
Adam Smith in the sense of cost. 

* Ricardo complains that Adam Smith here confounds the two ideas 
of wealth and value between which Ricardo himself draws an impor- 
tant distinction. " Many of the errors in Political Economy," he 


inodity, to the person who possesses it, and who means no; 
to use it himself, but to exchange it for other commodities; 
is equal to the quantity of labour which it enables him to 
purchase, ^^abour, therefore, is the real measure of the ex- 
changeable value of all commodities. 

What everything really costs to the man who wants to 
acquire it, is the toil and trouble of acquiring it. Labour 
was the first price, the original purchase money of all 

But although labour be the real measure of the exchange- 
able value of all commodities, it is not the measure by which 
their value is commonly estimated. It is often difficult to 
ascertain the proportion between two different quantities of 
labour. We have to ascertain not merely the duration of 
the labour, but the different degrees of hardship endured, 
and ingenuity exercised, as well as the preliminary training 
required for particular kinds of labour. But it is not easy 
to find any accurate measure of hardship or ingenuity. In 
exchanging the different productions of different sorts of 
labour some allowance is commonly made for all these cir- 
cumstances. This allowance is adjusted, however, not by 

says, " have arisen from considering an increase of riches and an in- 
crease of value as meaning the same thing " Wealth consists in the 
abundance of the necessaries and conveniences of life, although we 
generally exclude from our idea of wealth those things which are 
superabundant, and which we therefore never think of exchanging 
against each other, and which have consequently no power of pur- 
chasing labour, that is, no value. But value, when not used as a 
merely relative term, must mean power of purchasing labour, or those 
things which are necessary to set labour in motion. Now the power 
of purchasing labour, or of setting labour in motion, is not the same 
thing as the power of purchasing the necessaries and conveniences of 
life, because labour varies greatly in efficiency in different states of 
society, and in different places. It follows from this, that a measure 
of value is not a correct measure of wealth. It follows also that 
Political I'.conomy is not merely the scicnr e of value— Catallaclics, as 
Archbishop Whatcly called it. It deals with the progress of the pro- 
ductive powers of labour, as well with the distribution of the results of 
labour. Ricardo, xx., p. 135. 


tiny accurate measure, but by the higgling and bargaining 
of the market.. It is easier, therefore, and also more inteU 
ligible to ordinary minds, to estimate the exchangeable 
value of a commodity, rather by a quantity of some other 
commodity, than by a quantity of labour. When barter 
ceases, commodities are more often exchanged for money, 
than for any other particular commodity. It is natural, 
therefore, to estimate the exchangeable value of any com- 
modity by the quantity of money for which it will exchange. 
Hence money has become the measure of the exchangeable 
value of all things. 

Gold and silver, however, vary in their value, according 
to the fertility or barrenness of the mines from which they 
are dug.^ The discovery, for instance, of the abundant 
mines of America, reduced, in the sixteenth century, the 
value of gold and silver in Europe to about a third of what 
it had been before. But a commodity which is itself con- 
tinually varying in its own value, can never be an accurate 
measure of the value of other commodities. But equal 
quantities of labour at all times and in all places may be 
said to be of equal value to the labourer.* In his ordinary 

* The value of gold and silver in any particalar country depends 
hot only on the fertility of the mines, but also on the efficiency of its 
labour in producing exportable goods, and on the equation of interna- 
tional demand. The value of gold and silver is lowest in those coun- 
tries, whose labour in producing exportable goods is most efficient, 
whose exportable goods are most in demand abroad, and which them- 
selves have the least demand for foreign productions, cf. Mill, III., 
xix., p. 368. Ricardo, xxvii., p. 81. 

* This Mill denies. "If," he says, "a day's labour will pur- 
chase in America twice as much of ordinary consumable articles as in 
England, it seems a vain subtlety to insist on saying that labour is o' 
the same value in both countries, and that it is the value of other 
things which is different. Labour, in this case, may be correctly 
said to be twice as valuable, both in the market iuid to the labourer 
himself, in America as in England." Ricardo, on the other hand, 
holds that labour can only be said to have a high value when it wiH 
purchase the produce of a great deal of labour, cf. Mill, III., xv., p. 
343. Ricardo, xx., p. 166 note. 


state of health, strength, and spirits, in the ordinary degree 
of his skill and dexterity, he must always lay down the same 
{x>rtion of his ease, his liberty, and his happiness. The 
price which he pays must always be the same, whatever 
may be the quantity of goods which he receives in return 
for it. Of these indeed it may sometimes purchase a 
greater and sometimes a smaller quantity ; but it is their 
value which varies, and not that of the labour which pur- 
chases them. At all times and places, that is dear which it 
is difficult to come at, or which it costs much labour to ac- 
quire^ and that cheap which is to be had easily, or with very 
little labour. Labour alone, therefore, never varying in its 
value, is alone the ultimate and real standard by which the 
value of all commodities can at all times and places be esti- 
mated and compared. 

But although equal quantities of labour are always of 
equal value to the labourer, yet to the person who employs 
him, they appear to be sometimes of greater, and sometimes 
of smaller value. In this sense labour, like other commodi- 
ties, may be said to have a real and nominal price. Its real 
price may be said to consist in the quantity of necessaries 
and conveniencics of life which are given for it, its nominal 
price in the quantity of money. The labourer is rich or 
poor, in proportion to the real, not to the nominal price of 
his labour. 

The distinction between real price and nominal price, is 
of considerable use in practice. '^The same real price is 
always of the same value, but on account of the variations 
in the value of gold and silver, the same nominal price is 
sometimes of very different values. The rent of estates 
should not be reserved in money ; for its value would then 
be liable to variations of two kinds : (i) to those which arise 
from the different quantities of gold and silver which are 
contained at different times in coin of the same denomina- 
tion ; and (2) to those which arise from the different values 
of equal quantities of gold and silver at different times. 
Rents which have been reserved in corn, i.e., in the real 


price of labour, have preserved their value much better than 
those which have been reserved in money. By the i8th of 
Elizabeth it was enacted that one-third of the rent of all 
college leases should be reserved in corn. The money 
arising from this corn rent, is, according to Dr. Blackstone, 
commonly double of what arises from the other two-thirds. 
It appears, then, that equal quantities of labour will at 
distant times be purchased more nearly with equal quanti- 
ties of corn, the subsistence of the labourer, than with equal 
quantities of gold or silver, or perhaps of any other commo- 
dity. Equal quantities of corn will therefore at distant 
periods, be mqre_neaxl^' of the same real value, than almost 
any other commodity, that is, they will enable the possessor 
of them to command nearly the same quantity of the labour 
of other people.^ But they will not do this exactly. For 
the subsistence of the labourer is very different, upon differ- 
ent occasions ; more liberal in a society advancing to 
opulence, than in one that is standing still, more liberal in 
one that is standing still, than in one that is going back- 
wards. A rent, therefore, reserved in corn is still liable to 
the variations in the quantity of labour which a certain 
quantity of corn will purchase. Then again, though the realN 
value of a corn rent varies much less from century to cen- 
tury than that of a money rent, it varies much more from 
year to year. The value of silver, though it sometimes 
varies very greatly from century to century, seldom varies 
much from year to year, but the price of corn may through 
the variations of the seasons, frequently be double one year 
what it had been the year before. From century to century 
corn is a better measure of value than silver ; from year to 

' Corn cannot be taken as an accurate measure of value. The cost 
of producing corn tends to rise with every increase of population, and 
tends to fall with every improvement in agriculture or locomotion. The 
same quantity of corn will therefore at different times and places pur- 
chase or set in motion different quantities of labour — it would purchase 
more labour in England 50 years ago than it will now, and it will pur- 
chase more labour in London than it will at Chicago. — Mill, III. xv. 
P- 343- 


year, on the contrary, silver is a better measure than corn. 
Bu^ labour is the on ly univer sal and t he only accurate mea- 
sure of value, the only standard by which we can compare 
the values of different commodities at all times and places. - 

In establishing perpetual rents, the distinction between 
real and nomin^al price, is, as we have seen, of considerable 
use, but in ordinary buying and selling it is of no use. For 
at the same time and place, money is the exact measure of 
the exchangeable value of commodities. Even in carrying 
goods between distant places, the merchant has nothing 
to consider but their money price. Half an ounce of 
silver may command a greater quantity of labour at Canton 
than an ounce in London. The English merchant, however, 
looks only at the value of silver in London ; he will, there- 
fore, always give half an ounce of silver in Canton for a 
commodity which he can sell for an ounce of silver in 
London, although half an ounce is of more real value at 
Canton than an ounce in London. It is the money price of 
g^pods, then, which finally determines all purchases both in 
domestic and international exchange. We cannot wonder, 
therefore, that it has been so much more attended to than 
the real price. 

Commercial nations have found it convenient in the pro- 
gress of their industry to coin several different metals into 
money. They have always however adhered to one metal 
as the standard of valu^ . and they have generally given the 
preference for this purpose to tlie metal which they 
happened first to make use of as the instrument of commerce. 
This among the Romans was copper, which still remained 
their standard of value after silver began to be coined, about 
five years before the first Punic war. Among the English 
and the other nations which established themselves on the 
ruins of the Roman Empire, silver money was used from the 
beginning of their settlement. Little gold was coined in 
England till the time of Ed. III., and no copper till the time 
of James I. In England therefore, and among all the 
modern nations of Europe, silver is the standard of value. 


Originally legal tender of payment could only be made in 
coin of that metal which was considered the standard of 
value. Originally gold was not a legal tender in England, 
except at a valuation agreed to by the debtor (or fixed by 
royal proclamation). Latterly, however (since 171 7), the 
proportion has been fixed by law, and it has been enacted 
that a guinea shall exchange for 21 shillings, and be legal 
tender for a debt of that amount.* 

In the English mint a pound weight of gold is coined 
into forty-four guineas and a half, which is equal to 
£^6 14s. 6d. An ounce of such gold coin therefore is worth 
£2 17s. lo^d. in silver. A pound weight of standard silver 
is coined into sixty-two shillings. Five shillings and two 
pence, therefore, is said to be the mint price of silver in 
England. In the proportion between the different metals* 
as copper is rated very much above, so silver is rated very 
much below its real value. In the market of Europe, in the 
Dutch and French coin, an ounce of fine gold exchanges for 
about fourteen ounces of fine silver. In the English coin it 
exchanges for about fifteen ounces. The English silver 
coin is now in a very worn-out and degraded state, but 
were it brought back to its full standard weight, there would 
be a profit in melting it down in order first to sell the bullion 
for gold coin, and afterwards to exchange this gold coin for 
silver coin to be melted down in the same manner. This incon- 
veniency would perhaps be less, if silver were rated in the 
coin as much above its proportion to gold, as it is at pre- 
sent rated below it ; provided that it was at the same time 
enacted that silver should not be legal tender for more than 

• See Lord Liverpool's Treatise on the coins of the realm. Between 
1717 and 1774 gold was overvalued relatively to silver. Consequently 
all the silver coins of full weight were exported, and only those that 
were worn or debased remained in circulation. In 1816 Adam Smith's 
recommendation was adopted. A pound of silver was coined into 66 
instead of into 62 shillings, but in order to prevent this over-valued 
silver coin.ige from driving the gold coinage out of the country, it was 
enacted that silver should be legal tender for 40 shillings only. 


a guinea, in the same manner that copper is not a legal 
tender for more than the change of a shilling. 

The occasional fluctuations in the market price of gold 
and silver bullion arise from ip.e same causes as the like 
fluctuations in that of all other commodities, that is, from 
variations in the supply and demand. 

The money of any particular country is at any particular 
time and place, more or less an accurate measure of value, 
according as the current coin is more or less exactly agree- 
able to its standard, or contains more or less exactly the 
precise quantity of pure gold and silver which it ought to 
contain. As it rarely happens that coins are exactly agree- 
able to their standard, the merchant adjusts the price of his 
goods, not to the quantity of pure gold or silver which the 
coin ought to contain, but to that, which, upon an average 
it is found by experience to contain. 

Chap. VI. ^ — Of the component parts of the Price of Com.' 


In that early and rude state of society which precedes 

the accumulation of stock, and the appropriation of land, 

the whole produce of labour belongs to the labourer, and 

the proportion between the quantities of labour necessary 

for acquiring different objects, seems to afford tJie only rule 

for exchanging them for one another. If among a nation 

of hunters, for example, it usually costs twice the labour to 

kill a beaver wliich it does to kill a deer, one beaver should 

naturally exchange for, or be worth two deer. Some allow- 

' The main error of this chapter consists in a confusion between the 
two ideas of cost and remuneration. Adam Smith, like most other 
economists, has regarded the problem of the distribution of wealth 
from the point of view either of the capitalist or of the idle consumer. 
Like an ordinary dealer in labour or goods, he substitutes, in calcula- 
ting the cost of a commodity, wages for labour, and profits for the 
sacrifices made by the owner o»f capital. Hut the moment we quit the 
standing point of the capitalist and look at the problem from the 
point of view of the whole communijy, it becomes evident that the cost 



ance must, however, always have been made for the s everi ty 
q£-QI1 £ kind of labou r, and for the skHJ^ or ingenuity required 
i n another Id nd. But in the latter case this allowance may 
frequently be no more than a reasonable compensation for 
the time and labour spent in acquiring such skill and in- 

As soon as stock has accumulated in the hands of parti- 
cular persons, some of them will naturally employ it in set- 
ting to work industrious people, whom they will supply with, 
materials and subsistence, in order to make a profit by the 
sale of their work. In exchanging the complete manufac-j fij- 
ture for money, for labour, or for other goods, somethings 
must be given for the profits of the undertaker of the work, 
who hazards his stock in this adventure, over and above 
what may be sufficient to pay the price of the materials and ; 
the wages of the workmen ; otherwise he could have no in- 
terest to undertake the work. These profits of stock must 
not be confounded with the wages of the employer for his 
labour in directing the work. They are regulated by a 
quite difTerent principle. They are regulated by the value 
of the stock employed, and are greater or smaller in pro- 
portion to the extent of this stock. The labour of directing 
the employment of a capital of ;^i,ooo may be nearly the 
same, as that of directing the employment of a capital of 
;{^7,ooo ; but at the rate of ten per cent., the profits on the 

of producing a commodky cannot be said to be lessened because the 
labourer who produces it is not so well remunerated as he was before. 
No doubt to the landlord or to the receivers of fixed incomes cost is 
reduced by a fall of wages, but all that is gained by one class is lost 
by another ; and the whole society is no richer than before. Nothing 
can really reduce the cost of a commodity but a diminution either o£ 
the labour exerted to produce it or of the capital by which that labour 
is assisted. This important truth was first established by Ricardo. 
See Ricardo, xi. On the other hand Mill and Professor Fawcett 
have wandered away from the true doctrine, and speak of wages en- 
tering into cost of production. Mill, III., iv., p. 291. Fawcett, 
HI., iv., 338. Thp best modern treatment of the subject is to be found 
i*i. Caimes' Leading Principles of Political Economy, pp. 46-61. 


formerr will be £ioo, on the latter ;i^700. In many great 
works such labour is committed to some principal clerk, 
whose wages, however, never bear any regular proportion 
to the capital of which he oversees the management. In 
the price of commodities, therefore, the profits of stock 
constitute a component part altogether different from the 
wages of labour, and are regulated by quite different prin. 

As soon as the land of any country has all become private 
property, the landlords, like all other men, love to reap 
where they have never sowed, and demand a rent even for 
its j3atural p roduce.^ The labourer must then give up to 
the landlord a portion of what his labour either collects or 
produces. This portion constitutes the rent of land, and in 
the price of a greater part of commodities, makes a third 
component part. 

In every society the price of every commodity finally re- 
solves itself into some one or other, or all of these three 
parts, and in every improved society, all the three enter 
more or less, as component parts, into the price of the far 
greater part of commodities. In the price of ^ax, for ex- 
ample, one part pays the rent of the landlord^ another pays 
the wages or maintenance of the labourer, and the third 
pays the profits of the farmer. In the price of linen we 
must add to this the wages of the flax dresser, of the spin- 
ner, of the weaver, of the bleacher, etc., together with the 

* Ricardo has clearly shown that we may eliminate rent in estimat- 
ing the cost of commodities. Some part of the agricultural produce 
of a country is always raised upon landjidiitji pays no rent worth 
speaking about. The cost of this parCr cgulate^ the value of the re- 
mainder. Therefore in estimating the cost of corn, etc., we may 
leave the rent out of consideration, and simply calculate the quantity 
of labour and capital required for their production upon the worst soils 
under cultivation. Ricardo, ii. Mill, III., v. Fawcett, III., iii., p. 325. 
" But when land capable of yielding rent in agriculture is applied to 
some other purpose, the rent which it would have yielded is nn ele- 
ment in the cost of production of the commodity which it is employed 
to produce." Mill, III., v., adfinem. 


profits of their respective employers. As any particular 
commodity comes to be more manufactured, the part of the 
price which resolves itself into wages and profits, comes to 
be greater in proportion to that which resolves itself into 
rent. In the progress of the manufacture, not only the 
number of profits increases, but every subsequent profit is 
greater than the foregoing, because the capital from which 
it is derived must be greater. The capital which employs 
the weavers, for example, must be greater than that which 
employs the spinners, because it not only replaces that 
with its profits, but pays besides the wages of the weavers, 
and the profits must always bear some proportion to the 

In the most improved societies, however, there are 
always a few commodities of which the price resolves itself 
into two parts only, the wages of labour and the profits of 
stock, and a still smaller number in which it consists of the 
wages of labour only. In the price of sea fish, for example, 
one part pays the labour of the fisherman, and the other the 
profits of the capital employed in the fishery. Rent seldom 
makes any part of it. In some parts of Scotland a few 
poor people make a trade of gathering along the sea shore 
those little varigated stones commonly known as Scotch 
Pebbles. The price which is paid them by the stone cutter, 
is altogether the wages of their labour ; neither rent nor 
profit make any part of it. 

The whole annual produce of the labour of any country 
must resolve itself into the same three parts, and must be 
parcelled among the different itiliabitants of the country 
either as the wages of labour, the profits of stock, or the 
rent of land. Therefore wages, profit and rent, are the 
three original sources of all revenue, as well as of all ex- 
changeable value. All other revenue is ultimately derived 
from some or other of these. Interest, for example, must 
ultimately be paid out of the profits made by the borrower, 
by the use of the money, unless the borrower be a spend- 


thrift who contracts a second debt to pay the first, and then 
it must ultimately be paid, if paid at all, from the wages or 
rents of the borrower. All taxes, too, and all the revenue which, 
is founded upon them, all salaries, pensions, and annuities of 
every kind, are paid either mediately or immediately from one 
or other of these three original sources of revenue. When 
these three different sorts of revenue belong to different 
persons, they are readily distinguished ; but when they be- 
long to the same they are sometimes confounded with one 
another. A gentleman who farms part of his own estate, 
is apt to consider his whole gain as profit, but part of it 
should be regarded as rent. A common farmer who works 
with his own hands, calls his whole gain profit, but wages 
evidently make a part of it. On the other hand a gardener 
who cultivatt's his own garden, unites in his own person the 
three difTereiit ciiaracters of landlord, farmer, and labourer. 
The whole produce, however, is commonly considered the 
earnings of his labour. Both rent and profit are in this 
case confounded with wages. 

In every civilised country a large part of the annual pro- 
duct consists of rent or profits, and is employed in main- 
taining idle as well as industrious people. The idle every- 
where consume a great part of it, and according to the 
different proportions in which it is annually divided between 
the idle and industrious classes, its ordinary or average 
value must increase or diminish, or continue the same from 
one year to another. 

Chaptf.R VII. — Of the Natural and Market Price of 
There is in every society or neighbourhood, an average 
or ordinary rate both of wages and profit, in every different 
employment of labour and stock. This rale is naturally 
regulated partly by the different circumstances of the 

(^ > y ''See Note i at end of volume. * " 


of each employment. There is an average rate of rent, 
which is regulated, partly by the general circumstances of 
society, their riches or poverty, their advancing, stationary, 
or declining condition ; and partly by the particular nature 
the society or neighbourhood, in w^hich the land it situated, 
and partly by the natural or improved fertility of the land. 
This average rate may be called the natural rate of wages, 
profits, and rent, at the time aud place in which they com- 
monly prevail. The natural price of a commodity , is that 
price tvhich is just sufficient to pay the rent of the land, the 
wages of the labour, and the profits of the stock employed 
in raisings preparing, and bringing it to market, according 
to their natural rates. For although what is called the 
prime cost of any commodity, does not include the profit of 
the person who is to bring it to market, yet. if he sell it at 
a price which does not allow him the ordinary rate in his 
neighbourhood, he is evidently a loser by the trade ; since 
by employing his stock in some other way he might have 
made that profit. The price therefore which yields him 
this profit, although not the lowest at which a dealer may 
sometimes sell his goods, is the lowest at which he is likely 
to sell them for any considerable time ; at least where there 
is perfect liberty, or where he may change his employment 
as often as he pleases. 

The actual price at which any commodity is commonly 
sold, is called its market price. It may be either above or 
below, or exactly the same with its natural price. 

The market price of every particular commodity is regu- 
lated by the proportion between the quantity which is 
actually brought to market ^ and the effectual demand for it, 
that is, the demand of those, who are willing to pay the 
natural price of the commodity.^ When the quantity of any 

* According to Cairnes, the " proper market price " is that price 
which is just sufficient to carry off the existing or forthcoming supply. 
And the actual market price approximates to this proper market price 
in proportion to the shrewdness and knowledge of dealers. Cairnes 
Lcadmg Principles, p. 123. 


'commodity falls short of the effectual demand, a competition 
will immediately begin, among those who are willing to give 
more than the natural price for it, and the market price wili 
rise more or less above the natural price according as either 
the greatness of the deficiency, or the wealth of the compe- 
titors, happen to animate the eagerness of the competition. 
Anrong competitors of equal wealth and luxury, the same 
■deficiency will generally occasion a more or less eager com- 
petition, according as the acquisition of the commodity 
happens to be of more or less importance to them. Hence 
the exorbitant price of the necessaries of life during the 
blockade of a town or in a famine. When the quantity 
brought to market exceeds the effectual demand, some part 
of it must be sold to those who are only willing to pay less 
than the natural price, and the low price which they give 
for it must reduce the price of the whole. The market 
price will sink below the natural price, according as the 
greatness of the excess increases more or less the competi^ 
tion of the sellers, or according as it happens to be more or 
less important to them to get rid of the commodity imme- 
diately. The same excess in the importation of perishable 
Commodities, will occasion a much greater competition to 
sell, than in that of durable commodities, in the importation 
of oranges for example, than in that of eld iron. 

When the quantity brought to market is just sufficient to 
supply the effectual demand, the market price naturally 
comes to be the natural price. 

The quantity of every commodity brought to market 
naturally suits itself to the effectual demand. For, if at any 
time it exceeds the effectual demand, the component parts 
of its price must be paid below their natural rate. The 
interest, therefore, of landlords, employers, or labourers, will 
prompt them to withdraw a part of their land, stock, or 
labour, as tlic case may be, from this em[)loymcnt. The 
quantity brought to market will in this way Ix- reduced, and 
will soon be no more than sufficient to suppl\ I lie effectual 


demand. If, on the contrary, the quantity brought to mar- 
ket should fall short of the effectual demand, the market 
price will rise above the natural price, then more land, stock 
or labour, will be employed in bringing that particular com- 
modity to market, the quantity brought thither will soon be 
suflficient, and the commodity will soon sink to its natural 
price. The natural price is therefore, as it were, the cen^ 
tral price to which the market prices of all commodities are 
continually gravitating. Different accidents may sometimes 
keep them a good deal above it, or force them somewhat 
below it, but towards it they are continually tending. 

In some employments the same quantity of industry will 
produce in different years very different quantities of com- 
modities, while in others it will produce always the same or 
very nearly the same. Therefore the market price of some 
commodities will vary from year to year much more than the 
market price of others. Thus the price of woollen and linen 
goods is liable neither to such frequent nor such great fluc- 
tuations as the price of corn. Such occasional variations 
effect wages and profits, but do not much affect rent.^ For 
in settling the terms of a lease, the landlord and farmer en- 
deavour to adjust the rent not to the temporary and occa- 
sional, but to the average and ordinary price of the produce.* 
Such fluctuations affect either the rate of wages or of pro- 
fits, according as the market happens to be overstocked or 
understocked with commodities or with labour, with work 
done, or to be done. A public funeral raises the price of 

' The most important deviations of market value from normal value 
occur among those raw products of the earth which are necessary for 
the subsistence of the people, but are of a perishable nature. The 
market value, for instance, of corn or potatoes, has been known, in 
consequence of a bad harvest, to rise loo or even 200 per cent, above 
the normal value. 

* In this passage Adam Smith seems to recognise that^entjs_the_ 
effect and not the cause of pr ige^r value. It may be noticed that the 
custom of granting leases appears to have been much more common in 
England in Adan. Smith's time than it is now. 


black cloth, and augments the profit of the cloth merchants, 
but does not raise the wages of weavers. It raises however 
the wages of journeymen tailors, because in this case there 
is a demand for work to be done. 

The gravitation of the market price to the natural price 
may be interfered with for a long time, by the following 
causes : — (i) Manufacturers may succeed for a time in con- 
cealing a rise in the market price of the commodites they 
produce, especially if their market happens to be at a great 
distance. (2) Improvements in the process o^. pr.rticuiar 
manufactures may be kept secret for a great length of time. 
(3) Some commodities require a peculiar soil and situation 
for their production. Such are certain classes of French 
wines. The rent of vineyards producing such wines bears 
no regular proportion to the rent of other equallv fertile 
lands in the neighbourhood. The high rent enhances the 
market price of such commodities, and as it is the effect of 
a natural cause, the high price will continue so long as the 
demand continues, which may be for centuries, or indeed 
for ever, (4) A monopoly granted either to an individual 
or to a trading company, has also the effect of keeping the 
market price of the commodities subject to the monopoly 
greatly above their natural price. A monopoly price will 
be the highest which can be squeezed out of the buyers, or 
which it is supposed they will consent to give. (5) The 
exclusive privileges of corporations, statutes of apprentice- 
ship, and all those laws which restrain in a particular em- 
ployment, the competion to a smaller number than might 
otherwise go into it, have the same tendency as monopolies, 
though in a less degree. They are a sort of enlarged 
monopolies. All these causes may raise the market price of 
a commodity above its natural price, but can hardly sink 
it below its natural price for any considerable lengtii of 
time, or it can only do so where a systc.'m of caste 
prevails, as in India and Ancient Hgpyt, where every man 
was bound by a principle of religion to follow the occupa- 
tion of his father. 

Chap. VIII. — Of the Wages of Labour. 

The produce of labour constitutes the natural recompense 
Or wages of labour.^ 

Previous to th-e accumulation of stocl< and the appropria- 
tion of land, the whole produce of labour belongs to the 
labourer. Had this state of things continued, the wages of 
labour would have augmented with all those improvements 
in its productive powder, to which the division of labour 
gives occasion. All things would have become cheaper, ^ 
that is, would have become of less value when estimated in 
labour, though some things might have become of more 
value when estimated in money and other commodities ; 
for greater improvements would take place in the produc- 
tion of some commodities, than in the production of others. 

But as soon as land becomes private property^ the land- 
lord de?nands a share of almost all the produce which the 
labourer can either raise or collect from it. His rent makes 
the first deduction from the produce of labour which is em- 
ployed upon land. 

Then again it seldom happens that the person who tills 
the ground has wherewithal to maintain himself till he reap 
the harvest. His maintenance is generally advanced to 
him from the stock of the farmer who employs him. The 
farmer would have no interest to employ him, unless he was 

' See Note 2 at end of volume. 

2 Here again Adam Smith is wrong, because he failed to notice the 
law of diminishing returns from the soil. While most manufactured 
commodities become cheaper with the progress of impiovementS) 
agricultural products may, in consequence of the increase of popula- 
tion, and the necessity of cultivating inferior soils, become dearer, 
notwithstanding such improvements. Vox instance, the cost of meal 
and dairy produce has considerably increased in England since the 
beginning of the 17th century, notwithstanding many improvements 
in the management of cattle, while the cost of corn has only been kept 
down by importations from abroad, as well as by improvements in 


to share in the produce of his labour, or, unless his stocl< 
was to be replaced to him with a profit. This profit makes 
a second deduction from the produce of the labour which is 
-employed upon land. 

The produce of almost all other labour is liable to the 
like deduction of profit. In all manufactures the greater 
part of the workmen stand in need of a master to advance 
them the materials of their work and their own maintenance 
until the work be completed. It sometimes indeed happens 
that a single independent workman has stock sun.i ient both 
to purchase the materials of his work, and to maintain him- 
self until it is completed. He therefore enjoys the whole 
produce of his own labour, that is, the profits of stock as 
well as the wages of labour. Such cares, however, are not 
very frequent. In every part of Europe 20 workmen work 
under a master for one that is independent. ^ 

The common wages of labour depend everywhere upon 

the contract usually made between the owners of stock and 

the workmen, parties whose interests are by no means the 

,</^'^^T^ same. The J^rmej;' are disposed to combine to raise, the 

ji^^Tf^rjf^^^^io lower wages. In such disputes the advantage on 

>'-' /; -all ordinary occasions, lies with the masters. They are 

VA'^T fewer in number, and can therefore combine more easily, 

y" and there are no laws against the combination of masters, 

whereas there are laws against the combination of work^ 

men.* Then again the masters can generally hold out 

much longer than the men. For, although in the long run 

the workman may be as necessary to his master, as his 

master is to him, the necessity is not so immediate. ^ ■* 

There is, however, a certain rate below which it seems 

impossible to reduce for any considerable time, the orditiary 

wages even of the lowest species of labour.^ The workman's 

* This statement is certainly not true. 

* The laws against the combination of workmen were repealed by 
5 (jco. IV., c. 95. 

* Hy minimum or -necessary wages we mean such wages as arc 
necessary to support the labourer and his family. Mininuitn wages 



wages must be at least sufficient to support him. On most 
occasions they must be sufficient to enable him to bring up 
a family ; otherwise the race of such workmen could not 
last beyond the first generation. Mr. Cantillon has there- 
fore supposed that the lowest species of labourers must 
everywhere earn at least double their own maintenance. 
Accordingly we find that the labour of an able-bodied slave 
is generally computed to be worth double his maintenance. 
This, then, is the minimum or necessary rate of wages. 
~^ Wages, however, may sometimes rise considerably above 
this minimum rate. This happens when there is an in- 
creased demand for workmen. The demand for workmen^ 
it is evident, cannot increase, but in proportion to the in- 
crease of the funds which are destined for the payment of 
wages. These funds are of two kinds, (i) the surplus re- 
venue which a landlord or annuitant has immediately 
after maintaining himself and his family, and (2) the stock 

are said to be regulated by the habitual standard of comfort existing 
among the labouring population. Ricardo thought that wages are 
continually tending to a minimum, and that the minimum rate is 
therefore the natural or permanent rate of wages. For he supposed that 
the labouring population would always in the long run multiply up to 
the means of subsistence. It must be admitted that the economic his- 
tory of England and Ireland, as well as of India and China, seems 
to prove that Ricardo's supposition was to a certain extent well 
founded. But on the other hand it is apparent that the habitual 
standard of comfort can only affect the supply, and cannot affect the 
demand for labour; and even the supply of labour is affected by other 
causes, such as emigration and pestilence. It appears too that a 
change in the demand for labour may raise or depress the habitual 
standard of comfort. Thus it is said that in many districts of Eng- 
land, rye was substituted for wheat as the common food of the people 
in the i6th century, and wheat again for rye in the early part of the 
i8th century. Then again, it is admitted by Ricardo that the market 
rate of wages may in an improving society be above the natural rate, 
for an indefinite period. It is necessary therefore to find some prin- 
ciple which will account for variations in the demand for labour as 
well as for variations in the supply. Ricardo XXI., p. 176, v., 
P- 51- 


which a master workman has over and above what is neces- 
sary for his own employment and maintenance. The de- 
mand for workmen, therefore, naturally increases with the 
increase of the revenue and stock^ of any country, and can- 
not possibly increase without it. The increase of revenue 
and stock is the increase of national wealth. The demand 
for those who live by wages, therefore, naturally increases 
with the increase of national wealth, and cannot possibly 
increase without it. It is not, however, the actual great- 
ness of national wealth, but its continual increase which 
occasions a rise in the wages of labour. >^'It is not, accord- 
ingly, in the richest countries, but in the most thriving, or 
in those which are growing rich the fastest, that the wages 
of labour are highest. England is certainly in the present 
times, a much richer country than any part of North Ame- 
rica. The wages of labour, however, are much higher in 

s This is only partially true. The increase of stock employed in 
the purchase of labour is limited by the power of producing or import- 
ing the necessaries of Ttfe. When It becomes difficult to increase the 
production of the neces^rie? of life, stock is naturally turned into 
machijiery, and there will be no fresh demand for labour. Ricardo 
XXXI., p. 241. It may be noticed that the doctrine of wages (com- 
monly known as the Wages-fund theory) laid down in Mill's Prin- , 
ciples and in Professor Fawcett's Manual of Political Economy, was 
abandoned by Mill himself, and is rejected by most economists of the 
present day. It perhaps arose from some misconception of Ricardo's 
meaning. Ricardo generally means by wages, proportionate wages, 
that is, the proportion of his products which goes to the labourer. 
Using the word in this sense Ricardo correctly said that wages vary 
inversely with profits, and therefore depend on the proportion between 
the supply of capital and the supply of labour. But Mill seems to 
have meant that not only proportionate wages, but real wages also 
depend on the projK-t' )n between capital and population. The 
theory seems to invoK confused notions as to the functions of capital. 
The true office of capital is to assist, not to remunerate labour. The 
real fund for the remuneration of labour consists of the necessaries of 
life which the labourer can produce by his own labour, or get in ex- 
change for the products of his labour ; and it is upon the cost of pro- 
ducing these necessaries that the rale of wages chiefly depends. 
Mill II.. xi. 


North America than in any part of England. But though 
North America is not yet so rich as England, it is much 
more thriving, ^ and is advancing with much greater rapidity 
to the further acquisition of riches. The most decisive 
mark of this prosperity is the increase in the number of in- 
habitants. In Great Britain, and in most European coun- 
tries, population is not supposed to double in less than 500 
years. In the British colonies in North America, it has 
been found to double in 20 or 25 years. Those who live to 
great age there, it is said, frequently see from 50 to 100, 
and sometimes many more descendants from their own 
body. Labour is there so well rewarded that a numerous 
family of children, instead of being a burthen, is a source of 
opulence and prosperity to the parents. The labour of 
each child before it can leave their home is computed to be 
worth a hundred pounds clear gain to its parents. In a 
country where wealth has been long stationary, even though 
it be very great, we must not expect to find the wages of 
labour very high. The workmen in such a country natur- 
ally multiply beyond their employment. China,^ for exam- 

' Adam Smith here states the fact correctly, but his account of the 
cause is vague and imperfect. Wages are higher in America, it must 
be repeated, because the cost of producing the necessaries of life is 
lower in America than in England. 

* It was commonly supposed in the i8th century that China and 
India were very rich countries, and Adam Smith was probably mis- 
led by the vulgar opinion. But throughout the whole of these two 
books Adam Smith seems to mean by a rich country, an old country 
that is fully peopled and fully cultivated ; and by a poor country, a 
country that is in a backward state of economic development. Thus 
Holland (perhaps truly) is said to be a richer country than England, 
and China richer than any part of Europe. It is a natural fallacy to 
mistake an old country for a rich country. For in an old country 
there is naturally more accumulated wealth, and a larger proportion 
of fixed capital to population, while a greater proportion of the annual 
revenue goes to the owners of land and fixed capital, and a less pro- 
portion to the labourers. The great accumulations of wealth, and the 
lavish expenditure of landlords and capitalists, impress foreigners 
with a notion that the old country is a rich country. They forget to 


pie, has long been one of the richest and most populous 
countries in the world. It seems, however, to have been 
long stationary. The accounts of all travellers agree in the 
low wages of labour, and the difficulty which a labourer 
finds in bringing up a family in China. The poverty of the 
lower ranks of the people far surpasses that of the most 
beggarly nations in Europe. Yet China, though it may 
perhaps stand still, does not seem to go backwards. Its 
towns are nowhere deserted by their inhabitants. The 
lands which had once been cultivated are nowhere neg- 
lected. The lowest class of labourers, therefore, notwith, 
standing their scanty subsistence, must some way or an- 
other make shift to continue their race, so far as to keep up 
their usual numbers. 

The condition of the workman would be still worse in a 
country where the funds destined for the maintenance of 
labour were sensibly decaying. Every year the demands 
for servants and labourers, would in all the different classes 
of employment be less than it had been the year before. 
The competition for employment would be so great as to 
reduce the wages of labour to the most miserable and scanty 
subsistence of the labourer. Maay would not be able to 
find employment even upon these hard terms, but would 
either starve or be driven to seek a subsistence either by 
begging, or by the perpetration perhaps of the greatest 
enormities. Want, famine, and mortality, would imme- 
diately prevail in the lowest classes, and thence extend 
themselves to all the superior classes, till the number of in- 
habitants in the country was reduced to what could easily be 

notice the poverty of the labourer. Yet the revenue of the new coun- 
try may in proportion to its population be larger than that of the old' 
country, and this, according to Adam Smith, is the true criterion o£ 
wealth. Victoria,, for instance, is certainly a much richer country 
than China or India. In comparing the wealth of one country with 
that of another we must recollect that value is not a true measure of 
riches. We cannot, therefore, estimate the comparative wealth of a 
country by its money income. 


maintained by its stock and revenue. This perhaps is nearly 
the present state of Bengal. 

In Great Britain at the present time the wages of labour 
seem to be evidently more than what is precisely necessary 
to bring up a family. This appears from the following con- 
siderations, (i) In almost every part of Great Britain 
there is a distinction between summer and winter wages. 
Summer wages are always the highest. But the maintenance 
of the labourer's family is most expensive in winter. Wages, 
therefore, it seems evident, are not regulated by what is 
necessary for the maintenance of the labourer's family, but 
by the quantity and supposed value of the work. (2) The 
wages of labour do not in Great Britain fluctuate with the 
price of provisions. If, therefore, the labouring poor can 
maintain their families in dear years, they must be at their 
ease in times of moderate plenty, and in affluence in those 
of extraordinary cheapness. (3) The wages of labour vary 
more from place to place than the price of provisions. 
Bread and butcher's meat and most other things that are 
sold by retail, are generally fully as cheap or cheaper in the 
great towns, than in the remoter parts of the country. But 
the wages of labour in a great town and its neighbourhood 
are frequently 20 or 25 per cent, higher than at a few miles 
distance. For example, eighteenpence a day may be 
reckoned the common price of labour in London. At a few 
miles distance it falls to fourteen and fifteen pence. If the 
labouring poor, therefore, can maintain their families in 
those parts of the kingdom where the price of labour is 
lowest, they must be in affluence where it is highest. (4) 
The price of labour is frequently lowest in those places 
where the price of provisions is highest. Grain, the com- 
mon food of the people, is dearer in Scotland than in Eng- 
land, but labour, on the contrary, is dearer in England^than 

9 During the present century the average price of common labour 
has been higher in the lowlands of Scotland than in many parts of 
England, while the price of grain has been rather lower. This must 


in Scotland. Oatmeal, indeed, supplies the common people 
of Scotland with the greatest part of their food, which is 
generally very much inferior to that of their neighbours of 
the same rank in England. This difference, however, in the 
mode of their subsistence is not the cause but the effect of 
the difference in their wages. Then again, during the last 
century, grain was dearer in both parts of the United King- 
dom than at present. (1776.)^° This in Scotland is proved by 
the evidence of the public fiars, or annual valuations made 
upon oath, according to the actual state of the markets, of 
all the different sorts of grain in every different county in 
Scotland, But although corn was dearer, wages were cer- 
tainly lower during the last century than at present. The 
most usual day wages of common labour through the greater- 
part of Scotland, were sixpence in summer and fourpence^' 
in winter. Now, the most usual day wages through the 
low country of Scotland are eightpence, and as much as a 
shilling about Edinburgh and the counties bordering on 
England. Not only grain, however, but also potatoes and 
other vegetables, linen and woolen cloth, and many articles 
of household furniture, are cheaper now than in the last 
century. If the labouring poor, therefore, could bring up 
their families then, they must be much more at their ease 
now. Indeed, at the present time, the common complaint 
that luxury extends itself even to the lowest ranks of the 
people, and that the labouring poor will not now be con- 
tented with the same food, clothing, and lodging, which 
satisfied them in former times, may convince us that it is not 

chiefly be attributed to the great improvements which bcjjan to be made 
in .Scotch agriculture about the time of the American War, 1774-.S2. 

'° This is only true of the iHih century, up to about tlie time that 
Adam Smith wrote, 1775. After that time there was a great increase 
both in the real cost and m the money price of grain. The increase in 
cost must be attributed to the large increase of population, while the 
rise in money value was mainly due to the great extension of the fonign 
trade, which made money cheaper in Great Britain than it had ever 
been before. 


the money price of labour only, but its real recompense, 
which has augmented. This improvement, however, in the 
condition of the working class must be regarded as an 
advantage to the whole nation. For no society can surely 
be flourishing and happy, of which the greater part of its 
members are poor and miserable. 

Moreover, this liberal reward of labour, as it is the effect 
of increasing wealth, so it is the cause of increasing popu- 
lation. For poverty, although it does not always prevent 
marriage, discourages it, and is extremely unfavourable to 
the rearing of children. It is not uncommon in the High- 
lands of Scotland for a mother who has borne 20 children 
not to have two alive. Every species of animals naturally 
multiplies in proportion to the means of their subsistence, 
and no species can ever multiply beyond it. But in civilized 
society it is only among the inferior ranks of the people that 
the scantiness of subsistence can set limits to the further 
multiplication of the human species, and it can do so in 
no other way than by destroying a great part of the 
children which their fruitful marriages produce. ^^ 

Then, again, the liberal reward of labour, as it encourages 
the population, so it increases the industry of the common 
people. A plentiful subsistence increases the bodily strength 
of the labourer, and the comfortable hope of bettering his 
condition, and of ending his days perhaps in ease and plenty, 
animates him to exert his strength to the utmost. Where 
wages are high, we shall always find the workmen more 
active, diligent, and expeditious, than where they are low ; 
in England for example than in Scotland ; in the neighbour- 
hood of great towns than in remote country places. Some 
workmen, indeed, when they can earn in four days what will 
maintain them through the week, will be idle the other 
three. This, however, is by no means the case with the 

" Here we lia\c in germ the theory afterwards developed by 


greater part. Workmen, on the contrary, when they are 
liberally paid by the piece, are very apt to overwork them- 
selves, and to ruin their health and constitution in a iew 
years. Excessive application during four days of the week 
is frequently the real cause of the idleness so loudly com. 
plained of. Great labour either of body or mind, continued for 
several days together, is in most men followed by a great 
desire for relaxation. It is the call of nature which requires 
to be relieved by some indulgence. If not complied with, 
the consequences are dangerous, and almost always bring 
on some infirmity peculiar to the trade. 

It is also said that workmen are more idle in cheap years, 
and more industrious in years of scarcity. Plenty may pos- 
sibly have this effect on some workmen, but it seems not 
very probable that men in general should work better when 
they are ill fed than when they are well fed, better when 
they are disheartened than when they are in good spirits, 
when they are frequently sick than when they are generally 
in good health. 

Masters of all sorts, indeed, naturally commend years of 
scarcity as more favourable to industry. For in years of 
plenty many servants leave their masters, and trust their 
subsistence to what they can make by their own industry, 
But the same cheapness of provisions encourages masters, 
especially farmers, to employ a greater number. The de- 
mand for servants increases, while the supply diminishes. '^ 
The price of labour, therefore, frequently rises in cheap 
years. The contrary to all this happens in dear year.c. 
Then again, landlords and farmers, two of the largest classes 
of masters, have another reason for being pleased with dear 
years. The rents of the one, and the profits of the other, 
depend very much upon the price of provisions. That 
workmen are more industrious in cheap years seems also to 
be proved by the fact that a greater quantity as well as a 


" Here we h,n'c the germ of a true theory of w.npe?. ■ 

Cl^ 'YW 


fAj a i^- 


greater value of manufactured goods is produced hi cheap 
years than in dear years. ^^ 

Though the money price of labour is sometimes higher in 
cheap years than in dear years, we must not on that ac- 
count imagine that the price of provisions has no effect on 
t!ie price of labour. For the money price of labour is regu- 
lated by two circumstances ; the demand for labour, and the 
price of the necessaries and conveniences of life. The de- 
mand for labour determines the quantity of 7iecessaries and 
conveniences which must be givert to the labourer ; and the 
money price of labour is detemiined by what is requisite for 
purchasing this quantity.^^ Though the money price of 
labour is, therefore, sometimes high where the price of pro- 
visions is low, it would be still higher, the demand continu- 
ing the same, if the price of provisions was high. But, as 
we have already seen, the detnand in cheap years is caused 
by the cheapness ofprovisiojis, which i^icr eases the funds in 
the hands of masters for the employment ^f labour. The 
increase in the wages of labour naturally tends to increase 
the price of many commodities,^^ by increasing the part of 
it which resolves itself into wages. But this rise in the 

'■ There is always a greater demand for manufactures after a good 
harvest. When the price of food falls the people have more money to 
spend in manufactured goods. The price of manufactures rises, and 
with it the wages of manufacturers. 

'* This is correct as far as it goes; but the mone}' value of the neces- 
saries of life, and the money wages of labour, will both depend, (i) on 
the cost of producing exportable goods, and (2) on the amount of gold 
and silver which such goods will purchase in the markets of the com- 
mercial world. The latter circumstance is determined by the equation 
of international demand. Ricardo, vii., p. 81. Senior, Essay on cost 
of obtaining money. Mill, III., xix., p. 318. 

'•'' As was noticed before, a great demand for labour causes a rise in 
wages, and at the same time a rise in the value of those commodities 
which are made by hand relatively to those which are made by the 
assistance of machinery. Hence the high value of certain articles 
which are made by hand in the United States and the F.nglish colonies. 
This is the great incentive to the invention and employment of labour- 
3;u ing machinery in those countries. 


price of commodities will often be prevented by the use of 
better machinery, and by a better division and distribution 
of labour. In consequence of such improvements many 
commodities come to be produced by so much less labour 
than before, that the increase of its price is more than com- 
pensated by the diminution of its quantity. 

Chap. \X.— Of the Profits of S tec k} 
The rise and fall in the profits of stock depend upon the 
same causes with the rise and fall in the wages of labour, 
that is, the increasing or declining state of the wealth of the 
society ; but those causes affect wages and profits very 
differently. The increase of stock which raises wages tends 
to lower prof ts. When the stocks of many rich merchants 
are turned intothesame trade, their mutual competition tends 
to lower its profits ; and when there is a like increase of 

' VVe must carefully distinguish between net profits and gross pro- 
fits, and also between the general rate of profit existing in a country, 
and profits in particular branches of industry. In this chapter we are 
concerned chiefly with the general rate of profit. The general rate of 
profit depends on two circumstances : (i) on the cost of producing the 
necessaries of life ; and (2) on the rate of wages. The doctrine laid 
down by Mill and Professor Fawcett on the subject is very nearly 
correct. Profits, Mjj] says, depend on the cost of labour, and the cost 
of labour is a function of three variables; (i) of the efficiency of 
labour; (2) of the wages of labour; and (3) of the cost of producing 
the articles, which enter into the consumption of the labourer. But it 
may be noticed that the cost of producing the necessaries of life is an 
equivalent expression for the effectiveness of labour in producing the 
necessaries of life, and, as Mill elsewhere admits, the efficiency of 
labour in producing luxuries cannot raise the rate of profit. It is 
evident, therefore, that the rate of profit might more accurately be de- 
scribed as a function of two variables. 

Any change in the supply of capital, or in the demand for the 
services which it renders to labour will alter the rate of profit. On 
the one hand, the rate of profit will be reduced; (i) by increased 
accumulations of capital ; or (2) by the conversion of fivii c.ipiial 



stock in all the different trades carried on in the same so- 
ciety, the same competition must produce the same effect 
in them all. Profits are so very fluctuating, that it is im- 
possible to determine, with any degree of precision, what 
are or were the average profits of stock in the present or 
ancient times ; but some notion may be formed of them 
from the interest of money. For it may be laid down as a 
maxim that wherever a great deal can be made by the use 
of money, a great deal will be given for the use of it. Ac- 
cordingly, therefore, as the usual market rate of interest 

into circulating capital ; or (3) by any decrease in the nunibers of the 
labouring population ; or (4) by any diminution in the extent or fer- 
tility of the territory upon which that population is subsisted. On the 
other hand, the rate will be raised by any circumstance of an opposite 
character to these, such as the waste of capital on the conversion of 
circulating capital into fixed capital. 

Labour, then, may be dear to the capitalist or employer from two 
causes ; (i) from the great cost of raising or acquiring the commodi- 
ties which are necessary to maintain the bodily vigour of the labourer; 
or (2) from the high remuneration given to the labourer. In Ricardo's 
time labour was dear from the former of these causes. Hence the 
great desire of the capitalist class in England to repeal the corn laws. 
In the United States it is dear from the latter of these causes. Hence 
the great number of inventions in that country for economising labour, 
especially during the War of Secession, when labour was particularly 

Ricardo, it may be observed, means by profits, the proportion of the 
produce which goes to the capitalist, just as he means by wages, the 
proportion which goes to the labourer. In this sense of the word, 
wages are lower in the United States than in England, because the 
rate of profit there is higher than in England. The use of the terms, 
profits and wages, has been a stumbling block to many able econo- 
mists, for instance, to Mr. Henry George : see Poverty and Progress, 
Bk. I., c. I. But if out of every 100 pairs of gloves, the English em- 
ployer takes 10, and the American employer takes 20, it is evident 
that wages are relatively to profits lower in America than in England. 
But although the proportionate wages of workmen in America are 
lower than in England, the real remuneration is much higher. For a 
pair of gloves in America will command much more of the necessaries 
t)f life than they wiU in England. 



varies in any country, we may be assured that the ordinary 
profits of stock must vary with it. The progress of interest, 
therefore, may lead us to form some notion of the progress 
of profits. 

From the 37th of Hen. VIII. to the 21st of James I., the 
legal rate of interest in England was ten per cent., when it 
was restricted to eight per cent. It was reduced to six per 
cent, soon after the Restoration, and b}' the 12th of Anne, 
to five per cent. All these different statutory regulations 
seem to have been made with great propriety. They seem 
to have followed the market rate of interest, or the rate at 
which people of good credit usually borrowed. Since the 
time of Queen Anne five per cent, seems to have been 
rather above than below the market rate. Before the late 
war the Government borrowed at three per cent., and peo- 
ple of good credit in the capital, and in many other parts of 
the kingdom, at three-and-a-half, four, and four-and-a- 
half per cent. Since the time of Hen. VIII. the wealth and 
revenue of the country have been continually advancing; 
the wages of labour have been continually increasing ; and 
in most branches of trade and manufactures, the profits of 
stock have been diminishing. 

_ It generally requires a greater stock to carry on any sort 
of trade in a great town than in a country village. The 
great stock employed in every branch of trade, and the 
number of rich competitors, generally reduce the rate of 
profit in the former below what it is in the latter. But the 
wages of labour are generally higher in a great town than 
in a country village. In a great town the people who have 
great stocks to employ, frequently cannot get the number 
of workmen they want, and therefore bid against each other 
to get as many as they can, which raises the wages of 
labour, and lowers the profits of stock. But in the remote 
parts of the country, th(;re is frcqu(,'ntly not stock sufficient 
to employ all the people, who therefore bid against one an- 
otlicr in order to get employment, which lowers thr wages 
of labour, and raises the i)ro(its of slock. 


In Scotland, though the legal rate of interest is the same 
as in England, the market rate is rather higher. People of 
the best credit there seldom borrow under five per cent. 
Even private bankers in Edinburgh give four per cent, on 
their promissory notes, of which payment either in whole or 
in part may be demanded at pleasure. Most trades can be 
carried on with a smaller stock in Scotland than in England. 
The common rate of profit, therefore, must be somewhat 
greater. The wages of labour are lower in Scotland than 
in England. The country, too, is poorer, and the steps by 
which it is advancing to a better condition are more 

In France the profits of trade are higher than in England, 
and it is no doubt upon this account that many British sub- 
jects choose rather to employ their capital in a country 
where trade is a disgrace, than in one where it is highly 
respected. The wages of labour are lower in France than 
in England. When you return from France to England, the 
difference you may remark between the dress and the 
countenance of the common people sufficiently indicates 
the difference in their condition. France, though no doubt 
a richer country than Scotland, seems not to be going for- 
ward so fast. 

Holland, in proportion to the extent of its territory and 
the number of its people, is a richer country than England. 
The Government there borrow at two per cent., and private 
people of good credit at three. The wages of labour are 
said to be higher in Holland than in England, ^ and the 
Dutch, it is well-known, trade upon lower profits than any 
people in Europe.^ The capital of the Dutch is evidently 

* Money wages were perhaps higher in Holland than in England, 
but the real wages of the labourer were probably lower. For most of 
the articles necessary for the labourer, such as corn and meat and 
dairy produce, were considerably dearer in Holland than in England 
during the first 60 or 70 years of the i8th century. 

' The low rale of profit in Holland is correctly ascribed by Ricardo 
to the great cost of importing foreign corn, and to the heavy taxation 
on the necessaries of life. Ricardo XXI., p. 175. 


redundant, that is, it is larger than they can employ with 
advantage in their own country. For they have great pro- 
perty both in the English and French funds, and great 
sums lent out to private people in countries where the rate 
of interest is higher than in their own. But this is no proof, 
as some think, that the trade of Holland is decaying. A 
nation may be accumulating a greater capital than it can 
employ in its own trade, and yet its trade may be increas- 

In our North American and West Indian colonies not 
only the wages of labour, but the interest of money, and 
consequently the profits of stock are higher than in Eng- 
land. In the different colonies, both the legal and the 
market rate of interest run from six to eight per cent. 
High wages of labour and high profits of stock, however, 
are things which perhaps never go together, except in the 
peculiar circumstances of new colonies. A new colony 
must always be for some time more understocked in pro- 
portion to its territory, and more underpeopled in propor- 
tion to the extent of its stock, than the greater part of 
other countries. Stock and labour, therefore, are applied 
only to the cultivation of the land which is most fertile and 
most favourably situated. Such land is frequently pur- 
chased at a price below even the value of its natural pro- 
duce. Stock employed in the purchase and improvement 
of such lands must yield a very large profit, and conse- 
quently afford to pay a very large interest. The rapid ac- 
cumulation enables the planter to increase the r^umber of his 
hands faster than he can find them in a new settlement. 
His workmen therefore are very liberally rewarded. As 
the colony increases the profits of stock gradually diminish. 
When the most fertile and best situated lands have been all 
occupied, less profit can be made by the cultivation of what 
is inferior both in soil and situation^ and less interest can 
be afforded for the stock that is so employed^ In the 

* This is a tolerably correct account of the important doctrine known 
;is " the tendency of profits to a minimum." Mill. IV., iv., p. 439. 


greater part of our colonies, accordingly, both the legal and 
the market rate of interest have been considerably reduced 
during the present century. But the wages of labour do 
not sink with the profits of stock. The demand for labour 
increases with the increase of stock, whatever be its pro- 
fits ; and after these are diminished, stock may not only 
continue to increase, but to increase much faster than be- 
fore. The acquisition of new territory, or of new branches 
of trade, may sometimes raise the profits of stock, and with 
them the interest of money, even in a community which is 
fast advancing in the acquisition of riches. For some time 
after the conclusion of the late war, the greatest companies 
in London borrowed at five per cent., who before had not 
been used to pay more than four or four and a half per 
cent. The great accession both of territory and trade by 
our acquisitions in North America and the West Indies, 
will sufficiently account for this, without supposing any 
diminution in the capital stock of the society. But the 
diminution of the capital stock of the society, as it so 
lowers the wages of labour, so it raises the profits of stock, 
and consequently the interest of money. Commodities cost 
the capitalist less and he gets more for them. The great 
fortunes so suddenly and so easily acquired in Bengal, and 
the other British settlements in the East Indies may satisfy 
us, that as the wages of labour are very low, so the profits 
of stock are very high in those ruined countries. The in- 
terest of money is proportionately high. In Bengal money 
is frequently lent to the farmer at 40, 50 and even 60 per 
cent., and the succeeding crop is mortgaged for the pay- 
ment. Before the fall of the Roman republic a usury of 
the same kind seems to have been common in the provinces 
under the ruinous administation of the pro-Consuls. The 
virtuous Brutus lent money in Cyprus at 48 per cent. 

In a country which had acquired the full complement of 
riches which the nature of its soil and climate, and its situa- 
tion with respect to other countries, allowed it to acquire, 


the wages of labour and the profits of stock, would probably 
be very low. For in a country fully peopled and fully 
stocked in proportion to the extent of its land, the competi- 
tion of labourers for employment, and of capitalists for 
business, would be very great, and would reduce the wages 
of labour and the profits of stock to the lowest possible rate. 

Perhaps no country, however, has yet arrived at this 
degree of opulence. China, indeed, has long been station- 
ary, but with other laws and institutions China might tran- 
sact a larger quantity of business. In China the smaller 
capitalists enjoy scarce any security, foreign commerce is 
despised, and foreign vessels admitted into one or two ports 
only. Twelve per cent., accordingly, is said to be the com- 
mon rate of interest in China, and the ordinary profits of 
stock must be sufficient to afford this large interest. 

Wherever the law does not proporly enforce the perfor- 
mance of contracts, the rate of interest must necessarily be 
very high. The high rate of interest in the Middle ages 
may perhaps be partly accounted for from this cause. 
When the law prohibits interest altogether it does not pre- 
vent it, but the difficulty and danger of evading the law 
make the rate of interest much higher. The high rate of 
interest among all Mahometan nations is accounted for by 
M. Montesquien, not altogether from their poverty, but 
partly from this, and partly from the difficulty of securing 
the money. 

The lowest rate of profit must always be sufficient to com. 
pensate the occasional losses to which every employment of 
stock is exposed, and also to compensate the undertaker for 
the trouble of employing the stock. This is the gross profit. 
The neat or clear profit is what remains after the risk and 
trouble have been allowed for. The interest is in proportion 
to the clear profit only. Double interest in Great Britain is 
reckoned a good, moderate, and reasonable profit, terms, 
wliicli I aj;prolicnd mean no more than the common and 
vsual profit. I'ut the proportion might be different if the 


rate of profit were either higher or lower than it actually is 
in Great Britain. 

In a country which has acquired its full complement of 
riches, the rate of interest would be so low, that none but 
the wealthiest people could afford to live upon the interest 
of their money. All people of small or middling fortunes 
would be obliged to superintend the employment of their 
own stocks. Holland seems to be approaching this state. 
It is there unfashionable not to be a man of business. Ne- 
cessity makes it usual for almost every man to be in busi- 
ness, and custom everywhere regulates fashion. In such 
countries the low rate of profit may, in the price of many 
commodities, compensate the high wages of labour, and 
enable those countries to sell as cheap as their less thriv- 
ing neighbours, among whom the wages of labour may be 

Chap. X. — Of Wages and Profits in the different employ- 
ments of Labour and Stock} 
The whole of the advantages and disadvantages of the 
different employments of labour and stock must in the same 
neighbourhood be either perfectly equal or continually tend- 
ing to equality. If in the same neighbourhood one employ- 
ment was evidently either more or less advantageous than 

* The wages of particular groups of labourers depend upon the re- 
ciprocal demand for services. But, as far as competition is effective, 
supply and demand will adjust themselves in such a way that the 
workman will be remunerated in proportion to the sacrifices he is re- 
quired to make. He will be remunerated, as Adam Smith says, in 
proportion to the hardship and disagreeableness of the labour, to the 
expense of preliminary training, to the inconstancy of employment, 
and to the uncertainty of success. 

But in the labour market the adjustment of remuneration to sacri- 
fice, is interfered with by many circumstances, which give a kind of 
natural monopoly to particular workmen, or to particular groups of 
workmen, (i) Certain kinds of labour are at a scarcity value, be- 


the rest, every man's interest would prompt him to seek the 
advantageous, and to shun the disadvantageous employ- 
ment. This at least would be the case in a society where 
there was perfect liberty of choice, and where things were 
left to follow their natural course. 

Pecuniary wages and profits, indeed, are everywhere in 
Europe extremely different, according to the different em- 
ployments of labour and stock. But this difference arises 
partly from certain circumstances in the employments them- 
selves, which either really or in the imaginaLi^iio of men,. 
make up for a small pecuniary gain in some, and counter- 
balance a greater in others ; and partly from the policy of 
Europe which nowhere leaves things at perfect liberty. 

■ Part I. 
Of inequalities arising from the nature of the employ- 
ments themselves. 

The five following are the principal circumstances which 

cause they require some moral, intellectual, or physical quality of a 
comparatively rare description. Examples of such qualities are the 
sound judgment required by men of business, the fine ear or touch 
required by a musician, the high character for trustworthiness which 
is necessary for a banker or solicitor. (2) Every kind of labour thaj 
is superior to ordinary unskilled labour has been said to have a scar- 
^>ffy value, because unskilled labourers are generally too poor to train 
their children for any higher kind of employment than their own. 
Cairnes has suggested that the industrial society of England may be 
roughly divided into four large groups, consisting of (a) unskilled 
labourers, (b) skilled labourers, (c) tradesmen, and (J) of members of 
the learned professions and men in a large way of business. And he 
thinks that these groups practically do not compete with one another, 
because each group is, for the most part, recruited only from within 
itself. (3) The adjustment of remuneration to sacrifice is also ob- 
structed by custom, combinations, social opinions, and legislative 
enactments. See Cairnes' f.e.iding Principles, p. 71-74. 

Inside each particular group of labourers, the wages of the indivi- 
dual workman are regulated by the amount and quality of the work 
he can perform, unless the natural course of things is interfered with 
by custom or combination. 


influence the remuneration of labour in different employ- 

(i) The agreeableness or disagreeahleness of the employ- 

(2) The easiness and cheapness or the difficulty and ex- 
pense of learning it. 

(3) The constancy or inconstancy of employment in it. 

(4) The small or great trust which inust be reposed in 
those who exercise it. 

(5) The probability or improbability of success in it. 
The first of these circumstances accounts for the high 

images of colliers whose work is both dirty and laborious. 
They often earn in eight hours as much as an artisan can 
earn in twelve. The wages of fishermen, on the contrary, 
are in an advanced state of society, very low, because they 
pursue as a trade what others pursue as a pastime. On 
the same principle a profession or trade which is esteemed 
honourable is much worse remunerated than one which is 
esteemed disgraceful. Accordingly we find that the trade 
of a butcher is in most places more profitable than most 
common trades. 

Disagreeahleness and disgrace affect the profits of stock 
in the same manner as they affect the wages of labour. 
The keeper of an inn, who is never master of his own house, 
and who is exposed to the brutality of every drunkard, 
exercises neither a very agreeable, nor a very creditable 
business ; but there is scarcely any common trade in which 
a small stock yields so great a pre tit. 

. Secondly, the wages of labour vary with the ease and 
cheapness, or the difficulty and expense of learning the busi- 
ness. A man educated at the expense of much labour and 
time to any of those employments which require extraordi- 
nary skill and dexterity, may be compared to an expensive 
machine. The work which he performs, must replace to 
him the whole expense of his education with at least the 
ordinary profits of an equally valuable capital. It must do 


this, too, in a reasonable time, regard being had to the very- 
uncertain duration of human life, in the same manner as to 
the more certain duration of the machine. The difference 
between the wages of skilled labour and those of common 
labour is founded on this principle. This difference, how- 
ever, is generally very small. The daily or weekly earn- 
ings of journeymen in the more common sorts of manufac- 
tures, such as those of plain linen and woollen cloths, are 
on an average, in most places, very little more than the day 
wages of common labourers.^ Their employment, however,- 
is more steady and uniform. 

Education in the ingenious arts and the liberal profes- 
sions, is still more tedious and expensive. The pecuniary 
recompense, therefore, of painters and sculptors, of lawyers 
and physicians, ought to be much more liberal ; and it is so 

Thirdly, employment is much more constant in some trades 
than in others. In the greater part of manufactures a jour- 
neyman may be pretty sure of employment almost every 
day in the year that he is able to work. A mason or brick- 
layer, on the contrary, can work neither in hard frosts nor 
in foul weather, and his employment at all other times de- 
pends upon the occasional calls of his customers. Accord- 
ingly, where the earnings of the greater part of manufacturers 
are nearly on a level with the wages of common labourers, 
those of masons and bricklayers are generally from one half 
more to double those wages. In London where common 
labourers earn nine and ten shillmgs a day, masons and 
bricklayers commonly earn fifteen and eighteen. When in- 
constancy of employment is combined with hardship and 
disagrceableness of the work, it sometimes raises the wages 
of the most common labourer above those of the most skilled 

' According to Arthur Young's calculations the average rate of 
wages in agriculture about Adam Smith's time was 7s. Qd. a wcek> 
and in manufactures about 8s. 5d. a week. But the wool combers 
got 13s. a week. See Young's Tour in the Southern Counties. 


artificers. The employment of the coal heavers in London 
is not only dirty, disagreable, and laborious, but from the 
unavoidable irregularity of the coal ships, is also inconstant. 
It appears from an inquiry made some years ago, that they 
earn from six to ten shillings a day. 

Fourthly, the wages of labour vary according to the great 
or small trust which viust be reposed in the workmen. Thus 
the wages of goldsmiths and jewellers, on account of the 
precious materials in the which they are trusted, are every- 
where superior to the wages of many other workmen, not 
only of equal, but of much greater ingenuity. We trust our 
health to the physician, our fortune, and sometimes our life 
and reputation to the lawyer and attorney. Such confidence 
could not safely be reposed in people of a very mean or low 
condition. Their reward must be such, therefore, as may 
give them that rank in society which so important a trust 

Fifthly, the wages of labour in different employments 
vary according to the probability or improbability of success 
in them. The probability that any particular person should 
ever be qualified for the employment to which he is educated, 
is very different in different occupations. In the greater 
part of the mechanic trades, success is almost certain, but 
it is very uncertain in the liberal professions. Put your son 
apprentice to a shoe maker, there is little doubt of his learn- 
ing to make a pair of shoes ; but send him to study the law, 
it is at least twenty to one if ever he makes such proficiency 
as will enable him to live by his business. The counsellor 
at law, who, perhaps, at near forty years of age, begins to 
make something by his profession, ought to receive the re- 
muneration, not only of his own so tedious and expensive 
education, but of that of more than twenty others, who are 
never likely to make anything by it. How extravagant so 
ever the fees of counsellors at law may sometimes appear, 
their real remuneration is never equal to this. The law, as 
well as many other liberal and honourable professions, is in 
point of pecuniary gain, evidently under recompensed. 


These professions, however, keep their level with other 
occupations, and notwithstanding these discouragements, 
all the most generous and liberal spirits are eager to crowd 
into them. Two different causes contribute to recommend 
them. First, the desire of the reputation which attends 
upon superior excellence in any of them ; and secondly, the 
natural confidence, which every man has, more or less, not 
only in his own abilities, but also in his own good fortune. 
To excel in any profession in which but few arrive at 
mediocrity, is the most decisive mark of what is called 
genius or superior talents. The public admiration Avhich 
attends upon such distinguished abilities, niakes always a 
part of their reward. • It makes a considerable part of that 
reward in the profession of physic; a still greater perhaps 
in that of law ; in poetry and philosophy it makes almost 
the whole. 

On the other hand there are some very agreeable and 
beautiful talents, of which the possession commands a cer- 
tain sort of admiration ; but of which the exercise for the 
sake of gain, is considered, whether from reason or preju- 
dice, discreditable. The exorbitant rewards of players, 
opera singers, opera dancers, etc., are founded upon these 
two principles ; the rarity and beauty of their talents, and 
the discredit of employing them in this manner. Such 
talents, though far from being common, are by no means so 
rare as is imagined. Many people possess them in great 
perfection who disdain to make this use of them ; and many 
more are capable of acquiring them, if anything could be 
made honourably by them. 

The ovcr-wccning conceit which the greater part of men 
have in their own abilities, is an ancient evil, remarked by 
the philosophers and moralists of all ages. Their absurd 
presumption in their own good fortune has been less taken 
notice of. It is, liowevcr, if possible, rtill more universal. 
There is no man living who, when in tolerabh; health and 
spirits has not some share in it. It is at no period of life more 



active than at the time when young people choose their pro- 
fession. It is proved by the success of lotteries, by the 
neglect of insurance, by the readiness of the common people 
to enlist as soldiers, or to go to sea, as well as by the 
eagerness of those of better fashion to crowd into the liberal 

The pay of soldiers is less than that of common labourers,, 
and in actual service their fatigues are much greater. 
Romantic hopes make the whole price of their blood. 
Sailors, indeed, are better paid than soldiers, and more fre- 
quently get some fortune or preferment. But although 
their skill and dexterity are much superior to that of almost 
any artificers, and notwithstanding the hardships and dan- 
gers of their life, their wages are not greater than the wages 
of common labourers at the ports from which they sail.^ 
.. Of the five circumstances which vary the wages of labour,, 
two only affect the profits of stock ; the agreenbleness or 
disagreeabletiess of the business, and the risk or security 
with which it is attended. In point of agreeableness or dis- 
asrreeablenes there is little or no difference in the far greater 
part of the different employments of stock, and the ordinary 
profit of stock, though it rises with the risk, does not always 
seem to rise in proportion to it. It follows that in the same 
society or neighbourhood, the ordinary profits of stock in 
different employments, are more nearly on a level than the 
wages of different sorts of labour J^ . The apparent difference 
in the profits of different trades, is generally a deception 
arising from a failure to distinguish between wages and 

3 An able-bodied seaman is now paid at least ^3 a month in addi- 
tion to food and lodging. His wages are therefore considerably above 
those of a common labourer. In accounting for the low remuneration 
of sailors yVdam Smith might have noticed that a common sailor served 
no apprenticeship. From the age of 12 or 13 a boy who took to the 
sea was supported by his own labour. 

♦ This is partly due to the fact that capital has more mobility than 
labour; that is, it is more easily transferred from one employment tO' 
another, and finds its way more easily to distant places. 


profits. For example, an apothecary can be remunerated 
for his skill, and for the trust reposed in him, only by the 
price of his drugs. The greater part of his apparently exr 
travagant profits, is real wages disguised in the garb of 
profits. So again, the high rate of profit made by a small 
grocer in a little town is nothing more than a reasonable 
compensation for his labour in buying and distributing the 
fifty or sixty different sorts of goods in which he deals. 
Where, on the other hand, ten thousand pounds can be em- 
ployed in the grocery trade, the wages of the grocer's labour 
make but a very trifling addition to the real profits of so 
great a stock. The apparent profits of the wealthy retailer, 
therefore, are more nearly on a level with those of the 
wholesale merchant. On this account goods sold by retail 
are generally as cheap, and frequently much cheaper in the 
capital than in snrill towns and country villages. Grocery 
goods, for example, are generally much cheaper, bread and 
butcher's meat frequently as cheap. Bread and meat must 
be brought from a considerable distance to the capital, and 
the cost of this about counterbalances the diminution of 

Though the profits of stock are generally less in the 
capital than in small country towns, great fortunes-are more 
often made in the former than in the latter; because in 
great cities trade can be extended as stock increases, and 
the credit of a frugal, thriving man increases much faster 

* According to Arthur Young, the price of meat was about id. a 
pound higher, that of butter 2d. a pound higher in London than in re- 
mote country districts, but there was hardly any difference in the price 
of bread. Wages, on the other hand, aver.iged 9s. or los. round 
I^ndon, and only 6s. .3d. in the counties at a greater distance than 
no miles from London. Apparently, therefore, the labourers of Lon- 
don were considerably better off than the labourers of Dorsetshire and 
Devonshire ; bnt possibly the country l.ibourer had other advantages, 
such as a low house rent; fuel, garden, and common land, which 
Arthur Young omitted to notice. Sec Young's Tour in the Southern 


than his stock. But even in great cities Iarg2 fortunes are 
seldom made in any regular and well established branch of 
business, except in consequence of a long life of industry, 
frugality, and attention. Sudden fortunes, indeed, are 
sometimes made by speculators, but an^ often lost just as 
suddenly as they are gained. The trade of speculation, it 
may be observed, can only be carried on in a great town. 

In order that there may be equality of profits and wages 
in different employments, three things^ besides perfect 
liberty, are requisite, (t) Tlie employments must be well 
known and long established in the neighbourhood ; (2) tlwy 
must be in their ordinary or natural state ; and (3) they 
must be the sole or principal employments of those who 
occupy them. 

(i) Wages are generally higher in a new trade, and when 
it succeeds, the profits of the projector are generally much 
above the ordinary rate. On the same principle we find 
wages and profits higher in those manufactures, the demand 
for which depends entirely on fashion and fancy. Fashion 
and fancy are continually changing, and manufactures 
which depend upon them seldom last long enough to be con- 
sidered old-established manufactures. 

(2) The demand for almost every different kind of labour 
is sometimes greater, and sometimes less than usual. In 
time of war forty or fifty thousand sailors are forced from the 
merchant service into that of the king. The demand for 
sailors rises with their scarcity, and their wages commonly 
rise from a guinea and 27s., to 40s. and 60s. In a decay- 
ing manufacture, on the contrary, many workmen, rather 
than quit their old trade, are contented with smaller wages 
than would otherwise be suitable to the nature of their em- 
ployment.® The price of corn, wine, hops, sugar, and 
tobacco varies not only with the demand, but also with the 

* The handloom weavers during the first half of tlic present century 
are an instance of workmen persevering in a decaying industry on the 
most miserable wages. 


great and frequent fluctuations of the supply. The profits 
of the dealers must necessarily vary with the price. 

(3) When a person derives his subsistence from one em- 
ployment, which does not occupy the greater part of his 
time, he is often willing, in his intervals of leisure, to work 
for less wages than would otherwise suit the nature of the 
employment:^ The class of people called cottagers, in many 
parts of Scotland, derive the main part of their subsistence 
from small plots of land, which they hold of the larger far- 
mers, on the condition of working for them when their 
labour is required. During a great part of the year their 
time is at their own disposal, and they are said to be willing 
to work for less wages than other labourers. In the same 
way, stockings in many parts of Scotland are knit much 
cheaper than they can anywhere be wrought upon the loom. 
They are the work of servants and labourers, who derive 
the principal part of their subsistence from some other em- 
ployment. Such instances, however, occur chiefly in poor 
countries. 7 In opulent countries the market is generally so 
extensive as to employ the whole labour and stock of those 
who pursue it. But one instance of something of the kind 
may be noticed in London. 

In that city lodgings are cheaper than they are in Paris 
or Edinburgh, because, they are generally let by tradesmen, 
who expect to pay most part of the rent of the house, and 
to maintain their family, not by letting lodging's, but by the 
trade which they carry on on the ground floor. 

Part II. 

inequalities occasioned by the Policy of Europe. 

Further inequalities in the rate of wages and profits are 
caused by the policy of I*^urope. 

(i) By restricting tJie competition in some employments 
to a smaller number than would otherwise be disposed to 

' As to the remuneration of subsidiary employments and the im' 
poriant subject of the wages of women, see Mill II., xiv., p. 241-3. 


enter them ; (2) by increasing it in others beyond what it 
naturally would be ; and (3) by obstructing the free circu- 
lation of labour and stock from etnployment to employment, 
and from place to place. 

(i) The exclusive privilege of corporations restrains the 
competition in the incorporated towns to those who are free 
of the trade. An apprenticeship in the town under a mas- 
ter properly qualified is commonly the necessary requisite 
for obtaining this freedom. The bye-laws of the corpora- 
tions commonly regulate the number of apprentices which 
any master is allowed to have, and almost always the num- 
ber of years which an apprentice is obliged to serve. The 
intention of both regulations is to restrain competition. 

For instance, in Sheffield no master cutler can have 
more than two apprentices at a time ; in Norfolk no master 
weaver can have more than two apprentices at a time. 

Seven years seem anciently, all over Europe, to have 
been the usual term established for the duration of appren- 
ticeships in the greater part of the incorporated trades. 
The term of years which it was necessary to study, in order 
to obtain the degree of Master of Arts, appears to have 
been copied from the term of apprenticeship in the common 
trades. All such incorporations were anciently called uni- 
versities ; which indeed is the proper Latin name for any 
incorporation whatever. 

Accordingly, by the 5th of Eliz., commonly called the 
Statute of Apprenticeship,' it was enacted that for the fu- 
ture, no person should exercise any trade, craft, or mystery 
at that time exercised in England, unless he had previously 
served to it an apprenticeship of seven years at least ; and 
what before had been the bye-law of many particular cor- 
porations, became in England the general law of all the 
trades carried on in the market towns. Though the words 

' The Statute of Apprenticeship was repealed in 18 14. As to the 
restrictions on competition in the labour market through the combina- 
tion of Trades-Unionists, see Mill II., xiv., p. 243, V. x., p. 563. 


of the statute are very general, its operation has by inter- 
pretation been limited to market towns ; so that in country 
villages a person may exercise several different trades, 
though he has not served a seven years' apprenficeship to 
each. By a further strict interpretation of the words, trades 
introduced since the 5th Eliz., are excluded from the opera- 
tion of the statute. For instance, the trade of a coach 
maker is not within the statute, but the trade of a wheel- 
wright is. A coach maker, therefore, cannot make wheels 
for his coaches, but must buy them of a master wheel- 

In Scotland there is no general law which regulates the 
duration of apprenticeship, but three years is the common 
term. In general, I know of no country in Europe in which 
corporation laws are so little oppressive. 

These restrictions on the labour of the poor are unjust 
.and oppressive. The patrimony of a poor man lies in the 
strength and dexterity of his hands, and to hinder him from 
working at what he thinks proper, is a plain violation of 
this most sacred property, and a manifest encroachment on 
the just liberty of the workman. Nor do long apprentice- 
ships give any security that insufficient workmanship shall 
not frequently be exposed to public sale. When this is 
done it is generally the effect of fraud and not of inability. 
Quite different regulations are necessary to prevent this 
abuse. The sterling marks upon plate and the stamps upon 
linen and woollen cloth give the purchaser much greater 
security than any statute of apprenticeship. Long appren- 
ticeships, too, have rather a tendency to form young people 
to habits of idleness than to habits of industry. An ap- 
prentice is likely to be idle, and almost always is so, be- 
cause he has no immediate interest to be otherwise. In 
the inferior employments the sweets of labour consist alto- 
gether in the recompense of labour. A young man natur- 
ally conceives an aversion to labour, when for a long time 
he receives no benefit from it. 


Apprenticeships wftre altogether unknown to the an- 
cients. Long apprenticeships are altogether unnecessary. 
In the common mechanic arts, a few days, and in the arts 
much above them, a few weeks are a sufficient time for the 
necessary instruction. Experience would be gained by 
practice. If a young man wrought as a journeyman from 
the beginning, being paid for the little work he could exe- 
cute, and paying in turn for the materials which he might 
sometimes spoil, his education in this way would generally 
be more effective, and always less tedious and expensive. 
Both he and his master would no doubt in the long run be 
losers, because in a trade so easily learnt there would be 
many competitors. The increase of competition would re- 
duce the wages of the man and the profits of the master. 
But the public would be a gainer. 

The government of towns corporate in early times was 
altogether in the hands of traders and artificers, and the in- 
habitants of towns being collected into one place can easily 
combine together. It was the manifest interest of every 
particular class to prevent the market being overstocked 
with their own particular species of labour. Each class was 
eager to establish regulations for this purpose, and was 
willing to consent that every other class should do the 
same. In consequence the goods of every class became 
dearer. In dealing with one another it was as broad as it 
was lo}ig, as they say. But in their dealing with the coun- 
try they were all great gainers'^ ; and in these latter deal- 
ings consists the whole trade which supports and enriches 
the town. For the price which the town really pays for the 

' These tactics may be, and have been adopted on an international 
scale. A country which adopts a protective policy wastes a certain 
amount of its labour and capital ; but on the other hand, (as Mill ex- 
plains), "draws to itself, at the expense of foreigners, a larger share 
than would else belong to it of the gain arising fiom that portion of its 
foreign trade which it suffers to subsist." In other words, it gets its 
'inports at .1 less expenditure of labour and capital than before. Such 
)),i- been the policy of the United States since the Morrill tariff of 



provisions and viaterials imported into it, is partly the 
quantity of manufactures and other goods annually ex- 
ported from it, and partly the services which the townsmen 
render to the country, as carriers and distributors of goods 
from foreign and distant parts. The dearer the exported 
goods are sold, the cheaper the imported goods are bought.^ 
The industry of the town becomes more, that of the coun- 
try less advantageous. That such is the case appears by 
one very simple and obvious observation. In every coun- 
try of Europe we find one hundred people who have made 
fortunes from small beginnings in trade and manufacture 
for one who has done so by the raising of raw produce and 
the improvement and cultivation of land.* Industry, there- 

1861. Mill goes on to say that such a policy may be counteracted by 
foreigners establishing " equivalent prohibitions and restrictions 
against the commodities " of the protecting country. The policy of 
the United States has accordingly been counteracted in this way by 
the people of Canada ; but the same resource is not open to the peo- 
ple of England, because it would involve the taxation of the neces- 
saries of life. The only resource open to the English people is to de- 
velope their colonies as quickly as possible, and to arrive at some un- 
derstanding with them as to a common commercial policy. Mill V., 
X., p. 554. Essays on Unsettled Questions of Pol. Econ. i. 

* If Adam Smith had applied this principle in considering the sub- 
ject of foreign commerce, he might have anticipated Ricardo's theory 
of International Trade, and Mill's theory of International Values. 
The same principle that regulates the trade between a protected town 
and the surrounding country, regulates also the trade between a great 
commercial nation, like the Dutch in the 1 8th century, and the English 
at the present time, and the agricultural communities with which it 
tratficks. The Dutch were, and the English now are, manufacturers, 
carriers, and distributors of goods for the rest of the world. The 
dearer the English sell their own goods and services, the cheaper they 
get the commodities which are imported into the country. Mill III., 
xviii. cf. also Essay quoted in last note. 

* Fortunes are more often made in trade or manufactures than in 
farming, chiefly because the business of the manufacturer or merchant 
is more easily extended than the business of the farmer. This is partly 
due in I'^ngland to the necessity under which the farmer labours of 


fore, must be plainly better rewarded in one situation than 
in the other. Therefore stock and labour naturally seeking 
the most advantageous employment, resort as much as pos- 
sible to the town and desert the country.^ 

The inhabitants of the country cannot easily combine to- 
gether. They have never been incorporated, and they 
have not the corporation spirit. No apprenticeship has ever 
been thought necessary to qualify for husbandry. And yet 
the art of the farmer, the general direction of the operations 
of husbandry, and even many inferior branches of country 
labour require much more skill and experience than the 
great part of mechanic trades. The common ploughman, 
though less accustomed to social intercourse, though more 
uncouth in voice and language, is in understanding gener- 
ally much superior to the artisan. In China and India, ac- 
cordingly, both the rank and the wages of country labourers 
are said to be superior to the greater part of artificers and 

This superiority of the industry of the towns in Europe, 
is not altogether owing to corporations and corporation 
laws. The high duties upon foreign manufactures all tend 
to the same purpose. For they all raise prices, and the 
enhancement of price is everywhere finally paid by the 
landlords, farmers, and labourers of the country. 

hiring his land from the landowner. In Australia and the Western 
States of America, where new land can be readily acquired, very large 
fortunes have been made by raising sheep, cattle, corn, cotton, and 
other agricultural products. 

' In a progressive society possessing a limited amount of land, 
capital and labour naturally resort to the towns, because the surplus 
produce of agriculture is naturally expended in the purchase of either 
manufactured commodities, or of commodities imported from abroad. 
For instance, the Union opened the trade with the English colonies to 
Scotland, and the capital of Scotland was naturally poured into this 
advantageous business. But during the American war this trade was 
to a large extent annihilated, and the capital of Scotland flowed back 
upon the land. With its assistance those improvements were carried 
out which made Scottish agriculture famous throughout Kurope. 


In Great Britain the superiority of the industry of the 
towns over that of the country, seems to have been greater 
formerly than at present. The wages of country labour ap- 
proach nearer to those of manufacturers, and the profits of 
stock employed in agriculture to those of stock employed in 
trade and manufactures, than they are said to have done in 
the last century, or in the beginning of the present. This 
change is the necessary though very late consequence of 
the extraordinary encouragement given to the industry of 
the towns. For accumulations of stock in the towns have 
become redundant, and overflowing into the country have 
everywhere been the cause of the greatest improvements in 

The pretence that corporations are necessary for the 
better government of the trade is without any foundation. 
The real and effectual discipline which is exercised over a 
workman is not that of his corporation, but of his customers. 
It is the fear of losing their employment which restrains his 
frauds and corrects his negligence. An exclusive corpora- 
tion necessarily weakens the force of this discipline. A 
particular set of workmen must then be employed behave 
they ill or well. It is on this account that in many large 
incorporated towns no tolerable workmen are to be found 
even in the most necessary trades. If you would have your 
work tolerably executed it must be done in the suburbs, 
where the workmen, having no exclusive privileges, have 
nothin^r but their character to depend upon.^ 

^econdlyj the policy of Europe by increasing the compe- 
tition in some employments beyond what it would naturally 
be, occasions another inequality of an opposite kind. In 
all Christian countries many scholarships have been estab- 

^ \x\ this matter, the principle of laissez-faire may be carried too far_ 
Modern experience shows that customers cannot protect themselves 
effectually against the fraiidh of traders. Hence the necessity of Acts 
of Parliament against the adulteration of food and insecure build- 


iished for the education of the clergy. The Church is 
crowded with people who have been educated in this way, 
and who are therefore willing to accept a mucTi smaller re- 
muneration, than the long, tedious, and expensive educa- 
tion necessary for a clergyman would otherwise have en- 
titled them to. In this way, the competition of the poor 
takes away the reward of the rich. Men of letters, public 
and private teachers, have generally been brought up in the 
same way at the public expense, and consequently these 
professions are also crowded with indigent people, whose 
cempetition reduces the rate of remuneration below what it 
would otherwise be. In ancient times, public teachers 
were much more liberally rewarded. The professions 
of law and physic are not affected by this cause, 
as lawyers and physicians are seldom educated at the 
public expense. This inequality is, however, upon 
the whole, perhaps rather advantageous than hurtful 
to the public. It may somewhat degrade the profes- 
sion of a public teacher ; but the cheapness of literary 
■education is surely an advantage, which greatly over- 
balances this trifling inconveniency. 

Thirdly, the policy of Europe, by obstructing the free cir^ 
culation of labovr and stock both from ernployinent to em- 
ployme}it, and from place to place^ occasions in some cases a 
very inconvenient inequality iti the rate of prof t and ivages. 
This is the natural effect of the Statute of Apprenticeship, ^ 
and the exclusive privileges of corporations referred to 
above. It frequently happens that while high wages are 
given to the workmen in one manufacture, those in another, 
(perhaps in the same town,) are obliged to content them- 
selves with a bare subsistence. The one is in an advancing 
state, and has therefore a continual demand for new hands ; 
the other is declining, and the superabundance of hands is 
continually increasing. Yet these two manufactures can- 
not lend the least assistance to one another, although they 
may be of almost the same character. 


Whatever obstructs the free circulation of labour, ob- 
structs also in a less degree, the circulation of stock ; for 
the quantity of stock which can be employed in any busi- 
ness depends very much upon the quantity of labour which 
can be emploved in it. 

Another obstruction to the circulation of labour is pecu- 
liar to England. It consists in the difficulty which a poor 
man has in obtaining a settlement, or even in being allowed 
to exercise his industry in any parish but that to which he be- 
longs. This difficulty obstructs the free circulation of com- 
mon labour, as well as that of the labour of manufacturers. 
It arose from the operation of the poor law and is perhaps 
the greatest disorder of any in the police of England. 

After the destruction of the monasteries, it became 
necessary to devise means for the relief of the destitute 
poor. After several ineffectual attempts, it was enacted by 
the 43rd Eliz. c. 2, that every parish should provide for its 
own poor, and that overseers of the poor should be provided, 
who with the churchwardens should levy a rate for this 
purpose. Who were to be considered the poor of the 
parish, became therefore a question of some importance. 
By 13th and 14th Charles II. it was enacted that 40 days' 
undisturbed residence should give any person a setilement 
in any parish, but that within that time, it should be lawful 
for two justices of the peace upon complaint made by the 
overseers to remove any new inhabitant to the parish where 
be was legally settled, unless he either rented a tenement of 
the annual value of ten pounds, or could give security for 
the discharge of the parish. By 3 Will. III. the 40 days' 
residence began to count only from the date of a publica- 
tion of the new inhabitant's place of abode in the parish 
church after divine service. By subsequent statutes he 
could obtain a settlement. 

(1) By being taxed to the parish rates and paying them. 

(2) By being elected to an annual parish office and scrv^ 
ing in it a year. 


(s) ^y serving an apprenticeship in the parish. 

(4) By being hired into service there for a year, and 
continuing in the same service dnritig the whole of it. 

By the 8th and yth Will. III. it was further enacted that 
no person should be removed from any parish until he be- 
came actually chargeable to the parish, if he produced a 
certificate signed by the officer of the parish where he was 
last legally settled. 7 

Under these statutes it has become extremely difficult for 
a poor man to change his place of abode, or to exercise his 
trade in any place, except in the parish where he was born, 
especially if he be married. Hence the scarcity of hands 
in one parish cannot be relieved by the superabundance of 
another. In no other country, accordingly, do we meet 
with such sudden and unaccountable differences in the 
wages of labour in neighbouring places, as we sometimes find 
in England, where it is often more difficult for a poor man 
to pass the artificial boundary of a parish, than it is in 
other countries to pass an arm of the sea or a ridge of high 

This power to remove a man who has committed no mis- 
demeanour from the parish where he chooses to reside, is 
an evident violation of natural liberty and justice. 

Anciently it was attempted to fix the rate of wages by 
general laws, and afterwards by particular orders of the 
justices of the peace in each county ; but both these prac- 
tices have now gone entirely into disuse. Whenever the 
legislature attempts to regulate the difference between 
masters and workmen, its counsellors are always the mas- 
ters. When the regulation, therefore, is in favour of the 
workmen it is always just and equitable ; but it is some- 
times otherwise when it is in favour of the master. Thus 
the law which obliges masters to pay their workmen in 

T By 35 Geo. III. the certificates became no longer necessary and 
a poor person could not be removed until he became actually charge- 


money and not in goods is just and equitable, but the laws 
against the combinations of workmen are unfair to the 

In ancient times, too, the price of provisions and bread 
was regulated, but the assize of bread is now the only 
remnant of this practice. 

Chap. YA.—Ofthe Rent of Land. ^ 
Rent, considered as the price paid for the use of land, if, 
naturally the highest which the tenant can afford to pay in 
the actual circumstances of the land. In adjusting the 
terms of the lease, the landlord endeavours to leave him no 
greater share of the produce than what is sufficient to keep 
up the stock from which he furnishes the seed, pays the 
labour, and purchases and maintains the cattle and other 
instruments of industry, together with the ordinary profits 
of farming stock in the neighbourhood. Whatever is over 
and above this, the landlord naturally reserves for himself 
as the rent of land. This portion may be called the natural 
rent of land. It is naturally a monopoly price. It is not 
at all proportioned to what the landlord may have laid out 
on the improvement of the land, or to what he can afford to 
take, but to what the fariner can afford to give. I For the 
landlord demands a rent even for unimproved lands, and 
the supposed interest or profit on the improvement is 
generally an addition to this original rent. He sometimes 
demands rent for what is altogether incapable of improve- 
ment, such as a kelp shore in 'Scotland, or a fishing station 
in the Shetlands. 

Rent affects the price of commodities in a different way 
from wages and profits. High or low wages and profits are 
the cause* of high or low price ; high or low rent is the effect 1 
of it. It is because the price of a commodity is high or low, 

/ ' See note 3 at end of book. 
* This is a mistake. 


a great deal more, a very little more, or no more than suffi- 
cient to pay wages and profits, that it affords a high rent, 
or a low rent, or no rent at all, . 1 \ 

Of the produce of land which always affords rent. 

As men, like all other animals, naturally multiply in pro- 
portion to the means of subsistence, food is always more or 
less in demand. But land in almost any situation, produces 
a greater quantity of food than what is sufficient to main- 
tain all the labour necessary for bringing it to market, in 
the most liberal way in which that labour is ever maintained. 
The surplus, too, is alu'ays more than sufficient to replace 
the stock which employed that labour, together with its 
profits. Something, therefore, always remains for a rent to / 
the landlord.^ The most desert moor in Norway and Scot- 
land, produces some sort of pasture for cattle, of which the 
milk and increase are always sufficient to afford some small 
rent to the landlord. 

Rent increases with the fertility of the land, and also I 
varies with its situation. Land, in the neighbourhood of a i 
town, gives a greater quantity of rent than land equally fer- » 
tile in a distant part of the country, because in the latter 
case, there is the additional cost of bringing the produce to \ 
market, and the surplus left for rent is consequently less. 
Good roads, canals, and navigable rivers, diminish this \ 
difference. They are often, upon that account, the greatest 
of all improvements, because they encourage the cultivation 
of the remote, which must always be, the most extended 
circle of a country. They benefit the towns, and do not 
really injure the country in the neighbourhood of the 

' This is not strictly true. In a new country there is always 
abundance of land that is uncultivated. The land, therefore, that is 
last cultivated will pay no rent. Anything that is actually paid by the 
farmer for permission to till the soil must be regarded as a tax rather 
than rent in the economic sense of the word. 

touns, because they open many new markets for its pro- 
duce.^ Fifty years ago the counties round London peti- 
tioned ParHament against the extension of the turnpike 
roads to the remoter counties. They pretended that they 
would be undersold in the London markets by the cheaper 
labour of the remoter counties, and that their cultivation 
would be ruined. Their rents however have risen, and their 
cultivation has improved since that time. 

A corn field produces more food for man than the best 
pasture. Its cultivation requires more labour, but not more 
in proportion to its produce. 

The relative value of bread was much higher, that of 
butcher's meat much lower in the rude beginnings of society 
than it is now. In the highlands of Scotland a century ago 
a pound of meat was not worth more than a pound of oat- 
meal bread. Since the Union opened the markets of Errg- 
land, the ordinary price is thrice what it was before, and the 
rents of highland estates have trebled or quadrupled. In 
almost every part of Great Britain a pound of meat is now 
worth more than two pounds of the best white bread. After 
a plentiful harvest it is sometimes worth three or four 

When in the progress of improvement all the country has 
been enclosed and cultivated, a natural proportion arises 
between the value of grass and corn, and the rent of pas- 
I ture and arable land. An acre of land v/ill produce a 
^~much smaller quintity of meat than of corn. The inferiority 
of quantity must therefore be compensated by the superiority 
of price. V For if it were more than compensated, more corn 

* The same principle applies io the opening of a foreign trade in 
corn. The importation of corn enables a larger population to be sup- 
ported, and for this larger population, a larger quantity of meat and 
other bulky or perishable produce is required. Hence the importation 
of corn will not in the long run injure, but may even benefit, the 
owners of land, especially the owners of pasture or meadow lands. 
Thus the rent of land in Kngland has, on the whole, increased since 
the repeal of the corn laws. 



land would be turned into pasture ; and if it were not com- 
pensated, part of the pasture would be brought back into 
corn. This proportion, however, is disturbed in a country 
like ancient Rome or Holland, which feeds the great body 
of its people with imported corn. In such places there is an 
extraordinary demand for milk, forage, butter, and meat, 
and the value of grass is raised above its natural proportion 
to corn.^ 

But where there is no local advantage of this kind, the 
rent and profit of corn, or whatever else is the common ? 
vegetable food of the people, must regulate the rent and / 
profit of pasture. 

The use, however, of artificial grains, of turnips and 
carrots, tends to reduce the value of butcher's meat rela- 
tively to the value of bread. Such a reduction in the value 
of butcher's meat has taken place in the London market 
since the time of James I. For it appears from Dr. Birch's 
life of Prince Henry that beef was bought by the carcase for 
the Prince's household at the rate of 3|d. per pound. At 
that rate the choice pieces could not have been sold by retail 
for less than 4|d. or 5d. per pound. From a Parliamentary 
report made in 1764, it appears that the choice pieces of 
beef were sold from 4d. to 4|d. per pound by retail, the 
coarse pieces from ifd. to 2|d. per pound ; and these were 
considered high prices. On the other hand, the average 
price of wheat has risen, from £1 i8s. 3xd., in the first 12 
years of the last century, to £2 is. g^d. in the 12 years pre- 
ceding 1764. 

As the rent of grass land, and the price of meat is regu- . 

* The relative value of corn and meat did not change much in Eng- 
land between the time of Adam Smith, and the repeal of the corn 
laws, 1846. Forty years ago a pound of meat would still exchange 
for about two or three pounds of bread. But now we feed the 
greater part of the people on imported corn, the value of meat is raised 
above its natural proportion to corn, and a pound of meat will ex- 
change for about six pounds of bread. 

lated by the rent and profits of corn land, so are the rent, 
and profits of hop gardens, kitchen gardens, and vineyards.! 
Sometimes, indeed, it happens that the quantity of land 
which can be fitted for some particular produce, is too 
small to supply the effectual demand. Then the surplus 
part of the price may bear no regular proportion to the like 
surplus in corn or pasture, but may exceed it in almost any 
degree ; and the greater part of this excess goes to the \ 
landlord as rent. This is the cause of the high profits of 
certain vineyards in the South of France, which produce 1 
wine of a particular flavour, a flavour which no culture or i 
management can equal, it is supposed, upon any other land. I 
It is also apparently the cause of the high rents and profits 
made by the sugar planters in the West Indies, and by the 
tobacco planters in Virginia and Maryland.^ 

If the common people of a country are contented to live 
upon a food which can be produced from the same area of 
land in much greater quantities than corn can be produced, 
a much greater surplus would remain to the landlord as rent. 
This is the case of those countries where the people mostly 
live upon rice, of which two crops in the year of from 30 to 
60 bushels each, can be produced from an acre. So again, 
an acre of potatoes will produce three times the weiglit of 
solid nourishment produced by an acre of wheat. Should 
this food ever become, like rice, the common food of the 

6 This is not the true reason of the high profiLf? made by sugar and 
tobacco planters. A man who takes capital to a new country and 
superintends its employment himself, can always obtain a high rate of 
profit from it. Fiut in a corn growing country, the increase of his busi- 
ness would be impeded (in the i8th century, if not now) ([) by the 
difficulty of getting labourers, and (2) by the want of a large market 
for his agricultural produce. The tobacco and sugar planter had 
neither of these difficulties to contend with. He could import slaves 
from Africa, and he had a large external market in liuropc for his 
particular products. It may be noticed that the same industrial 
system is to day being developed in Queensland as that which grew 
up in Virginia and .South Carolina in the 17th and icSth centuries. 


people, the same quantity of cultivated land would maintairr 
a much greater number of people ; population would in- 
crease, and rents would rise much beyond what they are at 

Part IL 

Of the Proditce of Land which sometimes does, and som'etitnes does not 

afford Reiit. 
Humn7i food seems to be the only produce which always- 
and necessarily affords some rent to the lajidlord. Other 
sorts of produce sometimes may, and sometimes may not, 
according to circumstances. These sorts are the materials 
of clothing, such as skins and wool; the materials of build- 
ing, such as stone and wood ; of fuel, such as coals and 
wood ; and metals, such as gold and silver, iron, tin, and 
copper. In the rude beginnings of society some of these 
products are always superabundant. Their value is barely 
sufficient to pay for bringing them to market, and quite in- 
sufficient to afford any rent to the landlord. But when- by 
the improvement and cultivation of land, the labour of one 
family can provide for two, the labour of- one half of the 
society can provide food for the whole. The number of 
workmen increases with the quantity of food. The desire 
of food in every man is limited by the narrow capacity of 
the human stomach ; but the desire of conveniences and 
ornaments, of buildings, dress, equipage, and household 
furniture seems to have no limit. Those, therefore, that 
have more food than they themselves can consume, are 

' Rent, however, would not rise until the population had increased. 
The use of potatoes was, no doubt, the great cause of the high pro-- 
portionate rents paid to Irish landlords. The objections to potatoes 
as a staple article of food have been pointed out by MacCulloch. In 
the first place people that live upon a very cheap kind of food, have 
nothing cheaper to resort to in times of scarcity, and must, if they are 
able, become purchasers of the more costly food of their neighbours. 
In the second place potatoes by reason of their great bulk are difficult 
to import, and are particularly liable to disease. 


always willing to exchange the surplus for gratifications of 
this other kind. Hence arises a demand for every sort of 
material which human invention can employ, either use- 
fully or ornamentally, in buildings, dress, equipage, or 
household furniture ; for fossils and minerals, the precious 
metals and precious stones. Food is in this manner not 
only the original source of re7it ; but every other part of 
the produce of land, which afterwards affords rent, derives 
that part of its value from the improvements of the powers 
of labour in producing food. 

But even in improv-ed countries the demand for these 
products is not always such as to afford rent. The value i 
of a coal mine, for instance, depends not only on its ferti- | 
lity, but very much also on its situation. In an inland 
country, thinly inhabited, and without good roads or water 
carriage, even a fertile coal mine will not pay the expense 
ot working it, or when it will do this, it will not afford a 
rent to the owner. The value of a metallic mine depends I 
more on its fertility and less upon its situation. The coarse, 
and still more the precious metals, can generally bear the 
expense of a very long land and the most distant sea car- 
riage. The price of coals in Westmoreland or in Shrop- I 
shire can have little effect on their price at Newcastle ; 
whereas the price of copper in Japan must have some in- 
fluence upon its price at the copper mines of Europe, and 
the price of silver in Peru, must have some influence on its 
price, not only at the silver mines of Europe, but at those 
of China. After the discovery of the mines of Peru, the 
silver mines of Europe were the greater part of them aban- 
doned. The value of silver was so much reduced that the 
produce of the European mines could no longer pay the 
expense of working them, or replace with a profit tlie food, 
clothes, lodgings, and other necessaries, which were con- 
sumed in that operation. 

Part III. 
Of the variations in the proportion between the respective values of 


that sort of produce 'which ahvays affords Rent, and of that which 
sometimes does and soynetimes does not afford Rent. 

The increasing abundance of food in consequence of in- 
creasing improvement and cultivation of land must neces- 
sarily increase the demand for every part of the produce of 
land which is not food, and which can be applied either to 
use or to ornament. In the whole progress of improve- 
ment, therefore, it might be expected that there would be 
one variation only in the comparative value of those two 
different sorts of produce. As art and industry advance, 
the materials of clothing and lodging, the useful fossils and 
minerals, the precious metals and precious stones, should 
gradually come to be more and more in demand, should 
gradually exchange for a greater quantity of food, or in 
other words should become dearer and dearer. This ac- 
cordingly has been the case with most of these things, and 
would have been the case with all of them, had not parti- 
cular accidents on some occasions increased the supply of 
some of them in a still greater proportion than the de- 

A bulky commodity like freestone, that cannot easily be 
transported, will increase in value with the increasing im- 
provement and population of the country where it is pro- 
duced. But the value of a commodity, like silver, that can 
easily be transported, does not depend upon the population 
and improvement of the surrounding country. For the 
great market for silver is the whole commercial and civi- 
lised part of the world. Its value, therefore, depends not 
on the improvement of the surrounding country, but of the 
whole civilised world. 



First Period. 

From the time of Hen. IIII to the discovery of the mines 

of America the value of silver seems to have been gradually 

increasing. We know from the Statute of Labourers, 25th 


Ed. III., and other ancient documents, that the quarter of 
wheat in the 14th century, was worth about four ounces of 
silver, whereas in the early part of the i6th century, it was 
worth only two ounces. The popular notion, then, that 
the value of gold and silver diminishes, as wealth increases, 
seems to be altogether groundless. The quantity of gold 
and silver in a country may increase, and yet the value may 
not diminish, because the demand for the metals may in- 
crease in a greater proportion than the quantity. 

The quantity of precious metals in any country may in- \ 
crease from two different causes ; (i) from the increased 
productiveness of the mines which supply them, or (2) from 
the increased wealth of the people, from the increased pro- 
duct of their annual labour. The first of these causes is, 
no doubt, connected with the diminution of the value of the 
precious metals, bat the seccnd is not. When the wealth 
of a country increases, a greater quantity of coin is required 
to circulate a greater quantity of commodities ; and the 
people, as they can afford it, will naturally purchase a 
greater quantity of plate. The quantity of coin and plate 
will, like other luxuries, increase with the increasing wealth 
of the country, but they will not become less valuable. 
Gold and silver, like all other commodities, naturally seek 
the market where the best price is given for them. They 
are naturally of the greatest value among rich nations, and 
of the least value among the poorest nations. Among savages, 
the poorest of all nations, they are scarcely of any value at 

SrcoND Period. 

From 1570 to 1640 silver sunk in its real value, or would 
exchange for a smaller quantity of labour than before. Corn 
instead of being sold for about two ounces of silver, or 
about 10 shillings of our present money, came to be sold 
(or six or eight ounces of silver, or about 30s. or 40s. of our 

' See Note 4 at end of book. 


present money. The discovery of the abundant mines of 
America seems to have been the sole couse of this diminu- 
tion in the value of silver in proportion to that of corn, but 
the discovery of the mines does not seem to have had any 
sensible effect upon the price of things in England till after 


Third Period. 
Between 1630 and 1640, or about 1636, the effect of the 
discovery of the mines of America in reducing the value of 
sjlver appears to have been completed, and the value of 
that metal seems never to have sunk lower in proportion to 
that of corn that it was about that time. It seems to have 
risen somewhat in the course of the present century, and it 
had probably begun to do so even sometime before the end 
of the last. From 1637 to 1700 the average price of nine 
bushels of wheat at the Windsor nrarket appears to have 
been £2 iis., or only one shilling dearer than during the 
16 years before, x^ut during the course of these years 
three events contributed to enhance the money price of 
wheat. The first was the civil war which necessarily inter- 
fered with tillage, the second was the bounty on the expor- 
tation of corn granted in 1688, which must have con- 
tributed to raise the price in the home market, and the third 
was the great debasement of the silver coin by clipping and 
wearing. During the first 64 years of the present century, 
the average price of wheat at the Windsor market was 
£^2 OS. 6d., or rather more than 25 per cent cheaper than it 
had been during the preceding period of 64 years. A 
similar fall in the value of corn has been observed to take 
place in France during the same period. Had it not been 
for the bounty, the fall must have been still greater in the 
English market. The value of silver, then, in proportion to 
that of corn seems to have been rising during the present 

^ Adam Smith was probably wrong in supposing that the v^Iue of 
.silver was rising during the first 64 years of the i8th century. The 


During the last 12 years indeed (1764 — 1776) the price 
of corn has risen very considerably, but this enhancement 
of the price of corn seems to have been due to the extraor- 
dinary badness of the seasons, and not to any alteration in 
the value of silver. The money price of labour, too^ has 
risen in Great Britain during the course of the present cen- 
tury. But this again appears to have been the effect not of 
any diminution in the value of silver, but of the rise of the 
real price of labour in the particular market of Great Bri- 
tain, owing to the peculiarly happy circumstances of the 
country. In France the money price of labour has been 
observed to sink gradually, since the middle of the last cen- 
tury, with the average money price of corn.i*^ 

The value of silver has thus been maintained, and per- 
haps raised somewhat higher than it was about the middle 
of the last century by the gradual enlargement of the mar.- 
kets for the produce of the silver mines of America. 

Firstly, the market of Europe has become more exten- 
sive, because the greater part of Europe has become much 
improved, and has advanced considerably both in agricul- 
ture and manufactures sinc<r the discovery of America. 
This has been especially the case in England, Holland, 
France, and Germany. ^^ 

low prices of corn in the reigns of Geo. I. and Geo. II. were probably 
due in part to agricultural improvements, and in part to very 
abundant harvests. 

" The condition of the French peasantry during the i8lh century 
appears to have been very wretched. In most parts of France wages 
^ere probably at a minimum ; and wherever wages are at aminimurn 
the money price of labour will rise and fall with the price of food. 

" It is almost impossible to say whether such improvements as 
Adam Smith here speaks of would increase the demand for silver and 
so raise its value. Such improvements are often accompanied with 
numerous devices for economising the use of coin. Such are banks 
and clearing houses, and all the various forms of credit, — bills of ex- 
change, bank notes, cheques, etc. It seems impossible to say how 
far the economies thus effected will counterbalance or more than cniin- 
Icrbala'ict.- ilie demand caused by industrial improvements. 


Secondly, America is itself a new market for the produce 
of its own silver mines, and as its advances in agriculture, 
industry, and population, are much more rapid than those 
of the most thriving countries of Europe, its demand must 
increase much more rapidly. 

Thirdly, the East Indies is another market for the silver 
of America. Since the discovery of America this market 
has continually been taking off a greater and greater quan- 
tity of silver, especially since the beginning of the present 
century. For the value of the precious metals was at that 
time and still is much higher in China and India than in 
Europe. The money price of labour is low in India for two 
reasons, (i) because labour is plentiful, and therefore 
poorly rewarded, and (2) because rice, the commo?i food of 
the people is cheap. In consequence of this low price of 
labour, the money price of the greater part of manufac- 
tured goods, is much lower in India than in any part of 
Europe, Upon all these accounts the precious metals are 
and always have been a commodity which it is extremely 
advantageous to carry to India from Europe. There is 
scarcely any commodity that- brings a better price there ; 
or which, in proportion to the quantity of labour and com- 
modities w^hich it costs in Europe, will purchase a greater 
quantity of labour and commodities in India. It is more 
advantageous, too, to carry silver thither than gold. For 
in India and China the proportion between fine gold and 
silver is but as ten, or at the most twelve to one, whereas 
in Europe it is as fourteen or fifteen to one. The importa- 
tion of the precious metals into Europe is calculated to be 
about six millions sterling per annum. 

The price of the precious metals, it must be observed, 
unlike the price of corn, varies very little from year to year. 
The durableness of the metals is the foundation of this ex- 
traordinary steadiness of price. The corn which w'as 
brought to market last year will be consumed, or almost 
consumed, long before the end of this year, but some part 


of the gold still in use may have been brought from the 
mine two or three thousand years ago. The different 
masses of corn, which in different years must supply the 
consumption of the world, will always be nearly in propor- 
tion to the respective produce of those different years, but 
the proportion between the different masses of gold, which 
may be i?t use in two different years, will be very little 
affected by any difference in the produce of the gold 

Variations in the proportion between the respective values 
of gold and silver. 

Before the discovery of the American mines an ounce of 
gold was worth from lo to 12 ounces of silver. About 1650 
an ounce of gold came to be worth from fourteen to fifteen 
ounces of silver. Therefore the silver mines of America 
must have exceeded its gold mines in fertility. It appears 
that 22 ounces of silver are imported from America for 
every ounce of gold imported, so that the value of silver 
would have sunk still lower in proportion to the value of 
gold, had it not been for the great quantities of silver ex- 
ported to the East. 

The popular notion that gold and silver decrease in value 
with the increase of wealth is apparently confirmed by the 
increasing price of the raw produce of land. But if you ex- 
cept corn and such other vegetables as are raised altoge- 
ther by human industry, all other sorts of rude produce 
naturally become dearer, that is, increase in real price, as 
society advances in wealth, and improvciricnts are made in 
industry. Their rise in nominal price is the effect of this, 
and not of any fall in the value of silver. 

Different effects of the progress of improvement upon three 
different sorts of rude produce. 
The different sorts of rude produce which rise in pricQ^ 
as society progresses, may be divided into three classes ; 


{i) those which can scarcely be multiplied by human indus- 
try at all ; (2) those which it can multiply in proportion to 
the demand ; (3) those in which the efficiency of human in- 
dustry is either limited or uncertain. 

The first class comprehends rare birds and fishes, almost 
all sorts of wild fowl, game, and birds of passage. As the 
supply of these can hardly be augmented at all, while the 
demand increases with the increasing wealth and popula- 
tion, their price, like the price of sea mullets at Rome, may 
rise to any degree of extravagance. 

The second class consists of those useful plants and ani- 
mals which in uncultivated -countries, nature produces with 
such profuse abundance, that they are of little or no value, 
ajnd which, as cultivation advances, are found to give place 
to some more profitable produce. Cattle^ for example, 
gradually diminish in quantity and rise in valtie, until 
their real price, that is, their value in labour, gets so high 
that it become profitable to raise them upon the most fiertile 
and best cultivated lands. When their real price has got 
so high, it can scarcely go higher. If it did, more corn land 
^vould soon be turned into pasture. Till the price of cattle 
has got to this height, so that it becomes profitable to 
raise food for the cattle and feed them in the stable, the 
Jand of a country cannot, for want of manure, be completely 
cultivated. Thus the increase of stock and the improve- 
ment of land are two events which must go hand in hand. 
Without some increase of stock, there can scarcely be any 
improvement of land, but there can be no considerable 
increase of stock, but in consequence of a considerable im- 
provement of land. Hence of all the commercial advan- 
tages which Scotland has derived from the union with Eng- 
land, the rise in the price of cattle is perhaps the greatest, 
it has not only raised the value of all highland estates, but 
it has perhaps been the principal cause of the improvement 
of the low country. 

The same causes, viz., the low value of cattle, the unpro- 


fitableness of feeding them in the stable, and the consequent 
want of manure, have given occasion to the careless mode 
of farming noticed by M. Kolm, the Swedish traveller, in 
our North American colonies. 

To this class of produce also belong pigs, dairy produce, 
poultry and venison These, like cattle, all rise in real 
value till it becomes profitable to raise food for them ; and 
their increased value rs thne a principal cause of the im- 
provement of the land. Venison has not yet risen to this 
height ; for its price will not pay the expense of a deer 
park. When they have risen to this price, their real value 
can increase no further. ^^ 

The third class consists of those rude products in aug- 
menting the quantity of which the efficiency of human indus- 
try is either limited or uncertain. Such are those sorts of 
rude produce which nature has rendered a kind of append-* 
age to other sorts ; wool for example, and hides. These 
would increase in value with the increase of wealth only in- 
countries which had no foreign commerce. For unlike 
butcher's meat they can easily be transported. As articles 
of commerce, therefore, they are often of considerable value 
in the early, unimproved state of a country. Wool, indeed* 
was of more value in England in the time of Edward III. 
than it is now. It was then worth los. a tod, and los then 
contained as much silver as 30s. do now. At the present 
time it is worth only 21s. the tod. But this decrease in the 
value of wool is owing to the prohibition on its exportation-, 
to its importation from foreign countries, and to the forced" 
competition of the Irish, who are not allowed to export wool 
to any country but Great Britain. ^^ The diminution of its 

" This of course is only true of a country which does not import 
corn. In a country which imports most of its corn, the value of meat 
may rise still further above the value of corn. In Kngland, for in- 
stance, a pound of meat will exchange for twice as much bread as it 
would exchange for before the repeal of the corn laws. 

" For the causes which regulate the value of such commodities as 
wjul and hides, see Mill's chapter on " Some Peculiar Cases of 


real price, of its value in corn, has been still greater. It is 
worth only half the quantity of corn it was worth in the 14th 

The efficiency of human industry is also very uncertain 
in multiplying the quantity of fish brought to market. It 
depends very much on the productiveness of the rivers and 
lakes in the neighbourhood where the demand is increasing. 
It is otherwise with mineral products, especially the precious 
metals, which can easily be imported from abroad. The 
quantity of these in any country depends upon two circum- 
stances, (i) on its power of purchasing, that is, upon the 
annual produce of its land and labour, and (2) upon the fer- 
tility of the ?nines which may happen to be supplying the 
commercial world with those metals. Therefore the value 
of money is likely to rise with the wealth and improvement 
of a country, and to fall with its poverty and depression-. 
Most writers have wrongly supposed that the high value of 
gold and silver in a country is a sign of its poverty and bar- 
barism. This erroneous notion is connected with the sys- 
tem of political economy which represents national wealth 
as consisting in the abundance, and national poverty as 
consisting in the scarcity of the precious metals. But it 
must be evident that a poor country cannot afford to pay 
dearer for gold and silver than a rich one, and therefore the 
value of those metals is not likely to be higher in the former 
than in the latter. In China, a country much richer than 
any part of Europe, the value of the precious metals is much 
higher than in Europe.'* In Europe itself their value must 

Value." Mill III., xvi., and Cairnes Leading Principles, p. 138. 
The prohibition placed on the exportation of British wool was removed 
in 1825, and the low duties placed on its exportation in 1825, were re- 
pealed in 1833. The duties on the importation of foreign wool, 
originally imposed in 1802, were finally repealed in 1844. 

*♦ This is true, but it is not true that China is a rich couutry. See 
note 4, on the Local value of Money, at end of book. In asserting 
that " the value of the precious metals must be lower in Spain and 
Portugal, the countries from which they are brought, than in other 


be lower in Spain and Portugal, the countries from which 
they are brought, than in other parts of Europe. High 
prices, therefore, are no proof of wealth, and low prices are 
no proof of the poverty of a country. 

But though the low money value of goods in general, or of 
corn in particular, is no sign of poverty or barbarism, the 
low value of cattle and other animal products, in proportion 
to the value of corn, is a most decisive one. For it clearly 
shows that there is much uncultivated and unimproved land, 
and that the stock and population of the country do not 
bear the same proportion to the extent of its territory, which 
they commonly do in civilised countries.'^ 

Any rise in the money price of goods which proceeded 
altogether from the degradation of siver, would affect all 
sorts of goods equally. But the recent rise in the price of 
provisions does not affect all provisions equally, and there- 
fore, it cannot be altogether due to a fall in the value of 
silver. ^^ As we have already seen, the price of corn was 
lo\i'er during the first 64 years of the present century than 

parts of Europe," Adam Smith shows his ignorance of the principle 
which governs international trade — the principle of comparative cost. 

'^ The low price of cattle shows that capital and population are small 
as compared with the extent of land ; but it is not necessarily a proof 
either of poverty or barbarism. Neither New South Wales nor Texas 
is a poor or barbarous country. But except in the case of new 
colonies, the low price of cattle is generally a sign of a low state of 

'^ It may be true that a fall in the value of silver would raise the 
prices of all commodities equally, but it will not raise the prices of all 
commodities simultaneously. Gold and silver only raise prices in so 
far as they are used in purchasing commodities. When a fresh supply 
of gold comes into a country it is generally used in the purchase of ex- 
portable commodities. The rise in domestic prices will be more 
gradual, and will only take place, as the new gold diffuses itself over 
the whole industrial area. Wages, too, will generally rise more slowly 
than prices, unless they are forced up by the action of Trades' 
Unions. Hence the extraordinary gains of capitalists during a period 
of rising prices. Mill III., xii., p. 317; Cairncs Leading Principles, 
p. 246. 


if was during the last 64 years of the last century. The' 
recent rise in price can be sufficiently accounted for by the 
badness of the seasons. The opinion, therefore, that silver 
is continually sinking in its value seems to be without any 
good foundation. 

The question whether silver is falling in value, or 
whether several sorts of provisions, such as cattle, etc., are 
rising in value, is not a vain and useless one. From a fall 
in the value of silver nothing can be inferred but the fertility 
of the y\merican mines. ^^ But a rise in the value of cattle 
indicates in the clearest manner the prosperous and advanc- 
ing state of the country, i^3r t/te extension of improvements 
necessarily raises the price of animal products in proportion 
to the price of corn, while it lowers the price of every sort 
of vegetable food. 

It is the natural effect of improvement to diminish thereat 
price of aUnost all manufactures. The cost of workman- 
ship necessarily diminishes with every improvement in dex- 
terity or machinery, or in the division or distribution of 
labour. This diminution in the cost of workmanship may, 
however, in some cases be counterbalanced by a rise in the 
real price of the rude materials. In the work of carpenters 
and joiners, for instance, the necessary rise in the real price 
of timber, will more than compensate the advantages 
derived from improved workmanship. The diminution of 
price in the course of the past and present century has 
been most remarkable in those manufactures, of which the 
raw materials are the coarser metals. A movement of a 
watch can now be had for 20s. which, in the middle of the 
last century could not be had for less than ;{!20. There has 
also been a great reduction in Birmingham and Sheffield- 
ware. On the other hand, the price of cloth has not bceii 

i'' A fall in the value of silver may also indicate a greater demand 
m the markets of the world for English exportable goods. Such 
a fall, therefore, will often coincide with a period of commercial pros-- 
perity. Mill III., xxi , p. 379.. 

sensiblyloweredduringthepresentcentury ; but incaseoffine 
cloth it is more than one third, and in the case of coarse 
cloth, it is less than half the real price that it was worth 
towards the end of the 15th century. This reduction in the 
price of cloth is due to three capital improvements, (i) the 
exchange of the rack and spindle for the spinning wheel, 
(2) to the use of several ingenious machines, which facil- 
itate the winding of the worsted and woolen yarn, or 
the proper arrangement of the warp and wool before they 
are put into the loom, and (3), to the employment of the 
fulling mill for thickening the cloth, instead of treading it in 
water. ^^ 


Every itnprovement in the circumstances of society tends 
to raise the real rent of land, to increase the real wealth of 
the landlord, his power of purchasing the labour or the pro- 
duce of the labour of other people. Real rent is raised by 
the extension of improvement and cultivation, because with 
/ the increase of the product, the landlord's share necessarily 
increases.**] In the case of animal products the real value 
of the landford's share rises, not only with the real value of 
the product, but the proportion of his share to the whole 
produce rises with it. For, as the cost of raising such pro- 
ducts does not increase with the rise in value, a smaller 
proportion is necessary to recompense the farmer, and a 
larger proportion, therefore, goes to the landlord. Thirdly, 
by the improvement of manufactures, the landlord is en- 
abled to purchase with the same quantity of raw produce a 
larger amount of conveniences, ornaments or luxuries. 

On the other hand, the neglect of cultivation and im- 

'* Professor Rogers says that the fulling mill was not unknown in 
F)ngland in the 13th century. 

" It does not increase unless population also increases, but popula- 
tion ahnost invariably increases with the increase of food. 


provement, and the decay of manufacturing art and indus- 
try tend to diminish the real rent of the land. 

The whole annual produce of a country naturally divides 
itself into three parts, the rent of land, the wages of labour, 
and the profits of stock. Therefore, landlords, labourers, 
o.nd capitalists are the tJiree great constituent orders of 
every civilised society, from whose revenue that of every 
other order is ultimately derived. 

The interests of the landlords and labourers coincide with 
the interests of the nation. For rent and wages both rise, 
as the wealth of the nation increases. On the other hand, 
the interests of the third order, have no connexion with the 
general interests of society. For the rate of profit does tiot 
fall with the decline of wealth, but, on the contrary, is 
naturally low in rich countries, high in poor countries, and 
highest in those countries which are going fastest to ruinP-^ 

*° Adam Smith means that the rate of profit is high in an unim- 
proved country, but low in an improved and fully occupied country. 
In saying that the rate of profit is highest in countries which are going 
fastest to ruin, he probably means that the same public or private ex- 
travaafance which brings a country to ruin, also raises the rate of profit. 
This opinion is confirmed by experience. Adam Smith has noticed 
that the rate of profit rose during the seven years' war. It rose much 
more during the great war with revolutionary France. At one period 
of the war Consols were quoted as low as 51. Just before the com- 
mencement of hostilities they had been quoted at 93. From this fact 
we may infer that the rate of interest on good security had nearly 
doubled. And this rise in the rate of interest in government securities 
was not in the main due to any increase of risk, but was chiefly due to 
the immense loans required by government for carrying on the war, 
that is, to a vast unproductive expenditure. The gains of the class of 
capitalists were enormous. Many large fortunes were made by 
bankets, merchants, manufacturers, farmers and shopkeepers. On 
the other hand, the working classes suffered severe privations. It is 
commonly said that a lavish expenditure is good for trade. It is un- 
doubtedly good for dealers and capitalists, but it is bad for the work- 
ing classes and for the nation. It may be observed that the 
great rise of rents during the French war cannot be attributed to the 


Any suggestion, therefore, on matters of commerce which 
comes from the order of capitalists ought always to be re- 
ceived with great precaution, as it comes from an order of 
men who generally have an interest to deceive, and even to 
oppress the public, and who accordingly have, on many oc- 
casions, both deceived and oppressed it. 

lavish expenditure of Government. It was due partly to a fall in the 
value of money, and so far the rise was merely nominal. But in part 
it was due to an extraordinary increase of population, and consequent 
pressure on the means of subsistence. 


Of the Nature^ Accumulation, and Employincnt of Stock. ■ 


In that rude state of society in which there is no division 
of labour, and in which every man provides everything for 
himself, it is not necessary that any stock should be accu- 
mulated in order to carry on the business of life.^ But 
•when the division of labour has been thoroughly established, 
the greater part of a mans wants must be supplied by the 
produce of other men' s labour, which he purchases with the 
produce of his own. But this purchase cannot be made till 
the produce of his own labour has been completed and sold. 
A stock of goods, therefore, must be stored up sotnewhere, 
sufficient to maintain Imn, and to supply him with the 
materials and tools of his own work. A weaver, for in- 
stance, cannot apply himself entirely to his peculiar busi- 
ness, unless there is stored up either in his own possession, 
or in that of some other person, a stock sufficient to main- 
tain him, and supply him with the tools and materials of his 
work, till he has not only completed but sold his web. 

As the accumulation of stock must be previous to the 
division of labour, so labour can be more and more sub- 
divided in proportion only as stock is previously more and 
more accumulated. The quantity of materials which the 

' Even the savage hunter must have his bow and arrows, and 
generally some small supply of food for himself and his family, and 
perhaps also a hut to live in. With these trifling exceptions, the 
statement in the text is true of the hunting and fishing stage of exist- 
ence. But when mankind has arrived at the pastoral or agricultural 
stage, there must be somewhere accumulated a flock of sheep or herd 
of cattle in the one case, and in the other seed and tools and suflicient 
food to maintain the family of the husbandman till harvest- The 
necessity for an accumulation of stock increases with the division of 
1 abour and with the increasing complexity of society. 


same number of people can work up, increases more and 
more as labour comes to be more and more subdivided, and 
a variety of new machines are invented for facilitating the 
operations of labour. Therefore, as the division of labour 
advatices, in order to give constant employment to an equal 
number of workmen, a greater quantity of materials and 
tools ?nust be accumulated. 

On the other hand the accumulation of stock naturally 
leads to improvements in the productive powers of labour. 
For the owner of stock naturally endeavours to make 
among his workmen the most proper distribution of 'em. 
ployment, and to furnish them with the best machines. 
The quantity of industry, therefore, not only increases in 
every country with the increase of stock, but in consequence 
of that increase the same quantity of industry produces a 
much greater quantity of work. 

Chap. I. — Of the Division of Stock. 

The stock of a poor man is generally too minute to afford 
him any revenue. He depends entirely on his labour for 
his maintenance. He lives upon his small stock and re- 
places it by the proceeds of his labour. 

But when a man possesses much stock, it is generally 
divided into two parts ; (i) the part from which he expects 
to draw a revenue, which is called his capital ; and (2) the 
part ithich he reserves for the supply of his own immediate 

^Capital is either circulating or fixed. [Circulating capi- 
tal consists of such articles as food, raw materials, and 
finished goods, that is, of connnodities which are continually 
passing to and fro between the capitalist and his workmen 
and customers. Fixed capital consists of such articles as 
remain continuously in the possession of the capitalist, such 
as machinery and tools."^ Different occupations require very 

* This conception of the distinction between fixed and circulating 


different proportions between the fixed and circulating capital 
employed in them. For example, a master tailor, requires 
no fixed capital beyond a parcel of needles, but an iron 
master requires much expensive machinery for his business. 
That part of the capital of the farmer which is employed in 
the instruments of agriculture is a fixed, that which is em- 
ployed in the wages and maintenance of his labourers, is 
a circulating capital For he makes a profit of the one by 
keeping it in his own possession, and cf the other by part- 
ing with it. The price of the labouring cattle of the farm 
is a fixed capital, but the price of cattle bought to be fat- 
tened and sold for a profit, is part of the circulating capital. 
The price of the seed is a fixed capital, because the farmer 
makes his profit, not by its sale, but by its increase.^ 

The general stock of a country is the same with that of all 
its inhabitants, and therefore naturally divides itself into 
these same three portions, each of which has a distinct 


^\\^ first is the portion reserved Jor i?nmediate consump- 
tion, and affords no revenue. It consists of the stock of 
food, clothes, household furniture, etc., which have been 
purchased by their proper consumers ; and also of the 
whole stock of mere dwelling houses. These may afford 
a revenue to their proprietor, but can afTord none to the 

The second portion is the fixed capital. The characteris- 
tic of this is, that it affords a revenue without circulating or 
exchanging masters. It consists 

(i) Oi all useful machines or tools which abridge 

capital, it will be noticed, is different from that of Mill and Fawcett. 
Circulating capital, according to them, is " capital which is only used 
once in order to fulfil its particular purpose," and is destroyed by that 
one use; while fixed capital, is " capital that may repeat for a long 
period the assistance it renders to production." See Fawcett I., iv., p. 
3 ; Mill I., vi., p. 

' According to Mill's definilion seed would be circulating capital. 


(2) Of buildings which yield a revenue to the person ivlio 
occupies them, such as shops, warehouses, farmhouses, and 

(3) 0{ agricultural improvements, o\ what has been pro- 
fitably laid out in clearing and draining land. 

(4) Of the acquired and useful abilities of all the inhabi- 

The third portion is the circulating capital, and consists 
of those commodities, which afford a revenue by changing 
masters ; (i) of money, '^ by which all other commodities are • 
distributed ; of the stock of provisions which are in the .■ 
hands of the butcher, farmer, corn merchant, etc. ; of un- ^ 
manufactured materials ; oi finished work still in the hands jj 
of the manufacturer, merchant, or shopkeeper, and not yet'' 
distributed to consumers. Of these four parts, provisions,\^ 
materials, and finished goods, are either annually, or in ', 
longer or shorter periods, withdrawn from the circulating I ^ 
capital, and placed either in the fixed capital, or in they 
stock reserved for immediate consumption. 

Every fixed capital is originally derived from and requiresx, 
to be supported by a circulating capital; and no fixed /;/ 
capital can yield any revenue but by means of a circulating/ 

To maintain and augment the stock reserved for imme- 
diate consumption, is the sole purpose of both -the fixed and 
circulating capitals. It is this itock which feeds, clothes, 
and lodges the people. Their riches or poverty depend ^ " 
upon the-iabu7idant or sparing supplies which these two 
capitals can afford to the stock reserved for immediate con- 

The circulating capital is in turn supplied from the pro- 
duce of land, of mines and fisheries. Land, mines, and 

* Money by virtue- of its durability, should, accoitlinjr to Mill's de- 
finition, be reckoned as fixed capital, except where it is employed 
merely as an export. But to the individual who uses it in business il 
naturally appears to be circulating capital. 


fisheries require both a fixed and circulating capital to culti- 
vate them ; and their produce replaces with a profit, not 
only these capitals, but all the others in the society. Thus 
the farmer annually replaces to the manufacturer the pro- 
visions which he had consumed, and the raw materials 
which he had wrought up the year before ; attd the 
manufacturer replaces to the farmer the finished work 
which he had worn out in the same time. This is 
the real exchange that is anfttially made between these 
two orders of people. Land also replaces in part at least, 
the capitals with which fisheries and mines are cultivated. 

The produce of land, mines and fisheries when their 
natural fertility is equal, is in proportion to the extent and 
proper application of the capitals employed upon them. 
In all countries where there is tolerable security, a man will 
employ' his stock either in procuring present enjoyment or 
future profit. In the former case it is stock reserved for 
immediate consumption, in the latter it is either a fixed or 
circulating capital. It is only in badly governed countries 
such as modern Turkey or mediaeval Europe, that men bury 
their stock instead of employing it for a profit. 

Chap. II. — Of Money considered as a particular branch of 
the General Stock of the Society, or of the expense of 
maintaining the General Capital. 

It has been shown that the price of every commodity re- 
solves itself into three parts, (i) the wages of labour, (2) 
the profits of stock, and (3) the rent of land, or a least into 
some one or other of these three parts. It is evident, 
therefore, that the whole revenue of the country must re- 
solve itself into the same three parts. But as in a private 
estate, we distinguish between gross rent and neat rent, so 
must we distinguish between the gross revenue and the 
.neat revenue of the inhabitants of a great country. 


The gross rent of a private estate comprehends whatever 
is paid by the farmer, the ne|t revenue what remains to the 
landlord after deducting the expenses of management, and 
repairs, and other nece.sary charges. 

The gross revenue of a country comprehends the whole 
annual produce of its land and labour, the neat revenue 
comprehends what remains after maintaining (i) the fixed, 
and (2) the circulating capital.^ In other words it compre- 
hends what the people can afford to spend upon their sub- 
sistance, conveniences, and amusements, without encroach- 
ing upon their capital. Their real wealth is in proportion 
not to their gross, but to the neat revenue. 

It is evident that the expense of maintaining the fixed 
capital must be deducted from the neat revenue of a coun- 
try. The cost ot providing and maintaining machines, in- 
struments of trade and profitable buildings, may be com- 
pared to the cost of repairs on a farm. They increase the 
productiveness of labour, and so enable a larger neat 
revenue to be raised ; but they do not constitute any part 
of that revenue. 

On the other hand the whole expense of maintaining the 
circulating capital is not excluded from the neat revenue of 
a country. Of the four parts of which it is composed, all 
but the part composed of money, are regularly withdrawn 
from it, and placed either in the fixed capital of the society, 
or in the stock reserved for immediate consumption. What- 
ever is placed in the stock reserved for immediate consump- 
tion, makes a part of the neat revenue of the society. 

The circulating capital of a society differs in this respect 
' Adam Smith's conception of the distinction between gross and neat 
revenue is different from that of modern economists. These generally 
suppose the neat revenue of a society to consist of the rent of land and 
the profits of capital. But to rent and profits must be added what- 
ever the labourer can spare out of his wages, after providing his family 
with the necessaries of life. The power of paying taxes and of sup- 
porting fleets and armies is in proportion to the neat, not to the gross 
revenue of a country. Ricardo, xxvi.,p. 210. 


from the circulating capital of an individual. For example 
the goods in a merchant's ship must not be put in the stock 
reserved for his own immediate consumption, and therefore 
form no part of his neat revenue, which must consist 
altogether of his profits, but they may form a part in the 
neat revenue of other people, who may replace their value 
to him, without diminishing his capital or theirs. 

Money, therefore, is the only part of the circulating 
capital of a society, of which the maintenance can occasion 
any diminution in the neat revenue. So far as they affect the 
revenue of a society, money and fixed capital bear a great 
resemblance to each other. 

(i) For just as machines require a certain expense, first 
to erect them, and afterwards to support them, so money, 
that great, but expensive instrument of commerce, requires 
a certain expense, first to collect and afterwards to support 
it, both which expenses, as they are part of the gross, are 
deductions from the neat revenue of society. 

(2) Like machines, money makes no part of the neat re- 
venue of a society. The great wheel of circulation is alto- 
gether different from the goods w^hich are circulated by 
means of it. The revenue of society consists altogether in 
these goods, and not in the wheel which circulates them. 

Were it not for ambiguity of language this proposition 
would be self evident. 

By money we sometimes mean particular metal pieces, 
and sometimes we mean power of purchasing commodities. 

But if a man receive a pension of a guinea a week, his 
revenue is not equal both to that particular metal piece, 
and also to the goods which it will enable him to purchase ; 
it is equal to one only of these two values, and more pro- 
perly to the latter. So the whole revenue of the inhabi- 
tants of a country, is evidently not equal, both to the money 
they receive, and the goods they can purchase with the 
money, but only to one of these two values, and to the 
latter more properly than to the former. 


Though the revenue of an individual may sometimes be 
equal to the number of metal pieces paid to him in the 
course of the year, the amount of Dietal pieces "which circu- 
late in a society, can never be equal to the revenue of all its 
members. The same guinea which pays the weekly pension 
of one person to-day, may pay that of another to-morrow, 
and that of a third the day after. The amount of the metal 
pieces, therefore, which circulate in any country, must be 
less than the whole money pensions annually paid Avith 
them. The whole revenue of the society cannot consist 
then in those metal pieces, but consists in the power of 
purchasing, in the goods which can be successively bought 
with them, as they circulate from hand to hand. 

(3) Money has a third characteristic of fixed capital ; 
which is, that any saving in the expense of collecting and 
supporting it, is analogous to a saving made in erecting and 
repairing a machine. The substitution of paper money is 
a saving of this kind. Like a diminution in the cost of fixed 
capital, which yet does not decrease the productive powers 
of labour, it increases the amount of the circulating capital 
of the society, and causes a greater amount of industry to 
be set in motion. For it is the circulating capital which 
furnishes the materials and wages, and puts industry in 

There are several different sorts of paper money. 

When the people of any particular country have such 
confidence in the fortune, probity, and prudence of a par- 
ticular banker, as to suppose that he will always be ready 
to pay on demand, such of his promissory notes as are 
likely to be at any time presented to him, these notes have 
the same currency as gold and silver, from the confidence 
that such money can always be had for them. 

Let us suppose that one million pounds are sufficient to 
circulate all the commodities of a particular country. Let 
us suppose, too, that banks issue promissory notes to the 
extent of a million pounds, reserving ;{^200,ooo in their 



coffers to meet the occasional demands for the payment of 
their notes. As the commodities of the country are not 
supposed to have increased, no larger sum of money would 
be required for their circulation than before, and the 
amount of money now in the country being ;^i,8oo,ooo, 
the money would be redundant. It would not, however be 
lost. The ;^8oo,ooo in gold and silver will go abroad, and 
be profitably employed, while the one million pounds in 
notes will remain [at home, because it will not circulate 
among foreigners. In this way the ;^200,ooo in gold re- 
served by the bankers will be made to do the work of one 
million pounds in gold, and there will be a saving of 
;{^8oo,ooo to the country. This ^800,000 may either be 
employed in purchasing foreign wines, silk, etc , to be con- 
sumed by idle people, or it may be expended in the pur- 
chase of tools and provisions, for the employment of an ad- 
ditional number of industrious people, who reproduce, with 
a profit, the value of their annual consumption. In the 
former case it merely increases the consumption, but in the 
latter case it promotes industry, and increases the gross 
revenue of the society by the whole value which the 
labour of these workmen adds to the materials upon which 
they are employed, and the neat revenue, by what remains 
of this value, after deducting what is necessary for support- 
ing the tools and instruments of trade. It is almost certain 
that the greater part will be employed in the latter of these 
two ways. For the revenues of idle people will not be in- 
creased by this banking operation, and their demand for 
foreign goods will therefore not be increased. A very 
small part of the money thus saved is likely to be employed 
in purchasing goods for the maintenance of the idle, the 
greater part will be expended for the employment of in- 

If not expended in this way, it will be employed in what 
is called the carrying trade, the profits of which are an ad- 
dition to the neat revenue of the country. 


When we compute the quantity of industry which the 
GJrculating capital of a society can employ, we must have 
regard to those parts only, which consist in provisions, 
?naterials and finished goods; the other which consists in 
money must always be deducted. For three things only are 
necessary to put industry in motion ; materials to work on, 
tools to work with, a?id wages. Though wages are paid in 
money, the workman's real revenue consists, not in the 
metal pieces, but in what can be got for them. The quan- 
tity of industry, therefore, which capital can employ is equal 
to the number of workmen whom it can provide loith inate- 
rials, tools and inaintenance. When paper is substituted 
for gold, the quantity of materials, tools and maintenance, 
may be increased by the whole value of the gold, which used 
to be employed in purchasing them. The whole value of the 
great wheel of circulation is added to the goods which are 
circulated by means of it. The proportion which the cir- 
culating money bears to the annual produce of a country, 
has been computed by different authors at a fifth, a tenth, 
a twentieth, and even a thirtieth part of that value. It 
must however bear a very considerable proportion to the 
part of the annual produce destined for the maintenance of 
industry. The substitution therefore of paper for gold, 
must makeavery considerable addition to the funds destined 
for the maintenance of industry, and consequently to the 
value of the annual produce. 

An operation of this kind has been carried on in Scot- 
land within the last 30 years through the creation of bank- 
ing companies. Almost everywhere paper has taken the 
place of silver and gold. It is asserted that the trade of 
Glasgow has doubled in 15 years, and that the trade of all 
Scotland has more than quadrupled since the creation of the 
Bank of Scotland in i6<j5. It cannot be doubted that there 
has been a large increase, and that the increase is largly 
due to the establishment of Hanks. 

The whole circulation of Scotland at th<: lime of the 


Union may be estimated at one million in gold and silver. 
Its present circulation is probably about two millions ; but 
of this amount perhaps not more than half a million is in 
gold and silver. The metallic circulation of the country 
has decreased, but the produce of its agriculture, manufac- 
tures and trade has manifestly been augmented. 

The profits of a banker are chiefly made by discounting 
bills of exchange with his promisory notes. In discounting 
a bill, he deducts the legal interest. He is thus enabled to 
make a clear gain of the interest on all the promissory 
notes, that he can keep in circulation. 

The commerce of Scotland, however, was so inconsider- 
able, when the two first banking companies were established, 
that those companies would have had very little trade, had 
they confined their business to discounting bills. They in- 
vented therefore another method of issuing their promissory 
notes, by granting what are called cash accounts, that is, 
by giving credit to the extent of a certain sum (say two or 
three thousand pounds) to any individual, who could pro- 
cure two persons of undoubted credit, and good landed 
estate to become surety for him, that whatever money 
should be advanced to him, within the sum for which credit 
had been given, should be repaid with the legal interest. 
These cash accounts and the easy terms upon which the 
banks of Scotland accepted repayment, have perhaps been 
the principal cause, both of the great trade of the banks 
and the benefit which the country has received from it.'^ 

For by means of these cash accounts, a merchant may 

^ It has been pointed out by Ricardo that bankers can give just as 
much accommodation to merchants by the single system of discount- 
ing bills, as they can by the double system of cash accounts and dis- 
counts. Whatever notes they issue to their customers on cash 
accounts must be subtracted from the amount of notes which might be 
issued in discounting bills. For the circulation can only absorb a 
certain amount of note.=. Macculloch thinks that cash accounts are 
more convenient for merchants because they can be operated on at any 


without imprudence carry on a greater trade, than he other- 
wise could do. For instead of being obHged to keep by 
him or at his banker's a sum of money sufficient to meet 
occasional demands, he can satisfy such occasional demands 
from his cash account with the bank, and employ the whole 
of his capital in the purchase of goods, and thereby make a 
larger profit for himself, and give employment to a greater 
number of industrious people. In this way the Scotch mer- 
chant enjoys conveniences for carrying on business in ad- 
dition to the ordinary facilities given by the discount system. 
-I^The whole paper money of every kind which can easily 
circulate in a country never can exceed the value of the gold 
and silver which would circulate if there was no paper 
money. Should the circulating paper at any time exceed 
that sum, the excess^ as it cannot be sent abroad, or circulate 
at home, must immediately return upon the bank to be ex- 
changed for gold and silver. There would be a run upon 
the banks, and if there should be any backwardness in pay- 
ment, the alarm would increase the run. 

Over and above the expenses common to every kind of 
business, the expenses peculiar to a bank consist 

(i) In the expense of keeping in its coffers, to satisfy the 
occasional demands of the holders of the promissory notes, a 
large sum of money, of which it loses the interest, and 

(2) In replenishing its coffers as fast as they are emptied 
by answering such occasional demands. 

A bank that issues more paper than can be employed in 
the circulation of the country ought to increase its reserves 
of gold and silver, not only in proportion to this excessive 
increase of its circulation, but in a much greater proportion. 
The coffers, too, of such a company, though they must be 
filled much fuller, yet must empty themselves much faster, 
than if its business were confined within more reasonable 
bounds. C oin will be driven abroad by the excessi ve^ circu- 
l ation of note s. The fliflirully and expense of replenishing 
the reserves of a bank will therefore be increased. In pro- 


portion, therefore, to this forced increase in its business 
both kinds of expense will be enhanced — the bank must have 
larger reserves, and it will cost more to maintain them. 
Hence, if every bank understood and attended to its own 
particular interest, the circulation could never have been 
overstocked with paper money. But the case has been 

By issuing too great a quantity of paper, of which the ex- 
cess was continually returning to be exchanged for gold or 
silver, the Bank of England was obliged for many years to 
coin about ;£85o,ooo in gold every year, and was frequently 
obliged to buy bullion for £,\ an ounce, and issue it soon 
after in coin at ;{^3 17s. lo^d. an ounce. ^ In consequence 
of an excess of the same kind, the Scotch banks were 
obliged to constantly employ agents in London to collect 
for them money at an expense of 1^ to 2 per cent., and to 
send it down to them at a further expense of 15s. in the j^ioo. 
The gold coin was paid by the bank in exchange for that 
part of its paper, which was in excess of what could be em- 
ployed in the circulation of the country. The newest and 
best pieces were either sent abroad in the shape of coin, or 
melted down, and sent abroad as bullion, or sold to the 
Bank of England at £,^ an ounce. Hence the necessity of 
the great annual coinage to supply the Bank of England. 

The over trading of some bold projectors in both parts of 
the United Kingdom, was the original cause of this exces- 
sive circulation of paper money. 

bank cannot with propriety advance to a merchant 
either the whole, or a considerable part of the capital with 
which he trades, but that part only which he would_ other- 
wise kecpby h ivi in ready mon ey. If the paper money 
whicEuie bank advances never exceed this value, it can 
never exceed the value of the gold and silver which would 
necessarily circulate iti the country, if there had been no 

' This appears to have been due as much to the degraded state of 
the gold coin then in circulation, as to the over issue of notes. 

SI vc 

f eith( 


paper money ; it can never exceed the monjy which the 
country can easily absorb. This end is secured by the 
bank, when it confines its discounts to advances on real bills, 
that is, bills which are drawn by a real creditor on a real 
debtor, and which are really paid by that debtor, when they 
become due. The coffers of the bank will then be continu- 
ally replenished at little or no expense. A bank may also 
with propriety make advances with its notes upon a cash 
account, but in dealing with such customers, it ought to ob- 
serve with great attention, whether in the course of a short 
period (say of four, six, or eight months) the sum of repay- 
ments which it commonly receives from them, is or is tiot 
fully equal to the advances which it commonly makes to 
them. If not, the bank cannot safely continue to deal with 
such customers. For the stream that is continually 
running out will be greater than the stream running in, 
and unless the coffers of the bank are replenished by some 
great and continual effort of expense, they must be ex- 
hausted altogether. Accordingly, the Scotch banks were 
for a long time very careful to require frequent and regular 
repayments from all their customers. By this attention 
they saved themselves almost entirely the extraordinary ex- 
pense of replenishing their coffers, and also gained two 
other very important advantages. 

(i) They were able to form a tolerable judgment concern- 
ing the thriviyig or declining circumstances of their debtors ; 

(2) They secured themselves from the possibility of 
issuing more paper money than the circulation of the country 
could easily absorb. 

When by the convenience of discounting bills, and of 
cash accounts, the traders of a country are freed from the 
necessity of keeping any part of their stock unemployed in 
ready money, they can reasonably expect no further assist- 
ance from bankers. For a bank cannot, consistently with 
its own interest, advance to a trader the whole or even a 



considerable part of his circulating capital, since the re" 
turns would be too slow to suit the convenience of a bank. 
Still less can it advance him any considerable part of his 
fixed capital ; for in this, the returns are still slower. 
Traders may, indeed, properly carry on a considerable part 
of their business with borrowed capital, provided that their 
own capital is sufficient to ensure that of their creditors 
against loss. But such additional capital should be bor- 
rowed on bond or mortgage from private persons who pro- 
pose to live upon the interest of the money. 

Twenty-five years ago the banks of Scotland had already 
given all the assistance to traders which they ought to give. 
Certain traders, however, complained that the banks would 
not extend their credits in proportion to the extension of 
the trade of the country ; — meaning by this, the extension of 
their own projects beyond what they could carry on with 
their own capital. On the refusal of the banks to accom- 
modate them, they had recourse to the expedient of draw- 
ing and redrawing bills, the shift which unfortunate traders 
sometimes have recourse to, when they are on the brink of 

This practice of drawing and redrawing I shall endeavour 
to explain as distinctly as I can. 

Money is more readily lent on bills of exchange than on 
any other kind of obligation. The reason of this is the ex- 
traordinary privileges with which bills of exchange have 
been invested by the customs of merchants, — customs long 
since incorporated into the laws of all European states. If 
the acceptor of the bill fails to pay it, when it falls due, he 
becomes from that moment a bankrupt. The bill is then 
protested and returned to the drawer. The drawer and the 
endorsees, that is, the parties who have successively held 
it, then become liable to the owner of the bill ; and if they 
fail to pay it immediately, they become frem that moment 
bankrupts. \\'licn the bill is payable within two or three 
months after date, it is very unlikely that the acceptor, 


drawer, and endorsees will all become bankrupts within so 
short a period. Even where the parties to the bill are of 
doubtful credit, the shortness of the date gives some secu- 
rity to the holder. A bill of exchange is, therefore, consi- 
dered to be a very good security. 

Now the method adopted by the traders I referred to 
above, and known in the commercial world as drawing and 
redrawing, was as follows. 

A drew a bill on B in London. B, although he owed no- 
thing to A, accepted the bill on condition that he should 
before the expiration of the two months redraw upon A in 
Edinbuigh for the same sum, together with the interest and 
commission, another bill, payable likewise two months after 
date. A discounted B's bill at an Edinburgh bank, and B 
was provided with the means of paying it by discounting 
A's bill at the Bank of England, or some other London 
Bank. This was called raising money by circulation. It 
tvent on, not only for several months, but even for several 
years together. 

The interest on these bills was five per cent., and the 
commission on each draught (repeated six times in the 
year) was one-half per cent. These projectors were paying 
at least eight per cent, for their money. But ordinary 
profits of stock in Scotland did not then exceed six to ten 
per cent. It is evident, therefore, that none but very for- 
tunate speculators could afford to pay such a high rate of 
interest on their capital.* 

These circulating bills were discounted with notes both 
by the Scotch and English banks. The bills were repaid 
as soon as they became due, but the value taken from the 
bank on the first bill was never really returned to it. For 
the payment of the first bill was dependent on the discount- 
ing of a second bill. Hut the paper thus advanced by the 
bank amounted not only to that part of his stock, which the 

* It is said ihat Adam .Smith has in this passage considerably over- 
rated the expense of drawing and redrawing bills. 


projector must have kept by him in ready money, but on 
many occasions amounted to the whole fund destined for 
carrying on some vast project of agriculture, manufacture, 
or trade. It could not, therefore, be absorbed in the circu- 
lation. It immediately returned to the bank to be ex- 
changed for gold or silver, which the banks must find as 
best they could. 

When two traders draw and redraw upon one another 
continually, and discount their bills at the same bank, the 
banker quickly discovers what they are about, and sees that 
they are trading not with their own capital, but with the 
capital he advances to them. But it becomes more difficult 
to distinguish between a real and fictitious bill when the 
same two traders discount their bills at different banks' 
and occasionally run the round of a great circle of projec- 
tors, who find it their interest to assist one another. Even 
when a banker had made the discovery, it was sometimes 
too late. For he might find that by refusing to discount 
more bills of the projectors, he would make them bankrupts 
and perhaps ruin himself. He was obliged to withdraw his 
accommodation gradually, and by degrees force these pro- 
jectors to have recourse to other methods of raising money. 
Accordingly, the difficulties made by the Bank of England, 
and other banks in England and Scotland alarmed and en- 
raged these projectors. Their own distress they called the 
distress of the country, and this distress they attributed to 
the ignorance and pusillanimity of the banks. To relieve 
it a new bank was started, at Ayr, in November, 1769, un- 
der the title of Messrs. Douglas, Heron, and Co. It 'icas 
the avowed principle of this new bank to advance on ai,y 
reasonable security, the whole capital necessary for any pro- 
ject of improvement. By its liberality in granting cash ac- 
counts and discounting bills, it was enabled to issue great 
quantities of notes. Biit, as these notes could not be ab- 
sorbed in the circulation, they quickly returned to be ex- 
changed for gold. Consequently the coffers of the bank 


were never well filled, and they could only be replenished 
by the ruinous expedient of drawing upon London. This 
bank stopped payment in less than three years. It then 
had ;^200,ooo of its notes in circulation, and it had drawn 
bills on London to the extent of ;^6oo,ooo. It had, there- 
fore, lent ;i^8oo,ooo to different people at five per cent. 
The five per cent, on its notes in circulation was a clear 
gain. But it was paying by way of interest and commis- 
sion eight per cent, on the bills drawn in London. It was 
consequently losing three per cent, on three-fourths of its 

In the long run the operations of this bank only enabled 
the projectors whom it assisted to get deeper into debt, so 
that when ruin came, it fell heavier both upon themselves 
and their creditors, and thus aggravated the distress which 
it was meant to relieve. On the other hand the liberality 
of this new bank enabled the older and more prudent banks 
to extract themselves from the circle of projectors in which 
they had become unwittingly involved. In this way the 
new bank effectually relieved the distress of those rivals 
whom it was meant to supplant. 

But even had this bank been successful it could at best 
have been only a general loan office for the whole country. 
But a bank which lends money perhaps to some 500 differ- 
ent persons is not so likely to be judicious in its choice of 
debtors as a private person who lends to a few people 
whom he knows, and in whose sober and frugal conduct, 
he thinks he has good reason to confide. ^ The success, 
therefore, of such a bank would only have transferred a 
great part of the capital of the country from prudent and 
profitable to imprudent and unprofitable undertakings. 

It was the opinion of the famous Mr. Law that the indus- 

* This is true. Modern banks, therefore, h.ive found it expedient 
to make a large proportion of their advances to discount brokers, 
whose special business it is to distribute such advances amon^j trust- 
worthy and solvent traders. 


try of Scotland languished for the want of money. By 
establishing a bank of a particular kind, which he imagined 
could issue paper to the amount of the whole value of all 
the land of the country, he proposed to remedy this want. His 
scheme was not adopted by the Parliament of Scotland. With 
some variations it was adopted in France. This idea of the 
possibility of multiplying paper money to almost any extent 
was the real foundation of the Mississippi scheme, the most 
extravagant project of banking and stock-jobbing that per- 
haps the world ever saw. 

The Bank of England is the greatest bank of circulation 
in Europe. It was established by Act of Parliament in i6j^. 
At that time it advanced to Government ;^i. 200,000 at 8 
percent, interest, and ;^4,0D0 a year for the expense of 
management. In 1697 it was allowed to increase its cap- 
ital to ;^2,20i,i7i los. for the support of public credit; 
bank notes having been at 20 per cent, discount in the pre- 
ceding year ; and during the great recoinage of silver at 
that time the bank had stopped payment of its notes. In 
pursuance of the 7th Anne c. vii., the Bank paid into the 
Exchequer ;^4oo,ooo, making in all ;^i,6oo,ooo, for which 
it continued to receive only the ;i^96,ooo for interest and 
;^4,ooo for management. In pursuance of the same Act 
the Bank cancelled Exchequer bills to the amount of 
£i,']T$,02'] at six per cent, interest, and was allowed to 
double its capital. In 1708, therefore, the capital of the 
Bank amounted to ;^4,402,343, and it had advanced to Gov- 
ernment the sum of ;^3.375,027 17s. lo^d. 

In pursuance of 3rd Geo. I, c. 8, the Bank delivered up 
two millions of Exchequer bills to be cancelled. It had 
therefore advanced to Government ;C5..375,o27 17s. lo^d. 
In 1722 the Bank purchased stock of the South Sea 
Company to the amount of ;^4,ooo,ooo, and increased its 
capital by ;^3,40o,ooo. At this time the Bank had ad- 
vanced to the public ^{^9,375,027 17s. lo^d. for which it re- 
ceived interest ; and its capital stock upon which it paid 


dividends amounted to ;{i8, 959,995 14s. 8d. In 1746 the 
money advanced to the public was ;{^i 1,686,800, and its 
capital was j^io, 780,000. In pursuance of the 4th of Geo. 
III. c. 25, the Bank paid £110,000 for the renewal of its 

The dividend of the Bank has varied according to the 
variations in the rate of interest, which it has received for 
the money which it had advanced to the public, as well as 
according to other circumstances. This rate of interest 
has gradually been reduced from 8 to 3 per cent. For 
some years past the Bank dividend has been at 5^ per cent. 
The stability of the Bank is equal to that of the British 
Government. All that it has advanced to the public must 
be lost before its creditors can sustain any loss. It acts as 
a great state engine, It receives and pays a great part of 
the annuities which are due to the creditors of the public. 
It circulates Exchequer bills, and it advances to Govern- 
ment the annual amount of the land and malt taxes. In 
these operations it has frequently overstocked the circula- 
tion with paper money. It discounts bills, and has on many 
occasions supported the credit of the principal houses of 
England, Holland, and Hamburgh. Upon other occasions 
this great company has been reduced to the necessity of pay- 
ing in sixpences. 

// IS not by augmenting the capital of a country, but by 
rendering a greater part of that capital active and produc- 
tive, that the operations of a bank can increase the industry 
of a country. It enables a dealer to convert ready money 
which he would otherwise be obliged to keep by him un- 
employed into materials and tools, and provisions for the 
maintenance of labour. By substituting paper for gold and 
silver, it turns dead stock into active and productive stock. 
The gold and silver of a country may be compared to a 
highway, which while it circulates and carries to market all 
the grass and corn of the country, produces itself not a 
single pile of either. A bank by providing a sort of waggon 


7vay through the air, enables the country, as it were, to con- 
vert a great part of its highways into pasture a?td cornfields. 
It must however be admitted, that the industry and com- 
7nerce of a country, cannot be altogether so secure, when 
suspended, as it were on the Dsedalian wings of paper 
■money, as when they travel on the solid ground of gold and 
silver. They are exposed to accidents not only from the 
unskilfulness of the conductors, but also to others which no 
prudence or skill can guard against. 

For instance, an unsuccessful war, in which the enemy 
got possession of the capital and of the treasure which sup- 
ported the credit of the paper money would create much 
greater confusion in a country where the whole circulation 
was carried on by paper than in one where the greater part 
was carried on by gold and silver. The usual instrument 
of exchange having lost its value, no exchange could be 
made except by barter, or on credit. 

^ The circulation of every country may be considered as 
divided into two different branches ; the circulation of the 
dealers with one another, and the circulation between dealers 
and consumers. The circulation between dealers requires 
pretty large sums of money, that between dealers and con- 
sumers small sums. But small sums circulate muc h faster 
than l arge ones. Although, therefore, the annual purchases 
of consumers from dealers, are at least equal in value to 
those of all the dealers, they can generally be transacted 
with a much smaller quantity of money. 

Where there are no bank notes under j^io, paper tnoney 
confines itself very much to the circulation between dealers. 
This is the case in London, where no bank notes under ;^io 
are circulated. But in Scotland notes of the value of 20s. 
are issued. In some of the North American colonies they 
were issued for as small a sum as a shilling, and at one time 
in Yorkshire for sixpence. In these cases they circulate 
between consumers and dealers. It were belter perhaps 
that no bank notes were issued for a smaller sum than ;^5. 


Paper money would then confine itself pretty well to the cir- 
culation between dealers. There would then be always 
plenty of gold and silver. But where paper money extends 
itself to a considerable part of the circulation between 
dealers and consumers, it banishes gold and silver almost 
entirely from the country. 

Though paper money should be principally confined to 
the circulation between dealers, yet banks might give the 
utmost assistance, that they can properly give to traders 
of every kind. For by discounting bills and granting cash 
accounts, they might still relieve the traders from the neces- 
sity of keeping any considerable part of their stock unem- 
ployed as ready money for answering occasional demands. 

To restrain bankers from issuing promissory notes under 
a certain amount, would be, it may be asserted, a violation 
of natural liberty. But those exertions of the natural liberty 
of a few individuals^ which might endanger the security of 
the whole society, are, and ought to be restrained by the laws 
of governments ; of the ?nost free as well as of the most des- 
potical. Such a regulation, as I have suggested, would no 
more be a violation of natural liberty than the obligation to 
build party walls in order to prevent the communication of 

It is said that the increase of paper money by augment- 
ing the quantity, and consequently diminishing the value of 
the currency, raises the money price of commodities. But 
as the quantity of gold and silver taken from the currency 
is always equal to the quantity of paper added to it, the 
currency is not necessarily augmented. Paper money is- 
sued by people of undoubted credit, and payable on de- 
mand without any conditions, is in all respects equal in 
value to gold and silver money ; since gold and silver can 
always be had for it. Whatever is bought with such paper 
must necessarily be bouj^ht as cheap as with gold. 

It would be otherwise, indeed, with paper money which 
was not payable for several years, or which was payable 


only on the performance of some condition. Such paper 
money might sink below the value of gold and silver. Such 
a condition was the optional clause inserted by some Scotch 
banks, by which the bank promised payment to bearer 
either immediately, or at the option of the directors, six 
months after presentment, together with the legal interest. 
When this optional clause was enforced as in 1762 — 63 — 64, 
the exchange between London and Dumfries was four per 
cent, against Dumfries, while the exchange between Lon- 
don and Carlisle was at par. This shows that paper money 
at Dumfries was degraded four per cent, below the value of 
gold. This abuse was suppressed by the same Act of Par- 
liament which suppressed five shilling and ten shilling notes. 

The paper currencies of the North American colonies 
consisted of notes issued by the colonial governments, 
which were not payable till several years after they were 
issued. These notes were made legal tender. This was 
an act of violent injustice to creditors. It was, as Dr. 
Douglas assures us, a scheme of fraudulent debtors to cheat 
their creditors. For no positive law can make a shilling 
equal to a guinea, although it may enact that a debt of a 
guinea shall be discharged by a shilling. Although the paper 
money was legal tender, and was received in payment of 
taxes, ;^ioo sterling in some of the colonies were consi- 
dered as equivalent to ;^I30 currency, and in others to as 
great a sum as ;Ciioo currency. No law, therefore, could 
be more equitable, than the Act of Parliament so unjustly 
complained of in the colonies, which declared that no paper 
currency to be emitted there in time coming should be a 
legal tender of payment. 

Paper money may even at times bear a premium, that is, 
it may exchange for more gold and silver, than it was is- 
sued for. For instance, the bank money of the Bank of 
Amsterdam bears a premium or agio of four or five per 
cent. The greater part of foreign bills must be paid in this 
money ; and it is said that the directors take care to keep 

the \Yhole quantity of bank money below ihe amount re- 
quired for this purpose. 

A depreciated paper currency does not sink the value of 
gold and silver. The value of gold and silver depe nds 
u pon the quantity of labour required to bring a certain 
q uantity fo mark^f-^ as co mpare d wit h the quantity nf j abnnr 
required to bring oth^j^-g oodo to market. 

If bankers are restrained from issuing notes below a cer- 
tain value, and are obliged to pay them immediately on pre- 
sentment, their trade may with safety to the public be left 
in all other respects perfectly free. The late multiplication 
of banks does not diminish, but rather increases the se- 
curity of the public. It obliges each bank to be more cir- 
cumspect in its dealings, and restrains the circulation of its 
notes within a narrower circle, so that the failure of any 
particular company becomes of less consequence to the 
public. Free competition, too, obliges all bankers to be 
more liberal in their dealings with their cusLomtrs.^ 

Chap. III. — Of the Accumulation of Capital, or of Produc- 
tive and Unproductive Labour} 
There is one sort of labour which adds to the value of the 
subject upon which it is bestowed, there is another which has 
no such effect. The former as it produces a value, may be 
called productive, the latter unproductive labour. ( Thus the 
labour of a manufacturer adds generally to the value of the 
materials which he works upon, that of his own mainten- 
ance and of his master's profit. The labour of a menial 
servant, on the other hand, adds to the value of nothing/) 

' All through this chapter Adam Smith seems to regard a bank, 
only as an institution for economising the use of .money. But a 
bank also acts as a reservoir for receiving and storing the accumula- 
tions of thrifty people ; and for distributing such accumulations, 
(principally through discount brokers) into the departments of indus- 
try where they arc most required. 

' See Note 5 at end of book. 


A man grows rich by maintaining a number of manufac- 
turers, poor by maintaining a number of menial servants. 
(The labour of the manufacturer fixes and realises itself in 
^ome particular subject or vendible commodity, which lasts 
for some time at least after that labour is past. The sub- 
ject, or what is the same thing,^ the price of the subject, 
can afterwards, if necessary, put into motion a quantity of 
labour equal to that which had originally produced it. \ The 
labour of the menial servant, on the contrary, does not fix 
or realise itself in any particular commodity. His services 
generally perish in the very instant of their performance. 

The labour of some of the most respectable orders in 
society is unproductive of any value. The Sovereign, the 
officers of justice, the whole army and navy are unproduc- 
tive labourers. In the same class must be reckoned church- 
men, physicians, lawyers, men of letters of all kinds, players, 
musicians, opera singers and opera dancers. All this class 
produces notJiing which could afterwards purchase or 
procure an equal quantity of labour. Like the declama- 
tions of the orator, or the tune of the musician, the work of 
all these perishes in the very instant of its production. 

/Both productive and unproductive labourers, and those 

who do not labour at all, are all equally maintained by the 

annual produce of the land and labour of the country.! This 

/ produce how great soever can never b^ infinite. Accord- 

/ *'"g'yi therefore, as a gr^fCT or slsaSer proportion of it is, 

:u)y^ employed in maintaining unproductive hands, the more 

in the one case, and the less in the other, will remain for 

the productive hands ; and the next year's produce will be 

' Neither the subject nor the price of the subject will set an equal 
quantity of labour into motion, unless the subject is at least equal in 
value to the ingredients of capital which have been used up in produc- 
ing it. And the value of the subject will depend not so much on the 
effectiveness of the labour engaged in producing it, as on the effective- 
ness of the labour engaged in producing the ingredients of capital, 
i.e., the food and raw materials used up in production. 



greater or smaller accordingly ; the whole annual produce, 
if we except the spontaneous productions of the earth, 
being the effect of productive labour. 

When the whole annual produce first comes from the 
ground or from the hands of the productive labourer, it 
naturally divides itself into two parts. One of these is 
destined for replacing a capital, or for renewing the pro- 
visions, materials, and finished work, which had been with- 
drawn from a capital, the other for constituting a revenue, 
either to the owner of this capital as the profits of stock, 
or to some other party, as the rent of land. That part of 
the annual produce which replaces a capital, never is imme- 
diately employed except to maintain productive hands. It 
pays the wages of productive labour only. That part which 
constitutes profit and rent, may maintain indifferently either 
productive or unproductive labourers. Unproductive la-' 
bourers_ax£- t'naintai'ned by revenue ' (as distinguished from 
capital) that is, not only by rent, or the profits of stock, 
but also out of the spare earnings of productive labourers. 
For even a common workman may employ a menial ser- 
vant, or he may go to a puppet show, or pay taxes, and thus 
contribute his share towards maintaining one set or another 
of unproductive labourers. No part however of the annual 
produce, which has been originally destined to replace a 
capital, is ever directed towards the maintenance of unpro- 
ductive labourers, till after it has put into motion its full 
complement of productive labour. The workman must have 
earned his wages by work done, before he can employ any 
part of them in maintaining unproductive hands, and the 
part he can employ in this manner is generally a very 
small one. The rent of land and the profits of stock are 
everywhere the principal sourcestp^n which unproductive 
hands derive their subsistenc^^^j 

The proportion then between the productive and unpro- 
ductive hands depends very much in every country upon 
the proportion between that part (jf the aiiiuial [jroducc. 


Avliich as soon as it comes either from the ground or from 
the hands of the productive labourers, is destined for re- 
placing a capital, and that which is destined for constituting 
a revenue either as rent or profits. This proportion is very 
different in rich to what it is in poor countries. The part, 
therefore, of the annual produce, which is destined for re- 
placing a capital, is not only r.iuch greater in rich than in 
poor countries, but bears a much greater proportion to that 
which is destined for constituting a revenue either as rent 
or profit. In a rich country, therefore, the funds destined 
for the maintenance of productive labour, bear a much 
greater proportion to the funds, which may be employed in 
maintaining unproductive labour than in a poor country^ 

Thus at present in the opulent countries of Europe, a 
very large, frequently the largest portion of the produce of 
land and labour, is destined for replacing the capital of the 
rich and independent farmer. ^ But anciently a very small 
portion of the produce was sufficient to replace the capital 
employed in cultivation, which consisted generally of a few 
wretched cattle. All the rest of the produce properly be- 
longed to the landlord. At the present time the landlord's 
share of the produce seldom exceeds a third, sometimes not 
a fourth part of the whole produce of the land. In the 
progress of improvement, rent, though it increases in pro- 
portion to the extent, diminishes in proportion to the pro- 
duce of the land.* 

' Here Adam Smith's reasoning seems to be very confused in con- 
sequence of his looking at the matter from the standing point of the 
capitralist. In the Middle Ages the largest part of the produce of 
land was destined to replace the stock of the villeins and small pro- 
prietors who cultivated it. It now goes, says Adam Smith, to replace 
the capital of the farmer. But this is only because the farmei has 
directly or indirectly advanced the maintenance of the cultivators. In 
neither case can the landlord get anything until the maintenance of 
the cultivators has been provided. 

* This statement is historically inaccurate. The increase of rent 
has been fully proportionate to the increase of the gross produce. 

1 1 r 

Then again in the opulent countries of Europe, great 
capitals are at present employed in trade and manufac- 
ture. In the ancient state, there was little trade stirring, 
and the fcAv homely and coarse manufactures that were 
carried on required very small capital. These, however, 
must have yielded very large profits. The rate of interest 
was 10 per cent., and profits must have been sufficient to 
have afforded this great interest. At present in the im- 
proved parts of Europe the rate of interest is nowhere 
greater than six per cent., and in some parts it is as low as 
three or two per cent Though that part of the revenue of^ 
the inhabitants, -which is derived from the profits of stock ny 
is always much greater in rich than in poor countries, it is, 
because the stock is much greater ; in proportion to tJie stocti 
the profits are generally much less.^ 

The proportion between these two funds necessarily de- 
termines in every country the general character of the in- 
habitants as to industry or idleness. We are more indus- 
trious than our forefathers, because at the present time the 
funds destined for the maintenance of industry are much 
greater in proportion to those employed in the maintenance 
of idleness, than they were two or three centuries ago. 
Our ancestors were idle for the want of a sufficient encour- 
agement to industry. Hence it is that in mercantile or^ 
manufacturing towns, where the inferior ranks of people A 
are chiefly maintained by the employment of capital, they / 
are in general sober and thriving, as in many English and/ 
most Dutch towns. But in those towns where the inferior\ 
ranks arc supported by the spending of revenue, as at Rome, 
Versailles, etc., they arc in general idle, dissolute, and poorj 
In a city where a great revenue is spent it is probably diffi- 
cult to employ a capital with advantiige for any other pur- 

* This is mainly due to the constant substitution of machinery for 
the labour of man, as society progresses in industry. The enormous 
increase of incomes derived from profits may be traced in the Income 
Tax Returns. 


pose than for supplying the consumption of that city. For 
the idleness of the greater part of the people corrupts, it is 
probable the industry of those who ought to be maintained 
by capital, and renders it less advantageous to employ a 
capital there than in other places.J For instance, Edinburgh 
would be a less advantageous place than Glasgow, and ac- 
cordingly we find that the trade and industry of Edinburgh 
is much inferior to that of Glasgow.^ /;/ short wherever 
\.{ capital predominates, indusfty prevails ; wherever revenue, 
\ idleness? Every increase or diminution of capital, there- 
/ fore, naturally tends to increase or diminish the quantity of 
I industry, and consequently the real wealth and revenue of 
\ a country. 

Capitals are increased by parsimony and diminished by 
prodigality or niiscondnct. 

Whatever a person takes from his revenue he adds to his 

capital, and either employs it liimself in maintaining an 

additional number of productive hands, or enables some 

.other person to do so by lending it to him for interest, that 

is, for a sliare of the profits. As the capital of an indivi- 

• The industrial prosperity of Glasgow was mainly due to its trade 
with the American colonies and the \\'est Indies, and not to the cause 
mentioned by Adam Smith. 

' This notion of Adam Smith's appears to be somewhat fanciful. 
The fact is labourers work harder under the eye of an employer who 
expects to reap a gain from their labour, than they do under a master 
who employes them for his own convenience. In the former case the 
master necessarily looks after them verj- sharply or he would through 
the pressure of competition lose his profit ; in the latter case the mas- 
ter may be almost indifferent as to the amount of work his servants 
do. There can be no doubt that the pressure of competition has this 
tendency to develope industrious habits. On the other hand, the evils 
of the competitive system are verj- considerable. People who are 
alwa)-s tr}-ing to undersell one another are naturally full of tricks and 
cheating. Employers become callous about the health, and even about 
the lives of their work people. Hence the necessity of Acts of Par- 
liament for the protection of women and children and all that class 
of labour which is too weak to protect itself. 


f dual can be increased only by what he takes from his an- 
nual revenue, so the capital of a society, which is the same 

, with the capital of all the individuals who compose u, can 

\ be increased only in the same manner. ^ 
V What t's annually saved, however, is as regularly con- 
sumed as what is annually spent, and nearly in the same 
time too ; but it is consumed by a different set of people. 
The portion of his revenue which a rich man spends, is, in 
most cases, consumed by idle guests or menial servants, 
who leave nothing behind them in return for their consump- 
tion. That portion which he annually saves, is consumed 
by artificers, manufacturers, or labourers, who reproduce 
with a profit the value of their annual consumption. By 
what a frugal man annually saves, he not only affords main- 
tenance to an additional number of productive hands, but 
like the founder of a public workhouse, he establishes, as it 
were, a perpetual fund for the maintenance of an equal 
number for all time to come. The prodigal, on the other 
hand, by not confining his expense within his income, en- 
croaches upon his capital, and thereby dimfnishes the funds 
/destined for the support of productive labour, and conse- 
I quently diminishes the annual produce of the land and labour 
of the country, the real wealth and revenue of its inhabi- 
tants. If the prodigality of some were not compensated by 
the frugality of others, the conduct of every prodigal, by 
feeding the idle with the bread of the industrious, would 
tend not only to beggar himself, but to impoverish his coun- 
try. The effect of prodigality is the same, whether the ex- 
penditure of the prodigal be in home made or iif foreign 

' It is not true to say thai the capital of the society is made up of 
the sum of the capitals of the individuals composing the society. 
Modern economists are beginning to recognise that a distinction must 
be made between the capital of individuals and the capital of the so- 
ciety. Sidgwick, Pol. F!con., I. v. 

' 'i his is true except in so far as the extravagant consumption of 



I Prodigality not only diminishes the real wealth of the 

_M}Aj)^vh^society, it also diminishes the quantity of money in the coun- 
y .^. ■ try. \^or the same quantity of money cannot long remain in 

siA-^AT^ • any country in which the value of the annual produce 
diminishes. The sole use of money is to circulate consum- 
able goods/! The quantity of money, therefore, which can 
be annually employed in any country, must be determined 
by the value of the consumable goods annually circulated 
within it. [As the annual produce diminishes, money will be 
thrown out of the domestic circulation, and sent abroad to 
be employed in the purchase of consumable goods, which 
may be of some use at home. Its annual exportation will 
add something to the annual consumption of the country 
beyond the value of its own annual produce. The exporta- 
tion of gold and silver is in this case not the cause but the 
effect of its decline, and ynay even for some time, alleviate 
the misery of that decline. ^ i.-f'-'^ 

(On the other hand, the quantity of money in any country 
increases, as the value of its annual produce increases. A 
part of the increased produce will naturally be employed in 
purchasing the additional quantity of gold and silver re- 
quired for the circulation of the rest. The increase of those 
metals will be the effect, not the cause of the public pros- 
perity. Whatever, therefore, we imagine the real wealth of 
a country to consist in, whether in the value of the annual 
produce, or in the quantity of the precious metals, as vulgar 
prejudices suppose, in either view of the matter, every pro- 
digal appears to be a public enemy ^ and every frugal man a 
public benefactor. 

The effects of tnisconduct are often the same as those of 
prodigality. Every injudicious project in agriculture, 
manufactures, or trade, tends in the same manner to 
diminish the funds destined for the maintenance of produc- 

foreign luxuries tends to alter the equation of international demand 
against the prodigal's country. In this way it affects the interests of 
the nation and of ifie working classes unfavourably. 


tive labour. In every such project, though the capital is 
■consumed by productive labourers, they do not produce the 
full value of their consumption, a?id there must therefore be 
some diminution in the productive funds of society. 

With regard to individuals, the principle which prompts 
expense, which is the passion for present enjoyment, is gener- 
ally counteracted by the principle which prompts to save, 
which is the hope of bettering our condition. This principle, 
though calm and dispassionate, is generally the stronger of 
the two. It comes with us from the womb, and never 
leaves us till we go into the grave. To augment our for- 
tune bysavingisthe most vulgar andobvious way of bettering 
our condition. With the greater part of men the principle 
of frugality seems on most occasions to predominate very 
greatly over the principle of expense. ^^ 

As to misconduct, the number of prudent and successful 
undertakings, is everywhere much greater than the number 
of injudicious and unsuccessful ones. 

Great nations, therefore are never impoverished by private^ 
though they sometimes are by public extravagance. For 
sometimes all the frugality and good conduct of individuals 
may not be able to compensate the waste and degradation 
of produce occasioned by the violent encroachments of 
Government on the productive funds of the nation. On 
most occasions, however, it appears from experience that 
the uniform, constant and uninterrupted effort of the major- 
ity of men to better their condition, is powerful enough to 
maintain the natural progress of things towards improve- 
ment, in spite both of the prodigality of individuals and in 
spite of the extravagance of Government. Like the un- 
known principle of animal life it frequently restores health 
and vigour to the constitution, in spite not only of the 
disease, but of the absurd prescriptions of the doctor. 
( The annual produce of the land and labour of a country 

•* It has been said that Adam .Sinith thought that thorc was » 
Scotchman inside every man. 


can he increased by no other means^ but by increasing either 
\ the number of its productive labourers, or the productive 
\ power of its labourers. In either case an additional capital 
is almost always required, — in the first for the maintenance 
of fresh labourers, and in the second, for providing better 
machinery, etc.\ When therefore we find the annual produce 
increased we may be sure that there has been an increase 
of capital, that more has been added to it by the good con- 
duct of some than has been taken from it by the miscon- 
duct of others. Such will be found to be the present state 
of England, if compared with what it was at the Restora- 
tion of Charles II., though within that space of time have 
happened the fire and the plague of London, — two Dutch 
wars, — the disorders of the Revolution, — the war in Ireland 
— the four expensive French wars of i68cS, 1702, 1742, 
1756, together with the two rebellions of 17 15 and 1745. 
The expense of these wars cannot be computed at less than 
200 millions. But notwithstanding this enormous diver- 
sion' ^ of wealth to unproductive uses, the annual produce of 
land and labour in England, is undoubtedly much greater 
that it was either at the Restoration or the Revolution. It 
is evident then, that in the midst of the exactions of Go- 
vernment an additional capital has been gradually accumu- 
lated in England by the private frugality and good conduct 
of individuals, — by their universal, continuous, and uninter- 
rupted effort to better their own condition. It is this effort, 
protected by law, and allowed by liberty to exert itself in 
the manner that is most advantageous, which has main- 
tained the progress of England towards opulence and im- 
provement in almost all former times. England, however, 
has never been blessed with a very parsimonious govern- 
ment, and parsimony has never been a characteristic virtue 
of her people. 

" Funds expended in war are not entirely diverted from produc- 
tive uses ; because to a certain extent they are derived from revenue 
wliich would in any case have been spent unproductively. 


Kings and ministers have aluays been the greatest spend- 
thrifts. It is the highest impertinence, therefore, for them 
to pretend to watch over the economy of private people, 
and to restrain their expense, either by sumptuary laws, or 
by prohibiting the importation of foreign luxuries. Let 
kings look well after their own expense, and they may 
safely trust private private people with theirs. If their own 
extravagance does not ruin the state, that of their subjects 
never will. 

/ Some, modes of expense, however, seem to contribute more 
to the growth of public opulence than others. 

The revenue of an individual may be spent either on a 
sumptuous table, and in maintaining a great number of 
menial servants, or it may be spent on ornamental buildings, 
on furniture, pictures, or books. In the latter case the in- 
dividual's stock of accumulated wealth gradually increases, 
in the former no addition whatever would be made to it. 
The latter would, therefore, be at the end of a ^certain 
period the richer man of the two. This latter mode of ex. 
penditure is also more favourable to the opulence of the 
nation. The houses, furniture, and clothes of the rich, in a 
little time become useful to the inferior ranks of the people. 
They are able to purchase them when the rich grow weary 
of them. They are able to obtain in this way both houses 
and furniture which could not have been built or made for 
their own use. Thus, what was formerly the seat of the 
house of Seymour, is now an inn on the Bath road, and the 
marriage bed of James, was, some years ago, the ornament 
of an alehouse at Dumfermline.^^ 

" This question of expenditure has nothing to do with the question 
of production. An expenditure on durable cominodilies, such as fur- 
niture, is only more beneficial because the commodity is only partially 
consumed. People imagine that expenditure takes place when money 
is parted with, but the real expenditure takes place when the commo- 
dity that has been purchased, is consumed. 

Now, in the case of a house or furniture the consumption is very 
gradual, and the commodity may be enjoyed by many persons after 


The expense, too, that is laid out in durable commodities^ 
is favourable not only to accumulation, but to frugality. If 
a person should at any time exceed in it he can easily re- 
form without exposing himself to censure. Whereas, if he 
reduces the number of his servants, or the expense of 
his table or equipage, he cannot escape the observation of 
his neighbours. 

An expense, too, that is laid out in durable commodities 
commonly gives maintenance to a greater number of people 
than that which is employed in profuse hospitality. At a 
great festival a large part of the provisions is wasted. The 
same quantity divided among industrious workmen, such as 
mechanics, masons, or carpenters, will maintain a greater 
number of people. In the former way, besides, this ex- 
pense maintains unproductive, in the latter way, productive 
hands. In the one way, therefore, it increases, in the other 
it does not increase the exchangeable value of the annual 
produce of the land and labour of a country. 

Chap. W.— Of Stock lent at Interest. 

The stock which is lent at interest is always considered 
as capital by the lender. The borrower, however, may use 
it either as a capital, or as a stock reserved for immediate 
consumption. If he use it as a capital, he can both restore 
the capital and pay the interest without encroaching on any 
other source of revenue. If he use it as a stock reserved 
for immediate consumption, he acts the part of a prodigal, 
and dissipates in the maintenance of the idle what was de- 
stined for the support of the industrious. He can in this 
case neither restore the capital nor pay the interest without 
encroaching upon some other source of revenue, such as 
the property or rent of land. But there can be no doubt 
that stock lent at interest is used much more often in the 

the death of the person whose demand originallv caused it to be pro- 


former than in the latter of these two ways. Even among 
borrowers the number of the frugal surpasses considerably 
that of the idle and prodigaW' 

Country gentlemen, it is true, often borrow money on 
mortgage without any intention of making a profitable use 
of it. But generally they do not borrow merely to spend. 
More often they borrow in order to pay a debt. In this 
case, what they borrow in reality replaces a capital which 
has been already spent, that is, the capital of the tradesman 
to whom the borrower is indebted. 

Almost all loans at interest are made in money, but what 
is really supplied to the borrower is not the tnoney, but the 
goods which it will purchase. By means of the loan, the 
lender, as it were, assigns to the borrower, his right to a 
certain portion of the annual produce of the land and labour 
of the country to be employed as the borrower pleases, 
either for his own consumption or for the purpose of pro- 
viding productive labourers with tools, materials and main- 
tenance. The quantity of stock, therefore, which can be 
lent at interest in any country, is not regulated by the value 
of money, ^ but by the value of that part of the annual pro- 
duce, which, as soon as it comes from the ground, or from 
the hands of productive labourers, is destined, not only for 
replacing a capital, but such a capital as the owner does not 
care to be at the trouble of etnploying himself!^ Such capi- 
tals constitute what is called the ?noney interest. But 

' The expression " value of money," is used in two senses. When 
used by economists, it means either the power of money to set industry 
in motion, or power of purchasing commodities; but in the discount 
markets it means the value of the use of money. 

• The rate of profits being given, the rate of interest, i.e., the pro- 
portion of profits which go to the lender, " depends essentially and per- 
manently, on the comparative amount of real capital offered and de- 
manded in the way of loan ; but is subject to temporary disturbances 
from the increase and diminution of the circulating medium," Mill, 
III., xxiii., p. 392. We must therefore carefully distinguish between 
the permanent rate of interest and the rate of interest in the market 


money is only the deed of assignment which conveys from 
one hand to another those capitals which the owners do not 
care to employ themselves. The same pieces of money may, 
in the course of a few days be the instruments of trans- 
ferring many different capitals, that is, of effecting many 
different loans. 

The borrower agrees to assign annually to the lender, so 
long as the loan continues, a certain smaller portion of the 
annual produce of the country. This smaller portion is 
called interest. As the quantity of stock to be lent at in- 
terest increases, the interest, or the price which must be 
paid for the use of that stock, necessarily diminishes. For, 
as capitals increase in any _co^uiitry, Uie profits wliicli. can 
bejnade by employing them necessarily diminisl>-. There 
arises in consequence a competition between capitals, 
the owner of one endeavouring to get possession of that 
employment which is occupied by another. Every owner 
of a capital is forced by this competition to deal upon 
more reasonable terms. E^'ery dealer is obliged to sell 
cheaper and to buy dearer. The demand, too, for productive 
labour, by the increase of the funds destined for maintaining 
! it, grows every day greater and greater. TJie competition of 

Vn ernplqyezs^raises the wages of labour^ and sinks the profits 
' of stock. But when the profits which can he made by the 
use of capital, are, in this manner diminished, as it were at 
both ends, the price that can be paid for the use of it, that is, 
the rate of interest must necessarily be diminished. 

Mr, Locke, Mr, Law, and M. Montesquieu were wrong in 
supposing that the increase in the quantity of gold and 

for short loans. An influx of gold or silver cannot permanently lower 
the rate of interest, but it may temporarily lower the rate of interest in 
the market for short loans, or in what is called the Money Market. 
" The ndwly arrived gold can only get itself invested in any given state 
of business, by lowering the rate of interest ; and as long as the influx 
continues, it cannot fail to keep interest lower than, all other circum- 
itanccsi being supposed the same, would otherwise have been the case." 
Mill. III., xxiii., p. 392. 



silver, in consequence of the discovery of the Spanish West 
Indies, was the real cause ef the lowering of the rates of in- 
terest through the greater part of Europe. The fallacy of 
this notion has been exposed by I\Ir. Hume. Before the 
discovery of the Spanish West Indies ten per cent, seems to 
to have been the common rate of interest through the 
greater part of Europe. It has since sunk in different 
countries to six, five, four, and three per cent. But it is 
evident that if ;^ioo are in those countries of no more value 
than ;^50 were then, ;^io must now be of no more value 
than £^ were then. By reducing the rate of interest to five 
per cent, we in reality give what is now worth only as much 
as £2 IDS, was then worth, that is we give for a capital sup- 
posed to be equal to one-half of its former value, an interest 
which is equal to one-fourth only of the former interest. 

An increase in the quantity of silver, while that of the 
commodities circulated by it remained the same, could have 
no other effect than to diminish the value of that metal. 
The capital of the country would remain the same. The 
funds for maintaining productive labour being the same, the 
demand for it would be the same. Its price or wages, 
therefore, though nominally greater, would be really the 
same. But the whole capital of the country being the same 
as before, the competition between the different capitals 
would likewise be the same. They would all trade with the 
same advantages and disadvantages. The common propor- 
tion, therefore, between capital and profit would be the same 
— and consequently the common interest of money ; what 
can commonly be given for the use of money being neces- 
sarily regulated by what can commonly be made of it. 

On the contrary, any increase in the quantity of commo- 
dities annually circulated in a country, while that of the 
money which circulateij them remained the same, would 
produce many other im|)ortant effects b(;sides raising the 
value of money. T/ie fu»ds for maintaining productive 
labour would be increased. Consequently wages would rise, 


and yet might appear to sink. They might be paid with a 
smaller quantity of money, but that smaller quantity might 
purchase a greater quantity of goods. The profits of stock 
would be diminished both actually and in appearance, and 
so would the interest of money, which always keeps pace 
with the profits of stock. 

In some countries interest is prohibited by law. This 
regulation does not prevent, but only increases the evils of 
usury. For the debtor is obliged to compensate his credi- 
tor for the risk he runs in disobeying the law. 

The legal rate of interest should be fixed something above 
the market rate, that is, the rate charged to those persons 
who can give the most undoubted security. Otherwise the 
effects must be nearly the same as a total prohibition of in- 
terest. In Great Britain, where the Government can borrow 
at 3 per cent., and people of good credit at 4 or 4^, the 
present legal rate of 5 per cent is perhaps as proper as any. 

If, on the other hand, the legal rate was fixed much above 
the market rate, the greater part of the money which was to 
be lent, would be lent to prodigals and projectors, who 
alone would be willing to give this high rate of interest. A 
great part of the capital of the country would be kept out of 
the hands of those who are most likely to make a profitable 
and advantageous use of it, and thrown into the hands of 
those who are most likely to waste and destroy it.^ But 
Avhere the legal rate is fixed a little above the nrarket rate, 
sober people are universally preferred as borrowers. 

No law can reduce the rate of interest belozv the ordinary 
lowest market rate. In 1766 the French king attempted to 
reduce the legal rate from 5 to 4 per cent., but the law was 
evaded in a number of ways. 

' This assertion has been disputed. It will be observed that Adam 
Smith approved of the principle of fixing the rate of interest by law. 
His arguments were controverted by Bentham in his " Defence of 
Usury," and the laws against usury were repealed early in the present 


The market price of land depends everywhere upon, the 
market rate of interest. The person who has cap"; Lai at 
command deliberates whether he will lend it at interest or 
buy land with it. He will generally be contented with a 
smaller revenue from land than he might have by lending 
his money out at interest. But this being allowed for, a 
man will not buy land, if the rent fall much short of what he 
can obtain by lending his money at interest. On the con- 
trary, if the rent should more than compensate for this 
difference, everybody would buy land, and this would raise 
its ordinary price. When interest was at lo per cent., land 
was commonly sold for lo or 12 years' purchase. As in- 
terest sank to 6, 5, or 4 per cent., the price of land'* rose to 
20, 25, and 30 years' purchase. The market rate of interest 
is higher in France than in England, and the common price 
of land is lower. In England it commonly sells at 30, in 
France at 20 years' purchase. 


Chap. V. — Of the Different Employments of Capital. 

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

A capital may be employed in four different ways : — 

(i) In raising rude produce fro7n the earth. 

(2) In manufacturing rude produce for immediate use. 

(3) In transporting rude or manfactured produce to 
places li'here they are most wanted. 

* We must recollect that the price of land is not the same thing as 
the number of years' purchase for which land will sell. The price is 
the number of years' purchase multiplied by the rent. The high price 
of land during the I'Vench war, 1793-1^15, was the effect of the rise in 

' See Note 6 at end of book. 


(4) In dividing particular portions of the produce into 
such small parcels, as suit the occasional detnands of those 
who want them. 

Each of these three methods of employing a capital is 
essentially necessary to the existence or extension of the 
other three, or to the general convenience of society. 
Without the capital of the agriculturist it is evident that 
neither trade not manufactures could exist. If capitals 
were not employed in manufactures, that part of the rude 
produce which requires a good deal of preparation before it 
can be used would either not be produced, or when pro- 
duced would have no value in exchange. Without the 
capital of the wholesale merchant no more would be pro- 
duced than was necessary for the consumption of the im- 
mediate neighbourhood. Unless a capital were employed 
in retail trade, every man would be obliged to lay in a 
stock of provisions, and so would have a smaller stock to 
employ as a productive fund in his own industry. Shop- 
keepers can never be multiplied to the hurt of the public. 
Their competition will tend to make them sell cheaper to 
their customers, though it may be ruinous to themselves.'^ 

The persons whose ca{)itals are employed in any of^these 
four ways are themselves productive labourers, vTheir 
labour fixes itself in some subject or vendible commodity, 
and adds to the value of that commodity.N Equal capitals, 
however, employed in each of these four different ways, 
will immediately put into motion very different quantities of 

* But by combination shopkeepers can and often do agree among 
themselves to divide the business rather than lower prices to their own 
loss. In some kinds of business such combinations are much more 
easily effected than in otliers. Hence the high price which will some- 
times be given for the goodwill in a business. Hence too. larger 
quantities of capital than are necessary have been attracted into re- 
tail business in England. This evil has been somewhat abated in re- 
cent years by the institution of co-operative stores. Cairnes Leading 
Principles, p. 131. 


productive labour, and augment in very different propor- 
tions the value of the annual produce of the country. 

The capital of the ret&iler merely replaces the capital of 
the wholesale merchant. In the profit of the retailer con- 
sists all the value which the employment of his capital adds 
to the annual produce. 

The capital of the wholesale merchant replaces with a 
profit the capital of the farmer and manufacturer. 

The only productive labour W'hich it immediately sets in 
motion is that of the sailors and carriers who transport his 
goods from one place to another. 

Part of the capital of the master manufacturer is em- 
ployed as a fixed capital in the instruments of his trade, 
and replaces with profits that of some other artificer of 
whom he purchased them. Part of his circulating capital 
is employed in purchasing materials, and replaces with a 
profit the capitals of the farmers and miners of whom he 
purchases them ; but a great part of it is always distributed 
among the different workmen whom he employs. It aug- 
ments the value of those materials by their wages and by 
their master's profits upon the whole stock of wages, 
materials and instruments of trade. It puts immediately 
into motion, therefore, a much greater quantity of produc- 
tive labour, and adds a much greater value to the annual 
produce than an equal capital in the hands of any wholesale 

No equal capital puts into motion a greater quantity of 
productive labour than that of the farmer. Not only his 
labouring servants, but his labouring cattle are productive 
labourers. In ai,'riculturc, too, nature labours along with 
man. Labourers in agriculture not only reproduce a value 
equal to tiie capital which cm[)Ioys them tf)gethcr with its 
owner's profits, but over and above this they regularly pro- 
duce the rent of tiie lanrllord. This rent may he regarded 
as the produce of those powers of nature, the use of which 
the landlord lends to the farmer. It is greater or smaller 


according to the natural or improved fertility of the land^ 
No equal quantity of labour employed in manufacture can 
ever occasion so great a reproduction. In them nature 
does nothing; man does all.^ Capital, therefore, employed 
in agriculture adds a much greater value to the annual pro- 
duce than any other capital. Of all the v^'ays in which 
capital can be employed it is by far the most advantageous 
to society. 

The capitals employed in agriculture and in the retail 
trade of any society, must necessarily reside within that 
society. The capital of the manufacturer must, no doubt, 
reside where the manufacture is carried on, but this may 
be at a long distance from the place where the materials 
are grown, and from that where the manufacture is con- 
sumed. For example, part of the wool of Spain is manu- 
factured in Great Britain, and some part of the cloth is 
afterwards sent back to Spain. 

Whether the merchant whose capital exports the surplus 
produce of a society be a foreigner or native is of little im- 
portance. The capital of a foreigner gives a value to its 
surplus produce equally with that of a native, by exchang- 
ing it for something for which there is a demand at home, 
and in this way augments the value of the annual produce 
of the society. 

* It is obviously inaccurate to say that nature does nothing for man 
in manufacture. Steam, for instance, moves the machinery of the 
manufacturer. It is, however, true to say that the industrial success 
of the farmer is of more importance to the community than that of any 
other order of capitalists. For the farmer produces the chief part of 
those necessaries of life, which are the main ingredients of the circu- 
lating capital of the community. By industrial success, I mean in- 
creased production of commodities, as distinguished from commercial 
success, which means an increase of the wealth of the individual arising 
out of exchange. But in a country that imports the necessaries of life, the 
success of the manufacturer of exports is as important as the success 
of the farmer ; and in this case the community is interested not only 
in the quantity but also in the value of the commodities made for ex- 


It is of more consequence that the capital of the manu- 
facturer should reside within the society. It necessarily 
puts into motion a greater quantity of productive labour, 
and adds a greater value to the annual produce. 

It may, however, be very useful to the country, though it 
should not reside within it. For a particular country may 
frequently not have capital enough to improve and cultivate 
all its lands, to manufacture all their rude produce for im- 
mediate consumption, and to transport the surplus part 
either of the rude or manufactured produce to those distant 
markets, where it can be exchanged for something, for 
which there is a demand at home. Thus the wool of the 
southern counties of Scotland after a long land carriage 
over very bad roads is manufactured in Yorkshire for the 
want of a capital to manufacture it at home. 

When the capital of a country is insufficient for these three 
purposes, the more that is employed in agriculture, the 
greater will be the value which its employment adds to the 
annual produce. After agriculture capitals employed in 
manufacture, add the greatest value to the annual produce. 
The country, indeed, which has not capital for all these 
three purposes, has not arrived at thai degree of opulence 
for which it' seems naturally destined. To attempt, how- 
ever prematurely, and with an insufficient capital to carry 
on all these three kinds of industry is certainly not the 
shortest way to acquire a sufficient one. The capital of a 
society is likely to increase the fastest, when it is employed 
in the way that affords the greatest revenue to all the ifi' 
habitants of the country ; as they will thus be enabled to 
make the greatest savings. 

It has been the principal cause of the rapid progress of 
our American colonies towards wealth and greatness that 
-J^ almost their whole capital has hithertoo been employed in 
agriculture. Were they by violence or combination to stop 
the importation of British manufactures, and by thus giving 
a monopoly to their own country, divert part of their capi- 


tal into manufactures, they wculd retard the further increase 
in value of their annual produce, and obstruct the progress 
of their country towards real wealth and greatness. 

All wholesale trade, all buying in order to sell again by 
wholesale, may be reduced .to three different sorts : the 
home trade, the foreign trade of consumption, and the 
carrying trade. The home trade is employed in purchas- 
ing in one part of the same country and selling in another 
the produce of the industry of that country. It compre- 
hends both the inland and coasting trade. The foreign 
trade of consumption is employed in purchasing goods for 
home consumption. The carrying trade is employed in 
transacting the commerce of foreign countries, or in carry- 
ing surplus produce from one to another. A capital em- 
ployed in the wholesale trade at home replaces two distinct 
capitals, both of w^hich had been employed in supporting 
productive labour. The capital which sends Scotch manu- 
factures to London, and brings back English corn to Edin- 
burgh, necessarily replaces by every such operation, two 
diitinct British capitals, which had both been employed in 
the agriculture or manufactures of Great Britain. The 
capital employed in purchasing foreign goods for home con- 
sumption, when this purchase is made with the produce of 
liome industry replaces, too, by every such operation, two 
distinct capitals ; but one of them only is employed in sup- 
porting domestic industry. The capital which sends British 
goods to Portugal and brings back Portuguese goods to 
Great Britain, replaces by every such operation only one 
British capital. The other is a Portuguese capital. 
Though the returns, therefore, of the foreign tra(^e of con- 
sumption should be as quick as those of- the home tr.ide, 
the capital employed in it will give but half of the encour- 
agement to the productive labour of the country. 

But the returns of the foreign trade are seldom as quick 
as those of the home trade. Sometimes a capital engaged 
in the home trade will make 12 operations, while a capital 


engaged in the foreign trade is making one. In such cases 
the one capital will give 24 times as much encouragement 
to the industry of the country as the other. 

Foreign goods for home consumption are sometimes 
bought with other foreign goods. But all foreign goods 
are acquired in exchange for something which has been pro- 
duced at home, either itnmediately or after two or more 
different excJmnges. The effects therefore of a capital em- 
ployed in such a roundabout foreign trade are the same as 
that employed in a direct foreign trade, except that the re- 
turns are likely to be still more distant. 

Whatever be the foreign commodity with which foreign 
goods are purchased for home consumption can make no 
essential difference. If they are purchased with the gold of 
Brazil, this gold, like the tobacco of Virginia, must have 
been purchased directly or indirectly with something that 
was the produce of the industry of this country. A trade 
of this kind carried on with gold and silver, has, however, 
some advantages, inasmuch as these commodities are more 
easily transported than commodities of greater bulk. An 
equal quantity of foreign goods, therefore, may frequently 
be purchased with a smaller quantity of the produce of 
domestic industry, by the intervention of gold and silver, 
than by that of any other goods. "^ 

That part of the capital of any country which is employed 
in the carrying trade, is altogether withdrawn from support- 
ing the productive labour of that particular country, to sup- 
port that of some foreign countries. The capital of the 
Dutch merchant which carries the corn of Poland to F^ortu- 
gal, and brings back the fruits and wines of Portugal to 
Poland, replaces by every such operation two capitals, 
neither of which has been employed in sui)porting the pro- 
ductive labour of Holland. The profits only return to 
Holland, and constitute the whole addition which this trade 

* This is the reason why gold and silver liave been chosen as the 
instruments of international commerce. 



necessarily makes to the annual produce of that country. 
When indeed the carrying trade is maintained by the ships 
and sailors of the country in which the merchant resides, 
that part of the capital which pays the freight is distributed 
among the productive labourers of that country. It is sup- 
posed that the carrying trade is particularly advantageous 
to Great Britain, because its security and defence depend 
upon the number of its sailors and shipping. But the same 
capital may employ as many sailors and shipping in the 
foreign trade of consumption, or even in the home trade- 
when carried on by coasting vessels, as it could in the , 
foreign trade. The coal trade, for instance, between New-' 
castle and London, employs more shipping than all the 
carrying trade of England. To force capital, therefore, 
into the carrying trade, will not always necessarily increase 
the shipping of the country. 

The great object of the political economy of every country , 
is to increase the riches and power of that country.^ It ought, 
therefore, to give no advantage to the foreign trade of con- 
sumption above the home trade, or to the carrying trade 
above either of the other two. 

Each of these different branches of trade, is not only ad- 
vantageous, but necessary and unavoidable, when the 
course of things without any constraint naturally introduces 
it. When the produce of any industry exceeds what 
the demand of the country requires, the surplus must be 
sent abroad and exchanged for something for which there is 
a demand at home. Without such exportation, a part of 
the productive labour of the country must cease, and the 
value of its annual produce diminish.^ Again, when the 

* It may be concluded from this remark that Adam Smith regarded 
political economy as an art rather than as a science. Sidgewick, Pol. 
Econ., p.p. 14—18. 

6 Neither of these statements is true. All the economic advantage 
of foreign commerce lies in the importation of commodities which can- 
not be purchased at home, or in the importation of commodities with 

foreign goods which are thus purchased with the surplus 
produce of domestic industry, exceed the demand of the 
home market, the surplus part of these, must be sent abroad 
again, and exchanged for something more in demand at 
home. The most roundabout trade of foreign consumption, 
therefore, may, upon some occasions, be as necessary for 
supporting the productive labour of the country, and the 
value of its annual produce, as the most direct. 

When the capital stock of any country, is increased to 
such a degree, that it cannot all be employed in supporting 
the consumption, and supporting the productive labour of 
that particular country, the surplus -part of it naturally dis- 
gorges itself into the carrying trade. The carrying trade is 
the natural symptom and effect of great wealth^ and not, as 
some suppose the cause of great wealth. Holland in pro- 
portion to its territory and population is the richest country 
in Europe, and has accordingly the greatest share of the 
carrying trade. England, perhaps the second richest 
country, is supposed to have a considerable share of it 
though what commonly passes for the carrying trade of 
England, is perhaps rather a roundabout trade of foreign 

The extent of the home trade, and of the capital employed 
in it, is bounded by the value of the surplus produce of 
those distant places, which have occasion to exchange pro- 
ductions with one another ; the foreign trade is bounded by 
the value of the surplus produce of the whole country, and 

a smaller expenditure of labour and capital than is required for their 
production at home. ( airnes, Leading Principles, 505. 

'' The carrying trade is not alwnys the symptom of great wealth, 
but it is generally a sign that a country is fully occupied and cultivated. 
so that it can no longer continue to add to its labouring population. 
The merchants of one country engross the can) ing trade of other 
countries only because they are willing to trade on lower profits. This 
is partly the cause of the enormous increase of late years in the Eng- 
lish mercantile marine, and the diminution of the mercantile marine of 
the United States. 


what can be purchased with it ; the extent of the carryfng: 
trade is only bounded by the value ot the surplus produce 
of all the different countries of the world. 

Private profit is the only motive which determines the 
owner of a capital to employ it either in agriculture, manu- 
facture or trade. The question of the different amounts of 
productive labour which it will put into motion, never 
enters into his thought'. The capital of individuals will be 
employed most advantageously for society in those countries 
in which agriculture is most profitable. The profits of 
agriculture, however, have no superiority in Europe over 
those of other employments. We may infer this from the 
fact that few great fortunes are "made in agriculture, while 
many are made in trade. Yet there is much good land in 
Europe still uncultivated ; and even the cultivated land is 
capable of much improvement. Agriculture, therefore, is 
everywhere capable of absorbing a much greater capital 
than has yet been employed in it. The circumstances in 
the policy of modern Europe, which have induced private 
persons to employ their capitals in the most distant carry- 
ing trades of Asia and America, rather than in the cultiva- 
tion and improvement of the most fertile fields in their own. 
neighbourhood, shall be explained in the two following; 


Note i. — Real and Relative Value. 

In Chapter V. Adam Smith has used "price " in the sense of cosf» 
in this chapter he uses " price " in the sense of value. He thus con- 
founds the two separate ideas of cost and value. By cost we mean 
the eftort, labour, or other sacrifices which a man must make in; 
order to produce or obtain a commodity ; by value we mean the 
amount of labour and capital which it enables him to command. 

Mr. Mill defines value (by which we always mean exchange value) 
as, "command over purchaseable comnrodites in general." But this 
definition seems too vague and indefinite for the purposes of science. 
Mill III. i. 265. 

The word price, it must be noticed, is always used by modern 
economists as equivalent to value in money. 
>^^Xhe general law of value may be stated as follows : — • 

The exchange value of a commodity depends upon two conditions 
(i) upon its capacity of satisfying some human want or desire {i.e., 
upon its utility or value in use) and (2) upon its relative scarcity ; but 
if the commodity be capable of indefinite multiplication, then its 
value will be limited, or regulated by the cost of producing it, that is, 
by the quantity of labour and capital which must be expended in 
order to produce it. In other words the value of a thing depends 
upon the demand for it as compared with the supply ; but where the 
supply can be indefinitely increased, the value will be regulated by the 
cost of increasing the supply. Demand is the cause, cost is tjie regu- 
lator of_vakie. But although for the sake of brevity we say that value 
is regulated by cost, the real motive power which adjusts value to cost 
is the principle of competition, which urges every man to seize upon 
every opportunity of extraordinary gain. The adjustment therefore 
of value to cost depends upon the activity of this principle and the 
freedom with which it can be exerted. But certain states of society 
and certain departments of industry arc more favourable to activity 
and freedom of competition than others. It is probably more active in 
America than in England, and it is probably more active in lingiand 
to-day that it was 200 years ago. In applying the rule that cost 
regulates value we must always, therefore, be careful to make allow- 
ance for any circumstances, which impede the activity or free exertion 
of the principle of competition. 


When the value of a thing corresponds with cost, its natural regu- 
lator, it is said to be a natural value ; when it rises and falls 
with every oscillation of supply and demand in the market, it is 
said to be a market value. See Cairnes, Leading Principles of Pol. 
Econ., Part 1. 

As Adam Smith points out, the market value is always gravitating 
towards the natural value. 

By relative value we mean the ratio in which one commodity {e.g., 
corn) exchanges in open market against another commodity {e.g., 
iron) with which it is compared. 

The relative value of two commodities is naturally regulated by the 
same circumstances as their real value, that is either by the demand 
as compared with the supply, or by the cost of producing them. Cost 
has already been analysed into the quantity of labour and capital 
necessary for producing a commodity. But capital represents labour 
that has been already exerted, and which has been stored up in pro- 
ducts that assist the labourer in the production of new wealth. Now 
the value of capital, that is, of the products of past labour, vna.y either 
rise or fall as compared with the value of present labour. In other 
words, the profits of the capitalist may rise, while the wages of 
the workmen, (wTiich represent the value of labour in the markets of 
the day) may fall. Whenever this happens, a commodity that is pro- 
duced with the assistance of a great deal of capital in the form o' 
machinery and buildings, (fixed capital), may rise in value, as compared 
with another commodity that can be produced by the exertions of the 
labourer with little assistance from machinery. Iron goods, for 
instance, may rise in value as compared with corn. In such a Ccise 
the fall in the wages of labour appears to be the cause of the fall in the 
value of the commodity produced by that labour. But this is a mis- 
take. The fall in the wages of the workmen, and the fall in the value 
of the commodity produced by those workmen are co-ordinate results 
of a common cause, which is, the fall in the value of labour as com- 
pared .with the value of capital. 

A change in the relative value of two commodities may also be 
brought about by any change in the comparative demand for the ser- 
vices of the workmen who produce them. An increase in the demand 
for iron and a decline in the demand for silk, will increase the demand 
for the services of miners and puddlers as compared with the demand 
for the services of silk weavers, and will alter the ratio in which iron 
will exchange for silk. Where, however, there is perfectly free com- 
petition in the labour market this alteration will not be permanent. 
But in the labour market competition is scarcely ever perfectly free. 


" Each individual labourer," as Protessor Cairnes has noticed, "can 
only choose his employment within certain tolerably well defined 
limits." In most countries the labouring population is divided into a 
series of industrial groups which practically do not compete with one 
another for employment. Cairnes, Leading Principles, p. 78. 

The doctrine, therefore, of Adam Smith, as to the price or value of 
commodities is entirely erroneous. The analysis given by Mill and 
Professor Fawcett is also inaccurate, inasmuch as it teaches that wages 
and profits enter into value or price. High wages, profits, or rents, 
do not make high values. High wages, profits, or rents, are the re- 
_sults, not the causes of high values. 

Note 2. — Wages. 

We must carefully distinguish between gen eral wage s or the rate of 
wages, and comparative wages or wages in. particular employments. 
The latter are dealt with in chapter X. We must also distinguish 
between rea]_wages, or wages measured in commodities, and money 
wages. For money wages are influenced by certain circumstances 
wfiich may have no effect on real wages. 

The wages of the labourer depend not so much on the actual pro- 
duce of his labour, as on the effectiveness of his labour in producing 
the things which he requires for his own use. The principal of these is 
food. The real wages, for instance of the agricultural labourer mainly, it 
is evident, depend upon two circumstances ; ( i) on the quantity of food 
which he can produce on the worst lands in cultivation, and (2) on 
the share of this quantity which the farmer is able to reserve for his 
own recompense. But the wages of the manufacturer will depend 
principally, not on the quantity of manufactured goods which he can 
produce, but (i) on the quantity of food which he can get in exchange 
for them, and (2), as in the other case, on the proportion retained by 
his employer. But the amount of food which can be obtained for a 
certain quantity of manufactured goods will be determined by the cost 
of producing the food. A certain quantity of manufactured goods 
will exchange for a larger quantity of food in Melbourne than in Lon- 
don, because food can be produced at less cost in the neighbourhood 
of Melbourne than in the neighbourhood of London. Real wages, 
therefore, are higher in Melbourne than in London. But food is not 
the only commodity required by the labourer. Therefore, for " food" 
let us substitute "necessaries of life." The general law of wages 
then, may be staled as follows. <Thc rale of wages depends upon two 
circumstances, (1 ) upon the cost of producing the necessaries of life 
consumed by the labourer, and (2) upon the rate of profit. In those 
countries where the cost of producing the necessaries of life is very 
low as in some parts of America and Australia, the rate of profit may 


be very high, and yet the real wages of labour may be very liberal. 
Bat if in several countries the cost of producing the necessaries of life 
be the same, the wages of labour will be highest in that country where 
the profits of capital are lowest. 

It must be further noticed that in those countries which import a 
principal part of their food, the cost of necessaries is itself a function 
of two variables. It depends (i) on the cost of producing exportable 
goods, and (2) on the quantity of food which foreign nations give in 
exchange for these exportable goods. The latter circumstance, that 
is, the rate of international exchange, is determined by reciprocal de- 
mand, or, to use Mill's language, by the Equation of International 
Demand. " The values at which a country exchanges its produce 
with foreign countries depend on two things : first, on the amount and 
extensibility of their demand for its commodities, as compared with its 
demand for theirs ; and secondly, on the capital which it has to spare, 
from the production of domestic commodities for its own consump- 
tion." Mill. III., xviii., p. 365. 

In a country, thereforej which produces its own food, the funds for 
the.employrnent^ of labo ur vary very much from year to year with the 
goodness or badness of the harvest ; but in a country that imports the 
principal part of its food these funds vary with the value of the ex- 
ports. One of the best means we have for estimating variation in the 
funds for the employment of labour, is a comparison of the rate 
of marriages. For marriages are naturally more numerous in those 
years, in which employment is abundant, and real wages high. It has 
been frequently noticed that the rate of marriages in England used to 
vary with the abundance or scarcity of the harvest. But England now 
imports the principal part of her corn, and the marriage rate varies 
with the value of the exports. This is shown by the following table : — 
Maniage rate. Value of exports per head. 

£ s. D. 

1870 i6-i 6 

1871 16-7 7 

1872 17-4 8 

1873 17-6 7 

1874 17-0 7 

1875 16-7 6 

1876 16-5 6 

1877 157 5 

1878 15-2 5 

1879 '4-4 5 

1880 149 6 

1881 151 6 

















1 1 





This table is not indeed a correct index of the value of the exports 
but two conclusions may be drawn from it. Firstly, it appears that it 
is to the value of the exports and not to the abundance or scarcity of 
the harvest that we must chiefly look, when we are estimating the 
funds for the employment of labour. Secondly, it appears that the 
rate of international exchange has been during the last ten years con- 
siderably altered against England. This alteration has, no doubt, 
been due to foreign tariffs on English goods, and to the successful 
establishment of manufacturing industries in other countries ; and to 
these circumstances must be ascribed the lower rate of wages which 
has prevailed in England for the last six or seven years. 

Note 3. — Rent. 

in dealing with the subject of agricultural rent we have to consider 
two questions, (i) what are the causes which give rise to rent, and (2) 
how the rent of any particular piece of land is determined. 

Rent, as Ricardo teaches us, is always a creation of value, and not 
of riches. Or it may be defined in Senior's language as surplus 

The proximate cause of agricultural rent is always a rise in the 
value of agricultural products, as compared with the products of labour 
in other kinds of industry. This rise in the value of agricultural pro- 
ducts is generally brought about by an increase of population relatively 
to the means of subsistence. In other words it is brought about by 
the pressure of population on the means of subsistence. But it may 
also be brought about by any increase in the efficiency of labour not 
employed in agriculture. For the reduction in the cost of manufac- 
tured articles enables the labourer to spend a larger proportion of his 
income upon food, and the increased demand for food raises the value 
of all agricultural products. .Still the main condition upon which a 
rise of rent depends, is the increase of population ; so that we may lay 
it down as a general rule, that rents rise with every increase of popula- 
tion, and fall with every improvement in agriculture, and with every 
reduction in the cost of carriage, through which the means of subsis- 
tence become more abjndant. 

Agricultural improvements, however, are often the ulterior cause o' 
a rise in rents. Vov agricultural improvements, by increasing the 
supply and keeping down the cost of food, enable a larger popula- 
tion to be supported on the same extent of land ; and it is density of 
population which is the great cause of rent. 

An increase in the accumulation of capital may also raise rents- 
l''or the accumulation of capital lowers the rate of profit and raises 



wapfcs. (!) As wages rise, the labourers generally '^pcnd a larger 
proportion of their income on food. The value of food rises, and rents 
rise with the value of food. (2) As wages rise, population generally 
increases faster than before, and rent rises with the increase of popu- 

We see, therefore, that nearly all the circumstances of a progressive 
society are favourable to an advance of rents. Rents will rise with the 
increase of population, with the increase of capital, and with improve- 
ments in manufactures. They are reduced for a time, but in nearly 
all cases are ultimately augmented, by improvements in agriculture^ 
road making, or navigation. 

As the whole rental of a particular country evidently consists of the 
surplus profits of all the agriculturists, so the rental of a particular 
farm consists of the surplus profits that can be made on that farm. 
This surplus profit, as Eicardo says, "is always the difference between 
the produce " (or the value of the produce) " obtained by the employ- 
ment of two equal quantities of capital and labour." The difference 
in the actual produce is chiefly caused by differences (i) in the ferti- 
lity of the soil, or (2) in the facility with which it can be worked. The 
difference in the value of the produce is chiefly caused by differences 
of situation. 

For example, if a capital of j{J'io,ooo will bring 5,000 quarters of 
American wheat into the London market, and a similar capital of 
;^ 10,000 employed in Essex will bring 6,000 quarters into the London 
market, the landowners of Essex will, through the competition of 
capitalists, obtain the difference between the produce of the two capi- 
tals, viz., 1000 quarters, as rent. 

It will be observed that the case of a country which imports a large 
proportion of the common food of the people, is peculiar. In such a 
country the value of the food grown at home will be mostly regulated 
by the value of the imported food. Any diminution, therefore, in the 
cost of labour to the farmer, will leave a larger surplus profit to go to 
the landowner. On the other hand, any increase in the cost of labour 
will diminish rent, because the farmer cannot transfer any part of the 
increased cost to the consumer. 'Ihe recent fall in the rent of arable 
land in England has been brought about not only by the large impor- 
tations of corn from America and India, but also by a decrease in the 
agricultural population, and a consequent rise in the cost of agricul- 
tural labour. 

Finally we must remember that money rents will be affected by any 
circumstances that affect the value of money. The most important of 
these circumstance are the causes which govern the productiveness 
of the mines, and (2) the causes which regulate the equation of inter- 

national demand. Ricardo c. ii., p. 34. Mill II., xvi., p. 255, Bk, 
IV., iii., p. 430. 

But there is one case in which rent may rise without any increase in 
population, or capital, or any improvements in agriculture or manu- 
factures. Rent, as we have seen, depends upon the value of food. 
Now the value of food may rise either in consequence of an increase 
in the demand, or a diminution of supply. For instance, the supply 
of food may be diminished by turning arable land into wood or pas- 
turage. It will sometimes be the interest of the landowners to do 
this, either for the purpose of raising cattle or wool for foreign markets, 
or for the purpose of providing amusements for a wealthy and luxur- 
ious class at home. 

The conversionof arable land into pasturage in thetimeof Edward VI. 
and Elizabeth, raised the rents of the landowners while it helped to 
pauperise the people. The conversion of Highland estates into sheep 
farms and deer forests during the present century has increased enor- 
mously the incomes of the Highland proprietors, but has been thi^ 
cause of great discontent among the agricultural population. In Ire- 
land a similar cause has prevented the fall in rents which would 
otherwise have been the natural consequence of the vast emigration of 
the people since 1846. Compare the case of Ireland after the per- 
mission to import cattle into England, 1758. Rent according to Ar- 
thur Young doubled in about 28 years. 

It will be observed that the proximate cause of a rise in rent is also 
the proximate cause of a fall in real wages. But high rents are not 
the cause of low wages, as Mr. Henry George appears to suppose. 
High rents and low wages are co-ordinate results of a common cause, 
which is the scarcity of food. The low wages of unskilled workmen 
in England, are, I think, chiefly due to what is known as the immo- 
bility of labour. In consequence of this immobility, there is, as Pro- 
fessor Walker has pointed out, "a constant tendency for industry and 
population to grow apart," or, as I should prefer to say, there is a 
constant tendency towards a bad distribution of labour and conse- 
quent loss of productive power. The industrial depression which seems 
to have suggasted Mr. (ieorge's book, was cured in America by a 
great rush of the people to the agricultural states of the North West. 
What we want in England, in order to raise wages, is a great rush of 
the people to the colonies. Unfortunately, however, in l*lngland the 
immobility of labour is much greater than in America, because the 
margin of expenditure, left to the labourer after providing for the 
necessaries of life, is much less in England than in America. If, 
therefore, we would mitigate the poverty that exists in ICng' ind, we 
must organise some system of stalc-aidcd emigration. 


Note 4. — The Local Value of Money. 

Silver is an imported commodity, and its value in any particular* 
country therefore depends chiefly on the same circumstances which 
regulate the value of other imported commodities. Adam Smith has 
failed to give a true account of the principles which determine the local 
value of gold and silver, because he failed to grasp the principles which 
govern the foreign trade. Ricardo was the first to explain these prin- 
ciples. Before his time, the theory of the foreign trade was, as Mill 
says, "an unintelligible chaos." Yet Adam Smith had noticed that 
"the great market for silver is the whole commercial world." Now, 
it is this mobility of gold and silver which fits these metals to be the 
instruments of international commerce, and enables them, as Ricardo 
says, " to be distributed in such proportions amongst the different 
countries of the world, as to accommodate themselves to the natural 
traffic which would take place, if no such metals existed, and the trade 
between countries were purely a trade of barter." The quantity of 
gold and silver which will be distributed to any particular country, to 
England, for example, will depend upon the exchange value of the 
labour and capital of England in the markets of the commercial world. 
Their relative value, therefore, (that is, their value in commodities) will 
depend upon the foreign demand for the exportable goods of England 
as compared with England's demand for the exportable goods of other 
countries, that is, upon the Equation of International Demand, while 
their real or cost value will depend partly upon this Equation of Inter- 
national Demand, and partly on the effectiveness of English labour in 
producing exportable goods. Thus an increase in the foreign demand 
for English goods, without any corresponding increase in the English 
demand for foreign goods, would cause a larger proportion of the 
world's stock of gold and silver to be diverted to the English markets, 
in order that England might continue to exchange her goods with 
foreigners on the same terms that she would, if the trade were carried 
on by barter. With the increase of quantity, the value of gold and 
silver in England would fall, prices and money wages would both rise. 
Or again, if English labour became more effective in producing ex- 
portable goods, gold and silver would become cheaper. Prices, in 
this case, would not rise in those departments of industry where labour 
had become more efficient, but they would rise in those where the effi- 
ciency of labour remained unaltered, and money wages would rise in 
all departments. 

The value of silver then, does not depend, as Adam Smith thinks, 
on the riches or poverty of a country, but it will gcncr.nlly be of less 
value in a rich than in a poor country, because a countr)- becomes rich 


through the effectiveness of its labour, and it is also mainly through 
the effectiveness of its labour in particular departments of its industry, 
that one country obtains its silver at a cheaper rate than other 

Economists have hitherto failed to give any satisfactory account of 
the causes which raised money wages, rents, and prices, so enormously 
in England during the great French War. Their failure is perhaps 
due to their neglect of Ricardo's theory of the foreign trade. The 
high prices which prevailed during the war were, partly at least, the 
natural effect of the great expansion of English commerce which took 
place about that time. This expansion was partly due to the great 
inventions of Arkwright and Hargreaves, which made English labour 
for the time, so much more effective than that of other countries in the 
particular department of industry which we call the textile manu- 
factures; but it was also due in part to the annihilation of the Dutch 
and French commerce, and the consequent extension of the demand 
for English exportable goods in the markets of the commercial world. 

The tendency of events during the last lo years has been in an 
opposite direction. The successful establishment of manufactures on 
the continent of Europe, and in the States of the American Union, 
and the high import duties put by foreign governments upon Eno-lish 
manufactures, have caused a contraction in the demand for English 
exportable goods, as compared with England's demand for the food 
and raw produce of other countries. It is to this cause that the fall in 
prices and money wages in England must be chiefly attributed, and 
not as Mr. Goschen thinks, to the diminution in the supplies of gold 
at the Australian and Californian mines. 

A country gets all its imports cheap in the same proportion as it gets 
its gold and silver cheap. To a country like England, therefore, 
which imports so large a proportion of the necessaries of life, the ques- 
tion of the causes which affect the value of money is one of very great 

NoTB 5. — Productive and Unproductive Labour, 

Adam .Smith seems always to have thought of wealth as the 
"annual produce of labour." His great object is to ascertain the 
causes which regulate the amount of this annual produce. Now " the 
wealth of a country," says Ricardo, can be increased in two ways, it 
can be increased by employing a greater portion of "revenue in the 
maintenance of productive labour, which will not only add to the 
quantity, but lo the value of the mass of commodities ; or it may be 
increased withont employing any additional quantity of labour, by 


inakiHj^ the -;ime quantity more productive, which will add to the 
abundance, but not to the value of commodities." Ricardo xx., p. i6o. 

Adam Smith has treated of the latter of these ways in the first 
book. The principal cause of the increase of wealth, he says, is the 
increased effectiveness of labour. In the second book he endeavours 
to show us how wealth is increased in the former of these ways ; and 
in order to do this he has to explain the (i) difference between the 
productive and unproductive consumption of wealth, and (2) the dif- 
ference between productive and unproductive labour. 
, By productive labour we mean labour engaged in the production of 
' wealth. We cannot therefore define productive labour without having 
a clear conception of the meaning of wealth. Wealth has generally 
been conceived of by economists as consisting of material products. 
They, therefore, teach, that all workmen who are not engaged either 
directly or indirectly in the production "of utilities embodied in 
material objects," (Mill I. iii., p. 30) ought to be classed as unproduc- 
tive labourers. But this distinction between productive and unpro- 
ductive labour is quite barren of consequences, and is only calculated 
to confuse the student of political economy. In whatever way we 
may choose to classify labour, it is quite certain that no distinction can 
be made between the surgeon and the maker of surgical instruments, 
between the musician and the maker of musical instruments, although 
we may perhaps put the surgeon and musician into different classes. 
For evidently the riches of a country could not be increased by turn- 
ing any number of its surgeons into makers of surgical instruments ; 
unless indeed the surgical instruments were made to be exported. 

But Adam Smith confuses this idea of productive labour as defined 
above with another very different idea, viz., the idea of industrious 
people employed with a view to profit. He speaks of a workman pro- 
ducing a value equal to his own maintenance and his master's profit. 
But a workman whose services perish in the instant of performance, 
may produce a value for his master equal to his own maintenance, 
just as much as a workman whose services are fixed in some vendible 
object. 1 he servants of an innkeeper by waiting upon iheir master's 
guests reproduce for their master a value equal to their own mainten- 
ance, but ihe r services are not fixed in any vendible object. On the 
other hand the services of workmen employed in a paper collar manu- 
factory are fixed in a material objeci ; and they also produce a value 
equal t > their own maintenan .e. The society is no more enriched by 
the labour of the one class of workmen than it is by the labour of the 
other ; and there may evidently be a reproduction of value without 
any production of material objects. Neither is the intervention of the 
employer necessary for the production of a value. A boatman may 


row a party from Oxford to Nunehatrt in a boit hired from a third 
party. If he receives a half-a-crown for his services he may be said 
to reproduce the value of his own maintenance Another man may 
row the same party to the same place for the sake of exercise. In this 
latter case there is no reproduction of value, but the community is as 
much enriched by the services of the one man as it is by the services 
of the other. 

What then is the difference between the two cases ? One man 
rows a boat for pleasure, another for g'ain ; one man employs servants 
to wait upon himself and his friends, another employs them to wait 
upon guests who remunerate him for the accommodation received. In 
one case the labour or expenditure may be said to be productive, in 
the other case it is unproductive. A man gets rich by keeping a num- 
ber of hotels, poor by keeping houses for the entertainment of friends* 
A man who rows a boat for hire maintains himself by his own labour, 
but a man who rows for pleasure is either maintained by the labour of 
others, or by his own labour exerted on other occasions. This is the 
difference as far as the individuals themselves are concerned. But 
what is the difference to the community? The difference seems to be 
this. The capital of the hotel keeper or the labour of the hired boat- 
man, although not directly expended in producing the necessaries of 
life, yet determines a certain part of the labour and capital of the 
community towards the production of the necessaries of life ', and in 
so far as it does this, it enables a larger population to be supported, so 
that the wealth of the country is increased in the former of the two^ 
ways pointed out by Ricardo. There is an increase in the labouring 
population, and an increase in the value as well as in the quantity of 
commodities produced. For instance a new capital invested in any 
particular business, such as the keeping of hotels, will tend to displace 
or drive out of the business another capital, and this displaced capital 
or some part of it, will find no resting place at the old rate of profit 
until it is engaged in producing the necessaries of life. For the em- 
ployment of new capital there must be in any given condition of in- 
dustry, a new supply of l.ibour, and there can be no considerable in- 
crease in the supply of labour without an increase in the production of 
the necessaries of life. If in any country there be no possibility of in- 
creasing the production of the necessaries of life and the supply of 
labour, new capital must either be wasted, or it must be offered for 
investment at a reduced rate of interest. In either case the whole 
capital and labour of the country will produce no greater amovint of 
wealth than Ixifore, although, in the latter case, there will be a new dis- 
tribution of wealth in favour of the labourers and to the loss of the 
capitalists. In such a country profits would soon fall to a minimum. 


(liLt is to say, they would become so small that no fresh accumulation* 
could be made ; what is called the stationary state would be reached, 
and there could be no further increase of wealth. 

Whenever wealth continues to increase in an old and fully occupied 
country the result must be ascribed to one of three circumstances ; (i) 
the substitution of machinery for the labour of man ; (2) improve- 
ments in the production of the necessaries of life, especially in the pro- 
duction of food, or (3) to the importation of food from abroad. The 
same circumstances which promote the increase of wealth, also retard 
the fall of profits. But the fall of profits to a minimum may also be 
checked bythewasteorexportationof capital. Where capital is exported, 
it is properly speaking the wealth erf the foreign country which is in- 
creased by its investment. The inhabitants of the exporting country 
may have a legal right to receive a part of this wealth, but the legal 
right is conferred and can be taken away by the Government of the 
foreign country. 

It is evident from the above considerations that the term productive 
labour must either be defined so as to include all workmen who main- 
tain themselves by their own labour, or else it must be narrowed so as 
to include only those labourers who are engaged directly or indirectly 
in the production of the necessaries of life. It is mainly upon the 
success of productive labour in the latter sense that national wealth, 
the power of a community to pay taxes, and to support fleets and 
armies, depends. In the wider sense of the term the distinction is 
nearly the same as that between industry and idleness. 

The difficulty of defining productive labour arises from the difficulty 
of defining wealth. It is probable that our forefathers thought of 
wealth rather as power than as an aggregate of commodities, other- 
wise, the confusion between wealth and money would have been im- 
possible. Money was sometimes used to denote purchasing power, 
sometimes to denote metal pieces. Wealth was confused with pur- 
chasing power, purchasing power with money, and money consisted 
of gold and silver. It is possible that political economy might be 
cleared of many difficulties if we reverted to this conception of wealth 
as power. Wealth might be defined as the power of satisfying out 
desires through the labour of others. A man's wealth, as thus de- 
fined, would equal the real value of his possessions or income, multi- 
plied by the general effectiveness of the labour of the society in which 
he lives. I offer this merely as a suggestion. I cannot pretend that I 
ha\e worked the matter out. 


Note 6. — Meaning of the term Capital. 

The original meaning of the term capital appears to have been ac- 
cumulated wealth emplo^-ed with the expectation of profit. When we 
are thmking of capital from the point of view of the individual we still 
use the term with this meaning. But a new meaning has been given 
to the term by economists, founded on analogy between the individual 
and the state or community. This analogical extension of the term, 
like the analogical extension of the term "law," has given rise to 
endless misapprehension. 

In order to ascertain what is the proper meaning of the terrp when 
thought of from the point of view of the community, we must first 
consider what is the exact meaning of the term as thought of from the 
point of view of the individual. Now the primary notion that the 
word capital conveys to our minds, is the notion of something that will, 
without diminution of itself, give us continuously a future supply of 
wealth, or, as we say, an income or revenue. For instance, we get 
from a flock of sheep or herd of cattle, a continuous supply of meat, 
milk, wool, and hides, without any diminution in the flock or herd it- 
self. The second notion conveyed by the word is that of a quantity 
of wealth produced and accumulated by human effort. Some writers, 
it is true, appear to reject this second notion, and vaguely speak of 
land as being real capital, and of labour as personal capital, but such 
language only tends to introduce further confusion into the subject. 

In the example given above, of the flock of sheep, it will be noticed 
that the return of wealth to the capitalist is direct, but in modern life, 
the return is for the most part indirect, that is to say, it takes place 
through an act of exchange. Adam Smith has observed this distinc- 
tion, and has denoted it by the terms fixed and circulating capital, 
terms to which he gives a meaning quite different from that given to 
them by Mill and Professor Fawcett. When the return is indirect 
the capitalist either assigns through the instrumentality of money, a 
certain quantity of the necessaries of life to the workman, and receives 
jn return the product of that workman's labour as in the case of the 
farmer, or else his capital is employed in buying and selling, that is, 
in effecting exchanges for other people, as in the case of the shopkeeper 
or merchant. Hut whether the return be direct or indirect, capital 
must be defined as accumulated wealth employed with a view to 

When, therefore, we speak of the capital of a society, we must 
mean, any fund of accumulated wealth that will afford a revenue to 
the socrety. The revenue of a society can only be increased by set- 
ting fresh labourers to work, or by employing the present stock of 
labourers more effectively. The capital of a society, therefore, con- 



sists in those articles only which enable it to maintain a larger num- 
ber of labourers, or which promote the efficiency of labour. It con- 
sists mainly of the necessaries of life and the implements of industry. 
From it we must exclude all articles of luxury, such as velvets, silks, 
foreign wines, and pictures. All these things minister to immediate 
enjoyment, but do not sustain labour, and, therefore, do not lead to 
increase of revenue, or to any new production of wealth. It is no 
doubt less wasteful for a society to expend a quantity of wealth in 
building a Museum, than in giving a great banquet; because the 
Museum would perhaps afford enjoyment to the -society for 500 years 
or longer ; but both acts would be forms of unproductive expenditure- 
If on the other hand a society builds a railway, or carries out some 
judicious scheme of irrigation, it increases not only its wealth, but 
also its capital. In the one case, it enables labour to be employed 
more effectively, in the other case, it increases the quantity of food 
available for the sustenance of labour, and thereby enables the same 
extent of territory to support a larger number of labourers. Any ar- 
ticle of luxury, howe\er, which can be exported and exchanged for 
food or tools, must be considered to represent for the time being the 
amount of capital for which it will exchange. 

It has been asserted by a particular school of economists (of whom 
perhaps Professor Fawcett is almost the only survivor) that capital is 
the fund out of which all hired labour is remunerated. The advocates 
of this doctrine entirely misapprehend the nature of the services which 
the capitalist renders to society. The capitalist is a middleman. The 
services he renders are two-fold. In the first place he takes care that 
a certain part of the wealth of a societ)' shall be devoted to productive 
rather than to unproductive consumption. In the second place, he is> 
as Gibbon Wakefield says, "the representative of the division of 
labour." He collects workmen, provides them with tools and 
materials, and facilitates the exchange of their products with the pro- 
ducts of other workmen. But the wages of the workmen do not de- 
pend upon the funds in the hand of the middleman, but depend on the 
productiveness of their own labour, and especially on the productive- 
ness of that labour which is engaged in the production of the 
commodities most necessary for the labourer, because it is against the 
products of that kind of labour, that all other labouters exchange their 
own particular products. On the other hand it is true to say that the 
division of the joint products of labour or capital (in so far as it is de- 
termined by competition only) will depend on the ratio between capital 
and the labouring population. If tools are scarce, then the owners of 
tools must be well paid ; but if tools are plentiful and labour scarce, 
then a larger proportion of the remuneration will go to the labourers. 


The amount of circulating capital in the hands of employers is of less 
importance. For it is not true to say that the maintenance of the 
labourer must be advanced by the capitalist. This is merely a matter 
of custom or convenience, and not at all a matter of necessity. That 
this is so, has been clearly demonstrated by Professor Walker and other 
writers. " \\' hen the employer shall pay," says Professor \\'alker, " is 
merely a financial question, what he shall pay is the true industrial 
question." Of course there must be somewhere set apart a stock of 
food for the maintenance of labour. But this stock is not necessarily, 
a fund or capital devoted by employers to the purchase of labour. It 
is a stock that must feed the idle as well as the industrious. 

It must be noticed that in dealing with the problem of the distribu- 
tion of the products of labour into wages and profits, economists 
always regard capital from the standing point of the individual, that 
is, they regard it as accumulated wealth expended with a \new to 
profit. Mill expressly states that he means by capital, the aggregate 
funds in the hands of employers, which are devoted to the purchase of 
labour. Mill II., xi., p. 208. 


Paper I. 

1. Classify the causes upon which the growth of natural wealth de- 
pends, and explain the mode of their operation. 

2. What is meant by the division of labour? On what conditions 
does it depend, and what advantages does it produce ? 

3. Explain the reason why labour can be more sub-divided in some 
industries than in others. 

4. What is meant by the statement that the division of labour is 
limited by the extent of the market? 

5. How far was the formation of a class of capitalists an essential 
condition of a better sub-division of labour ? 

6. What are ehief uses of money ? Show that the introduction of 
money was a necessary consequence of the division of labour, and a 
necessary condition of its further sub-division. 

7. What are the qualities possessed by the precious metals, which 
have caused them to be chosen as the universal medium of exchange ? 

8. What is the proper economic sense of the term "value in use," 
or utility? 

9. Explain Adam Smith's distinction between the real and nominal 
price of commodities, and show why he attached importance to the 

ID, Show that corn is not an accurate measure of value. 

11. In what sense is it possible to take labour as a measure of value? 

12. Why is a rent reserved in corn more likely to preserve its value 
than a rent reserved in silver? 

13. Show that "at the same time and place the real and nominal 
price of commodities are exactly in proportion to one another." 

14. Show that corn varies in value more from year to year, silver 
from century to century. 

Paper II. 

1. Show that Adam Smith's theory of the component parts of price 
is unsatisfactory. 

2. What determines the natural, and what determines the market 
price of a commodity ? Show that the market price gravitates towards 
the natural price. 

3. Enumerate the circumstances which interfere with the gravitation 
of the market price towards the natural price. 


4- Show that rent does not enter into the price or cost of commo- 

5. Criticise the theory that wages depend on the ratio of population 
to capital. 

6. Show that the produce of labour constitutes the natural wages of 

7. How far is it true to say that " with the improvements to which 
the division of labour gives occasion," all things would have become 
cheaper ? 

8. How far is it true, that rent is a deduction from the reward of 

9. What is meant by the term, " minimum or necessary wages " ? 

10. Show that wages were not at a minimum in England in the time 
of Adam Smith. 

11. How is the money price of labour regulated ? 

12. On what causes does the rate of profit depend? 

13. Trace the variations in the legal rate of interest in England. 

14. Explain the doctrine of the tendency of profits to a minimum. 
What circumstances retard the fall of profits to a minimum ? 

15. Account for the low rate of profit in Holland, and the high rate 
prevailing in the American Colonies. 

Paper HI. 

1. Give Adam Smith's account of the nature of rent, and state how 
far it is imperfect. 

2. Show that economic rent is not the same thing as interest on 
capital laid out in improving the land. 

3. What are the effects, (i) of the formation of canals and railways; 
and (2) of the free importation of corn, on rents existing in any par- 
ticular neighbourhood ? 

4- Explain the causes of the great increase in ground rents during 
the last 40 years. 

5. How far is it true that the rent of meadow or pasture land is 
regulated by the rent of corn land ? 

6. How is the rent (i) of a coal mine, (2) of a silver mine, affected 
(i) by the increase of population in the neighbourhood, (2) by the 
establishment of improved communications 7 

7. Consider the effects of the introduction of clover, turnips, and of 
a better system of rotation of crops, on the rent of land. 

8. Consider the effects of a rise in the value of unskilled labour on the 
rent of land d) in a country that docs not import food, (2) in a coun- 
try that imports a larf^e part of its corn. 


g. Consider the effect of a fall in the value of English exportable 
goods in the markets of the world, on the rent of land inj, England, 

ID. What was the effect of the opening of the English markets, (i) 
on the value of Highland estates, (2) on the tillage of the Lowlands? 

11. What are the effects of an increase of population (i) on the re- 
lative value of corn and meat, and (2) on the relative value of wool 
and freestone? 

12. Discuss the statement that the precious metals are dearer in a 
rich country than in a poor country. 

13. Sketch the history of the law of settlement, and notice its effect 
on the wages of labour. 

14. What, according to Adam Smith, was the effect of the bounty 
on the exportation of corn ? 

15. Is it true to say that the low value of meat relatively to corn is a 
proof of barbarism or poverty ? 

16. What is the effect of industrial improvements on the relative 
value of raw produce and manufactured goods ? 

17. Show that all improvements in manufactures increase the real 
rent of land. 

18. Show that all improvements in the production of the necessaries 
of life increase the rate of profit and the real remuneration of labour. 

19. Why, according to Adam Smith, is it never safe for the legisla- 
ture to listen to the advice of the capitalist class ? 

Paper IV. 

1. Show the intimate connection between the division of labour and 
the accumulation of stock. 

2. Give Adam Smith's account of the distinction between fixed 
and circulating capital, and compare it with that given by Mill and 
Professor Fawcett. 

3. Ought we to regard money as fixed or circulating capital ? 

4.. Show .that every economy in the use of fixed capital enables a 
country to support a larger number of productive labourers. 

5. Give Adam Smith's account of the distinction between the gross 
and neat revenue of a country, and compare it with Mill's account of 
the matter. 

6. Show that the substitution of a paper for a metallic currency en- 
ables a country to support a larger number of productive labourers. 

7. What were the effects of the establishment of banking companies, 
(i) on the currency, and (2) on the trade of Scotland? 

8. Compare the advantages of the Scotch system of cash accounts 
with those of the English system of discounting bills. 


g. What are the limits which a bank must observe in issuing notes 
to borrowers ? 

ID. What rules should a banker observe in discounting bills or in 
granting cash accounts, in order to avoid an over issue of notes ? 

11. What part of a trader's capital may a banker safely advance in 
the form of notes ? 

12. Explain the sj-stem of drawing and redrawing. ' 

13. Give an account of the circumstances which led to the founda- 
tion and failure of the Ayr Bank. 

14. Point out the inconvenience arising from a currency that con- 
sists entirely of paper money. 

15. Show that it is not a violation of libert}' for a government to 
regulate the business of bankers. 

Paper V. 

1. Can any real distinction be made between productive and un- 
productive labour? If so, show that Adam Smith's distinction is un- 
important, and point out the real grounds of difference. 

2. Show the connexion between capital and industry, and between 
unproductive expenditure and idle habits. 

3. State the causes which regulate the rate of interest as distin- 
guished from the rate of profit. 

4. Distinguish between the value of money and the value of the use 
of money. 

5. Show that the rate of interest is not regulated by the value of 

6. Examine the effect of laws against usury. 

7. Show that the increase of the precious metals is the effect, not 
the cause of public prosperity. 

8. Classify the different ways in which, according to Adam Smith, 
capitals may be employed. 

9. "The carrying trade is the natural effect and symptom of great 
national wealth." Explain and criticise this statement. 

10. Criticise the statement that " in manufactures nature docs no- 
thing, man does all." 













C u 



O 0) 


•H P 



(D • 

- (U