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UNIVERSITY OF CALIFORNIA.
Received Accessions No.
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ELEMENTS
OF
POLITICAL ECONOMY
BY
JAMES MILL, ESQ.
AUTHOR OF
THE HISTORY OF BlUTISH INDIA.
SECOND EDITION,
REVISED AND CORRECTED.
■SEBIT¥ LONDON:
PRINTED FOR BALDWIN, CRADOCK, AND JOY.
1824
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\<^''
^Z^^J&
C. Baldwin, Printer,
New Bridge-street, Liondon.
PREFACE.
To this edition I shall prefix only an account of the changes which have been made in it.
The whole of the work has been carefully revised; and where it appeared that the expression could be rendered more clear or precise, the requisite altera- tion was attempted. The instances are too numer- ous to be specified.
A greater developement has been given to the subject of Production; and two sections, one on La- bour, another on Capital, have been added to that Chapter.
In the Chapter on Interchange, I have endeavour- ed to illustrate more completely the controverted subject of Value, and to establish on clearer proof the view which I have taken of the circumstances by which it is regulated.
In the same Chapter a new Section has been intro- duced, on the effect of employing two metals, as standard money, and of using subsidiary coins, at less than their metallic value.
A considerable portion of what relates to the doctrine of Excbange, or the transactions by bills among nations, has been re-written, in the hope that the difficulties by which that subject is enveloped, might be still farther removed.
•:>
IV PREFACE.
In the Chapter on Consumption I have endeavour- ed by new illustrations to render more palpable what appears to me to be demonstration of that most im- portant doctrine, that the aggregate demand and supply of a nation are always equal, that production can never be too rapid for the market ; in other words, that there never can be a general glut of commodities.
The Section which treats of a Tax on Wages has been re-written, and the subject more fully ex- pounded.
The question relating to the operation of a tax, proportional to their value, upon all commodities, has been cleared of some ambiguity of language, and has received farther illustrations.
A new Section has been introduced to ascertain the effects of a tax upon Farmers' Profits, and of taxes upon the Instruments of Agriculture.
In the Section which treats of taxes intended to fall indiscriminately upon all sources of Income, I have endeavoured to give a reply to the question, whether an income tax ought to fall equally on equal incomes, without regard to the time they are to en- dure, or thQ value which they derive from that duration.
CONTENTS.
Page INTRODUCTION.
The Subject— Its Limits — And Division 1
CHAPTER I.
Production 5
Section I. Labour 8
Section II. Capital 16
CHAPTER IL
Distribution 27
Section I. Rent 29
Section II. Wages 40
1 . That the Rate of wages depends on the proportion between Population, and Employment, in other words, Capital 41
2. Proof of the tendency of Population to increase rapidly 46
3. Proof that Capital has a less tendency than Popula- tion to increase rapidly 50
4. That forcible means employed to make capital in- crease faster than its natural tendency would not produce desirable effects 58
Section III. Profits , 70
VI CONTENTS.
CHAPTER III.
Page Interchange 83
Section I. Nature of the advantage derived from the Interchange of Commodities: And the principal agents
employed in it 83
> Section II, What determines the quantity in which commodities exchange for one another 86
Section III. Effect upon exchangeable values of a fluc- tuation in Wages and Profits 100
Section IV. Occasions on which it is the interest of nations to exchange commodities with one another. ... 113
Section V. The commodities imported are the cause of the benefits derived from a foreign trade 120
Section VI. Convenience of a particular commodity, as a medium of exchange 123
Section VII. What regulates the value of Money. .. . 126
Section VIII. What regulates the quantity of Money. . 131
Section IX. The effect of employing two metals both as Standard Money, and of using subsidiary Coins, at less than the metallic value 136
Section X. Substitutes for Money 141
Section XI. Advantages derived from the use of Paper Money 145
Section XII. Inconveniences to which the use of Paper Money is liable 147
Section XIII, The value of the precious metals deter- mines whether a country shall export or import 166
Section XIV. The value of the precious metal, or me- dium of Exchange, which determines exportation, is not the same in all countries. , , 169
CONTENTS. VU
Page Section XV. Mode in which the precious metal, or
medium of exchange, distributes itself among the na-^
tions of the globe ^ . 172
Section XVI. Money transactions between nations :
Bills of exchange 1 77
Section XVII. Bounties and Prohibitions 192
Section XVIII. Colonies 203
CHAPTER IV.
Consumption 213
Section I. Of productive and unproductive consump- tion 214?
Section II. That what is annually produced is annu- ally consumed 220
Section III. That consumption is co-extensive with
production 222
Section IV. In what manner government consumes , . 240
Section V. Taxes on Rent , 212
Section VI. A Tax on Profits , . . 251
Section VII. A Tax on Wages 253
Section VIII. Direct Taxes which are destined to fall
equally upon all sources of Income 262
Section IX. Taxes on commodities ; either some par- ticular commodities ; or all commodities equally . . , , 271
Section X. A tax upon the produce of the land 277
Section XI. A tax upon the profits of the Farmer, and
upon Instruments of Agriculture 279
Section XII. Tithes and Poor Rates 281
Section XIII. ' A tax per acre on the land 283
Section XIV. Taxes upon the transfer of property. . , . 287 Section XV. Law Taxes ,
VUl CONTENTS.
Page Section XVI. Taxation on Money, and the precious
metals 290
Section XVII. Effects of the taxation of commodities
upon the value of money, and the employment of
capital,.,, r ,, 295
ERRATA.
Page 111, line 16, for " mc, more as wages /aW," read *' /aW, more us
wages rise.^* Ibid, line 20, for " less or mofey* read ** more or less.^* Page 189, line 7, for ** interchange," read ♦' exchange."
ELEMENTS
OF
POLITICAL ECONOMY.
INTRODUCTION.
THE SUBJECT—ITS LIMITS— AND DIVISION.
Political Economy is to the State, what do- mestic economy is to the family.
The family consumes ; and in order to consume, it must obtain supply.
Domestic economy has, therefore, two grand ob- jects ; the consumption and supply of the family. The consumption being a quantity always indefinite, for there is no end to the desire of enjoyment, the grand concern is, to increase the supply.
B
2 INTRODUCTION,
Those things which are produced in sufficient abundance for the satisfaction ' of all, without the in- tervention of human labour, as air, the light of the sun, and water, at least in most regions of the globe, are not objects of care or providence ; and therefore, accu- rately speaking, do not form part of the subject of domestic economy. The art of him who manages a family consists in regulating the supply and consump- tion of those things which cannot be obtained but with cost, in other words, with human labour, " the original purchase-money which is given for every thing."
The same is the case with Political Economy. It also has two grand objects, the Consumption of the Community, and that Supply upon which the con- sumption depends. Those things which are supplied without the intervention of human labour, as nothing is required in order to obtain them, need not be taken into the account. Had all things desired for consumption, been found without the interven- tion of human labour, the Science of Political Eco- nomy would not have existed. No science is implied in putting forth the hand, and using. When labour, however, is to be employed, and the objects of desire can be multiplied only by a preconcerted plan of ope- rations, it becomes an object of importance to ascer- tain by what means they may be produced with greatest ease and in greatest abundance ; and upon these discoveries, when made, to frame a system of rules skilfully adapted to the end.
INTRODUCTION. 9
It is not pretended, that writers on Political Eco- nomy have always limited their disquisitions to this class of objects. It seems, however, important to de- tach the science from all considerations not essential to it. The Reader is accordingly requested to mark, that, in the following pages, I have it in view, to ascertain merely the laws according to which the production and consumption are regulated, of those commodities which the intervention of human labour is necessary to procure.
The Science of Political Economy, thus defined, divides itself into two grand inquiries; that which relates to Production, and that which relates to Con- sumption.
But after things are produced, it is evident that they must be distributed, before they are consumed. The laws of Distribution, therefore, constitute an in- termediate inquiry, between that which relates to Pro- duction, and that which relates to Consumption.
When commodities are produced and distributed, it is highly convenient, for the sake both of re-pro- duction and consumption, that portions of them should be exchanged for one another. To ascertain, therefore, the laws according to which commodities are exchanged for one another is a second inquiry, preliminary to that which relates to the last great topic of Political Economy, Consumption.
b2!
4 IKTRODUCTION.
It thus appears, that four inquiries are compre- hended in this science.
1st. What are the laws which regulate the produc- tion of commodities :
Sldly. What are the laws according to which the commodities produced by the labour of the commu- nity are distributed :
Sdly. What are the laws according to which com- modities are exchanged for one another :
4thly. What are the laws which regulate consump- tion.
CHAPTER I.
PRODUCTION.
The distinction between what is done by labour, and what is done by nature, is not always observed. A few words, therefore, are necessary to fix the meaning of terms.
Labour produces its desired effects only by con- spiring with the laws of nature. There is no com- modity, or thing produced for consumption, which labour provides in any other way than by co-operating I with the laws of nature. '"^"^
It is found that the agency of man can be traced to very simple elements. He can do nothing more
)^
6 CHAP. I — PRODUCTION.
than produce motion. He can move things towards one another, and he can separate them from one another : the properties of matter perform all the rest. He moves ignited iron to a portion of gun- powder, and an explosion takes place. He moves the seed to the ground, and vegetation commences. He separates the plant from the ground, and vege- tation ceases. Why, or how, these effects take place, he is ignorant. He has only ascertained, by experience, that if he perform such and such mo- tions, such and such events will follow. In strictness of speech, it is matter itself, which produces the effects. All that men can do is to place the objects of nature in a certain position. The tailor when he makes a coat, the farmer when he produces corn, do but the same thing. Each performs a set of motions ; and the properties of matter do the rest. It would be absurd to ask, to which of any two effects the properties of matter contribute the most ; seeing they contribute every thing, after certain portions of matter are placed in a certain position.
As our inquiry is confined to that species of pro- duction of which human labour is the instrument, and as human labour produces its effects chiefly #in two modes, either with, or without the aid of imple- / ments, this chapter naturally divides itself into two sections, of which the first will treat of Labour, simply, and as much as possible detached from the
CHAP. I— PRODUCTION. f
consideration of the instruments by which the powers of labour may be increased : the second will treat of Capital, or of the origin, and nature of that pro- vision of materials, on which labour is employed, and by which its operations are assisted.
8 CHAP. I — PRODUCTION.
SECTION L
LABOUR.
In the state of society in which we exist, we sel- dom see Labour employed, except in conjunction with Capital. To conceive the separate operation of Labour more distinctly, it may be useful to recur, in imagination, to that simple state of things, in which society ipay be conceived to have originated.
The savage who climbs a tree, and gathers the fruit; he who ensnares a wild beast, or beats it down with a club, may be ' considered as operating with their naked powers, and without the aid of any thing to which the name of Capital can properly be annexed.
The principal thing which, with a view to the con- clusions of Political Economy, it is necessary to re- mark in regard to Labour, considered separately, as a distinct portion of an analyzed whole^ and apart from Capital, is the necessity of subsistence to the labourer. In the idea of labour, the idea of this subsistence is included. Whenever we say that such and such effects are produced by pure labour, we mean the consumption and operations of the labourer
SECT. I — LABOUR. 9
taken conjunctly. There can be no labour without f the consumption of the labourer. If the man who climbs the tree to gather the fruit, can manage to find two such trees, and to climb them in a day, he can continue his employment with the subsistence of half a day provided in advance. If the man who subsists on animals cannot make sure of his prey, in less than a day, he cannot have less than a whole day's subsistence in advance. If hunting excursions are undertaken which occupy a week or a month, subsistence for several days may be required. It is evident that when men come to live upon those pro- ductions which their labour raises from the soil, and which can be brought to maturity only once in the year, subsistence for a whole year must be laid up in advance.
The previous provision of the labourer may be greater or smaller, in proportion to the greater or less time which it may require, to realize the fruit of his labour in the shape of subsistence ; but in all these cases, equally, whenever we speak of his labour as a thing by itself, a detached independent instrument of production, the idea of the subsistence is included in it.
This is the more necessary to be strongly remarked, that, as we shall afterwards see, this important cir- cumstance is liable to be overlooked. The terms Labour, and Wages, are sometimes incautiously used ; and much confusion of ideas, and some fundamental errors, are the consequence. Nothing, however, is
10 CHAP. 1 — PRODUCTION.
more clear, than that, when we speak of the labour of a man, for a day, or a month, or a year, the idea of his subsistence is as necessarily included, as that of the action of his muscles, or his life. His labour is not one thing, the action of his muscles another thing ; in the point of view relevant to the purpose in hand, they are one and the same thing. If wages be taken, therefore, as synonymous with the con- sumption of the labourer, the labour cannot be taken as one item of an aggregate, and its wages as an- other. As often as this is done, an error is the neces- sary consequence.
Having thus seen what ideas are necessarily in- cluded in that of labour, in its detached, and simplest form, it is only further necessary, under this head, to consider the improvements, in respect to its pro- ductive powers, of which it is susceptible.
It will be seen, hereafter, that the most important of these improvements arise from the use of those instruments which form one of the portions of ca- pital. Great improvements, however, also arise from the division, including the distribution, of labour: and all which it will be necessary, in this work, to advance on that topic, which has been so often ex- plained, and is commonly well understood, may be here introduced.
The foundation of this class of improvements, is.
SECT. I — LABOUR. 11
' the faculty by which an operation, which we performN slowly at first, is performed with greater and greater j rapidity by repetition. This is a law of human na* ture so familiar, and well understood, that it hardly stands in need of illustration. The simplest of all operations, that of beating equal times on a drum, is a proper example. A man who has not practised a similar operation, is often surprised, upon trial, at the slowness* with which he performs it, while the ra- pidity of a practised drummer is still more asto- nishing.
The repetition, upon which the greatest celerityX depends, must be frequent. It is not therefore com- I patible with a great number of different operations. The man who would perform an operation, or a few operations, with the greatest possible rapidity, must principally confine his labours to such operations. In the operations, therefore, which are conducive to the production of the commodities desired by man, if any one confines himself to a small number of those operations, he will perform them with much more rapidity ; and not only with more rapidity, but with more correctness and precision ; qualities often of the greatest consequence ; than if he employed him- self in a greater number of operations.
There is a certain immense aggregate of ope- rations subservient to the production of commodities useful and agreeable to man, at least in the more
12 CHAP. T — PRODUCTION.
complicated states of society. It is, obviously, from tjie above stated principles, of the highest importance, that this immense aggregate should be divided into portions, consisting, each, of as small a number of operations as possible, in order that every operation ay be the more quickly and perfectly performed, each man could, by the more frequent repetition thus occasioned, perform two of these operations, in- stead of one, and also perform each of them better, the powers of the community in producing articles, useful and agreeable to them, would, upon this sup- position, be more, than doubled. They would not only be doubled in point of quantity, but a great advantage would be gained in point of quality.
This subject has been beautifully illustrated by Adam Smith, in the first chapter of the first book of ^the " Inquiry into the Nature and Causes of the 'ealth of Nations," where the extraordinary effect >f the division of labour in increasing its productive powers, in the more complicated cases, is displayed in some very remarkable instances. He remarks, that a boy who has been accustomed to make nothing but nails, can make upwards of two thousand three hun- dred of them in a day ; while a common blacksmith, whose operations are nevertheless so much akin to those of the nailer, cannot make above three hundred, and those very bad ones.
In the simplest state of labour, it cannot be
SECT. I— LABOUR. 13
doubted, that if one man should confine himself to the operation of climbing trees for their fruit, another to the operations of ensnaring and killing animals, they would acquire a dexterity, the one in climbing trees, the other in procuring animals, greater than they would have acquired, had each occasionally performed both operations ; and that they would by such means obtain a greater abundance both of fruit, and of game.
So obvious is this advantage, that some remark- able cases of the division of labour are exemplified in the earliest stages of the arts. The hands which spin the thread, and the hands which weave it into cloth, were different in every country, perhaps, in which we have any memorial of the early state of the art. The man who tans the hide, and the man who makes it into shoes; the man who works in iron, and the man who works in wood, were all se parated at an early period, and divisions of labour appropriated to them.
If the immense aggregate of the operations which are subservient to the complicated accommodations, required in an artificial and opulent state of society, wer6 to be divided, under circumstances the best cal- culated for breaking it down into those small groupes of operations, which afford the greatest aid to the productive powers of labour, the most perfect philo- sophical analysis of the subject would be the first
y
li CHAP. I — PRODUCTION.
operation to be performed; the next would be an equally perfect philosophical synthesis.
In order to know what is to be done with a vast aggregate of materials, existing in forms ill adapted in many respects to the ends which are to be ob- tained, it is necessary to contemplate the aggregate in its elements, to resolve it into these elements, and carefully and comprehensively to pass them under review. This is the analytical operation.
'^ When we have the full knowledge of the elements, which we are to combine as means towards our ends, and when we have an equally perfect knowledge of the ends, it then remains that we proceed to form those combinations by which the ends will be most advantageously produced. This is the synthetical operation.
It is well known that neither of these operations has as yet been performed, in order to obtain the best division and distribution of labour. It is equally certain that this division is still in a most imperfect state. As far as it has been performed, it has been performed practically as they call it, that is, in a great degree, accidentally, as the fortuitous discove- ries of individuals, engaged in particular branches, en- abled them to perceive that in these branches a par- ticular advantage was to be gained. Such improve- ments have almost always been founded on some very
SECT. I — LABOUR. 15
narrow view ; an analysis and synthesis, certainly, but including a small number of elements, and these but imperfectly understood. Improvements, founded upon narrow views, are almost always equally con- fined in their application. There is no generalization. An improvement, introduced into one machine, or one manufacture, is often long before it is introduced into another machine, or another manufacture, where it would be equally important. And one improve- ment is still more slow in suggesting another which is akin to it, because a narrow view discovers no re- lations between the things which it embraces and those which it excludes.
16 CHAP. 1— PRODUCTION.
SECTION II.
CAPITAL.
We have already observed, that labour performs its operations either simply by the unaided powers of the human body, or with the use of instruments, which augment not only the quantity, but often also the accuracy and precision of its results. -
As examples of the earliest and simplest of the in- struments contrived for this purpose, we may mention the bow and arrow, and the sling, of the huntsman. The spade is an instrument soon invented for turn- ing the soil; and a certain rude instrument, to which the force of cattle may be applied, and which is the earliest form of a plough, is not long in suggest- ing itself.
From these beginnings men proceed, inventing one instrument after another, the axe, the hammer, the saw, the wheel, the wheel-carriage, and so on, till they arrive at last at that copious supply of com- plicated machinery by which labour is rendered pro- ductive in the most artificial states of society. The provision made of these instruments is denominated capital.
SECT. 11— CAPITAL. 1 7
This, however/ is not the whole of what is deno- minated capital. Labour in its earliest stage is not employed upon any materials but such as nature pre- sents, without any preparation at the hands of man. When the savage climbs the tree to gather the fruit, when the huntsman tears down the branch to form his club or his bow, he operates upon materials which are prepared for him by the hand of nature. At a subsequent stage in the progress of industry, the materials upon which labour is employed have gene- rally been the result of previous labour. Thus, the flax and the cotton which are to be manufactured into cloth and muslin, have been the result of the labour of agriculture ; the iron has been the result of the labours of the miner and smelter, and so of other cases. The materials upon which labour is to be employed, where they have thus been the result of previous labour, are also denominated capital.
And when we speak of labour as one of the instru- ments of production, and capital as the other, it is certain that these two constituents, namely, the in- struments which aid labour, and the materials on j which it is employed, are all that can be correctly included in the idea of capital. It is true that wages are in general included in that idea. But in that case labour is also included, and can no longer be spoken of as an instrument of production apart from capital. We have already seen, that whenever labour is spoken of as a separate, distinct instrument of
c
18 CHAP. I — iPRODUCTION.
production, the idea of the subsistence, or consump- tion of the labourer, for which wages is but another name, is included in the idea of the labour. This subject is noticed in this place merely for the better ensuring of clear ideas. We shall consider hereafter the errors to which a confusion of ideas on this point has given rise.
Having thus endeavoured to annex precise ideas to the terms Capital and Labour, a matter of the utmost importance in the study of political economy, and to distinguish their respective departments in the busi- ness of production, it is only necessary for the learner farther to advert to the origin of capital, the source from which it of necessity springs, and the laws of its accumulation.
It is easy to discover that the source from which capital is ultimately derived, is labour. Production of necessity begins with the hands, and nothing else, of the labourer. There can be no instrument till it is made ; and the first instrument had no previous instrument to be made with.
The first portion of capital, therefore, was the re- ^ |sult of pure labour, without the co-operation of capital.
Speedily, however, after the first instrument which increased the productive powers of labour, as the bow of the huntsman, had been made, another instrument would be made to assist in the formation of the
SECT. II — CAPITAL. 19
former, as a knife to aid in the formation of the bow, and then capital first begins to be the result of la- bour, and of capital conjoined.
This subject is too clear to need to be illustrated by tracing the mode in which capital and labour combine in producing the articles which form capital, from the simplest to the most complicated cases. It will be hereafter seen, that in the more artificial and improved states of the business of production, a very great proportion of the whole of the labour and capi- tal of the country is constantly employed in the pro- duction of the articles which form capital.
As capital, from its simplest to its most com- plicated state, means something produced for the purpose of being employed, as the means to- wards a further production, it is evidently a result of what is called saving. The meaning of this term is so well understood, and so little liable to abuse, that not many words will be necessary to explain this particular relating to capital, though it is a law of great importance to remark.
It is sufficiently evident that without saving there could be no capital. If all labour were employed upon objects of immediate consumption, which were all immediately consumed, such as the fruit for which the savage climbs the tree, no article of capital, no article to be employed as a means to further produc-
c 2
2!0 CHAP. I — PRODUCTION.
tion, would ever exist. To this end something must be produced which is not immediately consumed, which is saved and set apart for another purpose.
All the consequences of this fact, to which it is necessary here to advert, are sufficiently obvious.
Every article which is thus saved becomes an arti- ' cle of capital. The augmentation of capital, there- fore, is every where exactly in proportion to the de- gree of saving ; in fact, the amount of that augmen- tation annually is the same thing with the amount of the savings which are annually made.
The labour and the capital, which combine to the production of a commodity, may belong both to one party, or one of them may belong to one party, the other to another. Thus, when the savage who kills a deer, kills it with his own bow and arrows, he is the owner both of the labour and of the capital: when he kills it with the bow and arrows of another man, the one is the owner of the labour, the other of the capital. The man who cultivates his little farm with his own labour and that of his family, without the aid of hired servants, is owner both of the capital and of the labour ; the man who cultivates with none but hired servants, is owner of the capi- tal, the servants may be considered, at least for the present purpose, as owners of the labour, though we shall presently see under what modifications that meaning is to be taken.
SECT. II — CAPITAL. Si
In this sense of the term " owners of labour," it is familiarly known that the parties concerned about production, are divided into two classes, that of the capitalists, the rich men who supply the materials and instruments of production, and that of the work- men, who supply the labour.
These terms are all sufficiently familiar; but a few observations are further necessary, in order, on this important subject, to preclude, as far as possible, confusion of ideas.
The great capitalist, the owner of a manufactory, if he operated with slaves instead of free labourers, like the West India planter, would be regarded as' owner both of the capital and of the labour. He would be owner, in short, of both instruments of production ; and the whole of the produce, without participation, would be his own.
What is the difference in the case of the man who operates by labourers receiving wages ? The labourer who receives wages sells his labour for a day, a week, a month, or a year, as the case may be. The ma- nufacturer who pays these wages buys the labour, for the day, the year, or whatever period it may be. He is equally therefore the owner of the labour, with the manufacturer who operates with slaves. The only difference is in the mode of purchasing. The owner of the slave purchases at once the whole of the la-
22 CHAP. I — PRODUCTION.
bour, which the man can ever perform : he who pays wages purchases only so much of a man's la- bour as he can perform in a day, or any other stipu- lated time. Being equally, however, the owner of the labour so purchased, as of that which the slave owner purchases in the case of the slave, the pro- duce, which is the result of this labour, combined with his capital, is all equally his own. In the state of society in which we at present exist, it is in these circumstances that almost all production is effected : the capitalist is the owner of both instruments of production, and the whole of the produce is his.
There is a distinction of capital into two sorts, arising from a difference in the mode of applying it, to which some consequences of importance are attached, and of which it is necessary, therefore, that a correct idea should be retained.
Of the articles whereof capital consists, some are of a durable nature, and contribute to production without being destroyed. Of this nature is a great proportion of the tools and machines which are em- ployed both in agriculture and manufactures. Such are the buildings subservient to the various kinds of production ; and all other accommodations, not neces- sary to be enumerated, which do not peiish in the using. That portion of capital, which comes under J;his description, has been denominated " Fixed Capital."
SECT. II — CAPITAL. 2S
There is anotlier portion of the articles subservient to production which do perish in the using. Such are all the tools worn out in one set of operations, all the articles which contribute to production only by their consumption, as coals, oil, the dye stuffs of the dyer, the seed of the farmer, and so on. Of this nature, also, are the raw materials worked up in the finished manufacture. The wool of the clothier is consumed in the making of his cloth, the cotton of the cotton- manufacturer in making his muslins. Under the same head must be included the expence of repairing and keeping in order the more durable articles of fixed capital. The distinctive character of all this portion of capital is, that it is necessarily consumed in contributing to production, and that it must be reproduced in order to enable the producer to con- tinue his operations. This has been denominated " circulating " capital ; but by a very inappropriate appellation. There is nothing in its consumption and reproduction which bears much resemblance to circulation. It would be much better to call it " re- produced" capital, although the word " reproduced" being a past and not a future participle, is not unex- ceptionable ; it is capital which constantly needs to be reproduced, because, in contributing to production, it is constantly consumed.
There is another thing which is also constantly consumed, and constantly needs to be reproduced, and that is the subsistence, or consumption, or wages
24 CHAP. I — PRODUCTION.
of the labourer ; and that equally whether the la- bourer supplies it to himself, or whether he receives it from the capitalist in the shape of wages, that is pay, in advance, for his labour. In this latter shape, being advanced by the capitalist out of those funds, which would otherwise have constituted capital in the distinctive sense of the word, and being considered as yielding the same advantage, it is uniformly spoken of under the name of capital, and a confusion of ideas is sometimes the consequence.
When all these items are included, it is obvious that a very great proportion of the consumption and production of every country takes place for the sake of reproduction. This is a highly important fact, of which the consequences will hereafter occur for more particular consideration.
It follows, necessarily, if the instruments of la- bour, the materials on which it is employed, and the subsistence of the labourer, are all included under the name of capital, that the productive industry of every country is in proportion to its capital; increases when its capital increases, and declines when its ca- pital declines. It is obvious that when there is more instruments of labour, more materials to work upon, and more pay for workmen, there will be more work, provided more workmen can be obtained. If they cannot, two things will happen : wages will be raised, which, giving an impulse to population, will increase
SECT. II — ^^CAPITAL. ^ 25
the number of labourers ; while the immediate scar- city of hands will whet the ingenuity of capitalists to supply the deficiency, by new inventions in machi- nery, and by distributing and dividing labour to greater advantage.
CHAPTER II.
DISTRIBUTION.
We have seen that two classes of persons are concerned in production ; namely. Labourers and Capitalists. Each of these must have (heir share of the commodities produced: or, whifeh comes to the same thing, of the benefit derived from them. When the Land is one of the instruments of production, another party comes in for a portion ; I mean, the Owners of the Land. And these three form all the classes who immediately share, that is, divide among them, the whole of the annual produce of the country.
When the parties are determined, among whom the whole of the produce is distributed, it remains to
28 CHAP. II — DISTRIBUTION.
be ascertained, by what laws the proportions are established according to which the division is made. We shall begin with the explanation of Rent, or the share received by Landlords, as it is the most simple, and will facilitate the explanation of the laws upon which the shares of the Labourers and Capitalists depend.
SECT. I — EENT. £0
r
SECTION I.
HENT.
Land is of different degrees of fertility. There is a species of land, the elevated or stony parts, for example, of high mountains, loose sand, and certain marshes, which may be said to produce nothing. Between this and the most productive sort, there are lands of all the intermediate degrees of fertility. Lands of the highest fertility do not yield the whole of what they are capable of yielding, with the same facility. A piece of land, for example, may be ca- pable of yielding annually ten quarters of corn, or twice ten, or three times ten. It yields, however, the first ten with a certain quantity of labour, the second ten not without a greater, the third ten not , without a greater still, and so on ; every additional ten requiring to its production a greater cost than the ten which preceded it. This is well known to be the law according to which capital is applicable to the obtaining a greater and greater produce from the same portion of land.
Till the whole of the best land is brought under cultivation, and till it has received the application of a certain quantity of capital, all the capital employed
30 CHAP. II^—DISTHIBUTION.
upon the land is employed with an equal return. At a certain point, however, no additional capital can be employed upon the same land without a diminutioq^^^ of return. In any country, therefore, after a certain^^^ quantity of corn has been raised, no greater quantity can be raised but at a greater cost. If an additional quantity is raised, the capital employed upon the land may be distinguished into two portions, one produc- ing a higher, another a lower return.
When capital producing a lower return is applied to the land, it is applied in one of two ways. It .is either applied to new land of the second degree of fertility, then for the first time brought under culti- vation ; or it is applied to land of the first degree of fertility, which has already received all the capital which can be applied without a diminution of re- turn.
Whether capital shall be applied to land of the second degree of fertility, or in a second dose to the land of the first degree of fertility, will depend, in each instance, upon the nature and qualities of the two soils. If the same capital which will produce only eight quarters when applied in a second dose to the best land, will produce nine quarters when applied to land of the second degree of fertility, it will be applied to that land, and vice versa.
The land of the different degrees of fertility ; first.
SECT. I — UENT. SI
or highest ; second, or next highest, and so on, may, for facility of reference, be denominated No. 1, No. 2, No. 3, &;c. In like manner, the different doses of capital which may be applied to the same land, one after another, with less and less e^ect, may be deno- minated 1st dose, 2d dose, 3d dose, and so on.
So long as land produces nothing, it is not worth appropriating. So long as a part only of the best land is required for cultivation, all that is uncultivated yields nothing ; that is, nothing which has any value. It naturally, therefore, remains unappropriated ; and any man may have it, who unjjgrtakes to render it productive.
undert
During this time, land, speaking correctly, yields no rent. There is a difference, no doubt, between the land which has been cultivated, and the land which is yet uncleared for cultivation. Rather than clear the fresh land, a man will pay an equivalent, annual or otherwise, for the cost of clearing : and it is evident that he will pay no more. This, therefore, is not a payment for the power of the soil, but simply for the capital bestowed upon the soil. It is not rent, it is interest.
The time, however, comes, at which it is necessary either to have recourse to land of the second quality, or to apply a second dose of capital, less productively, upon land of the first quality.
32 CHAP. II— DISTKIBUTION.
If a man cultivates land of the second quality, upon which a certain quantity of capital will pro- duce only eight quarters of corn, while the same quantity of capital upon land of the first quality will produce ten quarters ; it will make no difference to him, whether he pay two quarters for leave to cul- tivate the first sort, or cultivate the second without any payment. He will therefore be content to pay two quarters for leave to cultivate the first soil ; and that payment constitutes rent.
Let us suppose, again, that instead of cultivating land of the second quality, it is more adviseable to apply a second dose of capital to land of the first qua- lity ; and that while the first dose produces ten quar- ters, the second of equal amount will produce only eight quarters : it is equally implied in this, as in the former case, that, it being no longer possible to em- ploy any more capital with so great an effect as the ten supposed quarters, there are persons who are wil- ling to apply it with so little a return as eight. But if there are persons who are willing to apply their capital on the land witJi so little a return as eight quarters, the owners of the land may make a bargain, by which they will obtain all that is produced above eight. The effect upon rent is thus the same in both cases.
Rent increases, therefore, in proportion as the effect of the capital successively bestowed upon the
SECT. I— RENT. 33
land decreases. If population has arrived at another stage, when, all the land of second quality being cul- tivated, it is necessary to have recourse to land of third quality, yielding, instead of eight quarters, only six quarters, it is evident, from the same process of reasoning, that the land of second quality will now yield rent, namely, two quarters ; and that land of first quahty will yield an augmented rent, namely, two quarters more. The case will be exactly the same if, instead of having recourse to land of less fertility, a second and a third dose of capital, with the same diminution of produce, are bestowed upon land of the first quality.
We may thus obtain a general expression for Rent. In applying capital, either to lands of various degrees of fertility, or in successive doses to the same land, some portions of the capital so employed are attended with a greater produce, some with a less. That which yields the least, yields all that is necessary for reim- bursing and rewarding the capitalist. The capitalist will receive no more than this remuneration for any portion of the capital which he employs, because the competition of others will prevent him. All that is yielded above this remuneration the landlord will be able to appropriate. Rent, therefore, is that part of the return, made to the more productive portions of capital, by which it exceeds the return made to the least productive portion.
34 CHAP. II — DISTRIBUTION.
Taking for illustration the three stages mentioned above, of ten quarters, eight quarters, and six quar- ters, we perceive that rent is the difference between six quarters and eight quarters for the portion of capital which yields only eight quarters ; the differ- ence between six quarters and ten quarters for the portion of capital which yields ten quarters ; and if three doses of capital, one yielding ten, and another eight, and another six quarters, are applied to the same portion of land, its rent will be four quarters for dose No. 1, and two quarters for dose No. 2, making together six quarters for the whole.
If these conclusions are well supported, the doc- trine of rent is simple, and the consequences, as we shall see hereafter, are exceedingly important. There is but one objection which it seems possible to make to them. It may be said, that after land is appropri- ated, there is no portion of it which does not pay rent : no owner being disposed to give the use of it for no- thing. This objection has, indeed, been raised. And it has been urged, that some rent is paid even for the most barren of the Scottish mountains.
When an objection is taken, it affects the conclu- sion, either to a material, or to an immaterial extent. Where the matter alleged in objection, even if ad- mitted, would still leave the conclusion substantially, and to all practical purposes, true, the objection must be owing to one of two defects in the mind of the ob-
SECT, I — RENT. 35
jector ; either a confusion of ideas, which prevents him from seeing to how small a degree the matter which he alleges affects the doctrine which he denies ; or a disposition to evade the admission of the doctrine, even though nothing solid can be found with which to oppose it.
That the matter alleged in this objection, even if allowed, would leave the conclusion, to all practical purposes, just where it was, can hardly fail to be acknowledged, as soon as the circumstances are dis- closed. It cannot be so much as pretended that the rent paid for the barren mountains of Scotland is any- thing but a trifle ; an evanescent quantity, when we speak of any moderate extent. If it were 20/. for a thousand acres, that is, about one penny per acre, this would bear so small a proportion to the cost of cultivation, which could not be less than several pounds per acre, that it would little affect the truth of the conclusion we have endeavoured to establish. '-^v u{ ^ -
Let us suppose, for the sake of the argument, that the worst species of land under cultivation pays one penny per acre ; rent, in that case, would be the differ- ence between the produce arising from different por« tions of capital, as explained above, with the cor- rection required on account of the penny per acre paid as rent for the worst species of land under culti- vation. Assuredly^ if right in every other respect, we
D2
36 CHAP. 11— DISTRIBUTION.
shall not be far wrong in our conclusion, by leaving this penny out of the question. A very slight ad* vantage, in simplifying our language on the subject, would justify this omission.
But it is not true that our conclusions stand in need of any such correction, even for metaphysical exactness. There is land, such as the sands of Arabia, which yields nothing. Land is found at all the intermediate stages from this to the highest fer- tility. Some land, though not absolutely incapable of yielding any thing for the accommodation of man, could not be made to yield what would maintain the labourers required for its cultivation. This land can never be cultivated. There is land, the annual pro- duce of which would just maintain the labour ne- cessary for its cultivation, and no more. This land is just capable of being cultivated, but obviously in- capable of ever paying rent. > The objection, there- fore, is not only practically immaterial, it is meta- physically unsound.
It may be asserted, that there is no country, of any considerable extent, in which there is not land inca- pable of yielding rent ; that is, incapable of yielding to human labour more than would be necessary for the maintenance of that labour. That such, at least, is the case in this country, seems very unlikely to be disputed. There are parts of its mountains where nothing less hardy than heath, others where nothing
SECT. I — RENT. 37
but moss, can vegetate. When it is asserted that every part of the mountains of Scotland pays rent, the state of the facts is misunderstood. It is only true that there is no tenant of any portion of any man's estate in the highlands of Scotland who does not pay rent. The reason is, because even in the mountains of Scotland there are spots in the valleys, the produce of which is considerable. It does not follow, though hundreds of acres of mountain are added to these valleys, that therefore every part of the mountain yields rent; it is certain that many parts neither do nor can.
Even where the land is not absolutely barren, and where there is still something for the more hardy of the useful animals to pick up, it is not to be allowed that rent is the necessary consequence. It ought to be remembered, that these cattle are capital, and that the land must afford enough not only to make the return for that capital, but to pay for the tendance of the cattle, of which, in such situations, especially in winter, no inconsiderable amount is required. Un- less the land yields all this, and something more, it cannot yield any rent.
I assert, that, in the greater part of this island, there is hardly a farm, of any considerable extent, which does not contain land, some of more, some of less fertility, varying from a high or moderate degree of fertility, down to land which yields not enough to
S8 CHAP. II — DISTRIBUTION.
afford any rent. Of course I do not request admission to this affirmation upon my authority ; I rest it upon an appeal to the experience of those men who are best acquainted with the circumstances. If the state of the facts corresponds with the affirmation, it fol- lows demonstratively, that the last portion of the land which is placed under cultivation yields no rent. In such farms as those we have now described, the tenant has bargained for a certain sum to the land- lord. That sum, of course, was calculated, upon the produce of that land which yielded not only the proper return for the capital with wliich it was cultivated, but something more. As the motive of the tenant to cultivate is wholly constituted by the proper return to his capital, if there is any portion of the barren land included in his farm which will just yield the profit of stock, and no more, though it will not afford any thing for rent, it affords to him the adequate motive for cultivation. It can hardly be denied that in the insensible degrees by which land declines from greater to less fertility, there will, in all considerable farms, be generally found a portion with this parti- cular degree of fertility and no more. That parti- cular degree of fertility, is an adequate motive for its cultivation.
The conclusion, however, may be established by the clearest evidence, without regard to the question, whether all land pays or does not pay rent. On land which pays the highest rent, we have seen that ca-
SECT. I — RENT. 39
pital, applied in successive doses, is not attended with equal results. The first dose yields more, possibly much more, than the return for the capital. The second also may yield more, and so on. The rent, if accurately calculated, will be equal to all that is ren- dered by those several doses, over and above the pro- fits of stock. The cultivator, of course, applies all those several doses of capital on which he has agreed to pay rent. But immediately after them comes another dose, which, though it yields nothing for rent, may fully yield the ordinary profits of stock. It is for the profits of stock, and them alone, that the farmer cultivates. As long, therefore, as capital ap- plied to his farm will yield the ordinary profits of stock, he will apply capital, if he has it. I therefore / conclude, with assurance, that in the natural state of ! things, in every agricultural country, one portion of the capital employed upon the land pays no rent ; rent, therefore, consists wholly of that produce which is yielded by the other portions of capital, over and above the return which is due to them.
K
40 CHAP. II— DISTRIBUTION.
SECTION IL
WAGES.
Production is performed by labour. Labour, however, receives the raw material which it fashions, and the machinery by which it is aided, from capital ; or, more properly speaking, these articles are the ca- pital itself.
The labourer is sometimes the owner of all the capital which his labour requires. The shoemaker or tailor has, sometimes, not only the tools with which he works, but also the leather or cloth upon w^hich his labour is employed. In all cases of that descrip- tion, the commodity is wholly the property of the man by whose labour it is prepared.
In the greater number of cases, however, espe- cially in the more improved stages of society, the labourer is one person, the owner of the capital another. The labourer has neither raw material nor tools. These requisites are provided for him by the capitalist. For making this provision, the capitalist, of course, expects a reward. As the commodity which was produced by the shoemaker, when the capital was his own, belonged wholly to himself, and consti- tuted the whole of his reward both as labourer and capitalist, so, in this case, the commodity belongs to
SECT, n— WAGES. 41
the labourer and capitalist together. When prepared, the commodity, or the value of it, is to be shared between them. The reward to bt)th must be derived from the commodity, and the reward of both makes up the whole of the commodity.
Instead, however, of waiting till the commodity is produced, and abiding all the delay and un- certainties of the market in which the value of it is realized, it has been found to suit much better the convenience of the labourers to receive their share in advance. The shape under which it has been found most convenient for all parties that they should re- ceive it, is that of wages. When the share of the commodity which belongs to the labourer has been all received in the shape of wages, the commodity itself belongs to the capitalist, he having, in reality, bought the share of the labourer and paid for it in advance.
1 . That the rate of wages depends on the propor- tion between Population^ and Employment^ in other wordsy Capital.
We come now to the question as to what deter- mines the share of the labourer, or the proportion in which the commodity^ or commodity's worth, is divided between him and the capitalist. Whatever the share of the labourer, such is the rate of wages ; and, vice
42 CHAP, II — DISTRIBUTION.
versa, whatever the rate of wages, such is the share of the commodity, or commodity's worth, which the labourer receives.
\ It is very evident, that the share of the two par- ties is the subject of a bargain between them ; and if there is a bargain, it is not difficult to see on what the terms of the bargain must depend. All bargains, when left in freedom, are determined by competition, and the terms alter according to the state of supply and demand.
Let us begin by supposing that there is a certain number of capitalists, with a certain quantity of food, raw material, and instruments or machinery ; that there is also a certain number of labourers ; and that the proportion, in which the commodities produced are divided between them, has iixed itself at some particular point.
Let us next suppose that the labourers have in- creased in number one half, without any increase in the quantity of capital. There is the same quan- tity of the requisites for the employment of labour ; that is, of food, tools, and material, as there was before ; but for every 100 labourers there are now 150. There will be 50 men, therefore, in danger of being left out of employment. To prevent their being left out of employment they have but one resource ; they must endeavour to supplant those who have fore-
SECT. II — WAGES. 49
stalled the employment; that is, they must offer to work for a smaller reward. Wages, therefore, decline.
If we suppose, on the other hand, that the quan- tity of capital has increased, while the number of labourers remains the same, the effect will be re- versed. The capitalists have a greater quantity than before of the means of employment ; of capital, in short, from which they wish to derive advantage. To derive this advantage they must have more labourers than before. These labourers are all employed with other masters : to obtain them they also have but one resource, to offer higher wages. But the masters by whom the labourers are now employed are in the same predicament, and will of course offer higher to induce them to remain. This competition is unavoid- able, and the necessary effect of it is a rise of wages.
It thus appears, that, if population increases, )^ without an increase of capital, wages fall ; and that, if capital increases, without an increase of population, wages rise. It is evident, also, that if both increase, but one faster than the other, the effect will be the same as if the one had not increased at all, and the other had made an increase equal to the difference. Suppose, for example, that population has increased one-eighth, and capital one-eighth ; this is the same thing as if they had stood still, with regard to the effect upon labour. But suppose that, in addition to the above-mentioned one-eighth, population had
44 CHAP. II-— DISTRIBUTION.
increased another eighth, the effect, in that case, upon wages would be the same as if capital had not increased at all, and population had increased one- eighth.
Universally, then, we may affirm, other things remaining the same, that if the ratio which capital and population bear to one another remains the same, wages will remain the same ; if the ratio which ca- pital bears to population increases, wages will rise ; if the ratio which population bears to capital in- creases, wages will fall.
From this law, clearly understood, it is easy to trace the circumstances which, in any country, deter- mine the condition o^J)ody ^he great ^of the people. If that condition is easy and comfortable, all that is necessary to keep it so, is, to make capital in- crease as fast as population; or, on the other hand, to prevent population from increasing faster than capital. If that condition is not easy and com- fortable, it can only be made so by one of two me- thods ; either by quickening the rate at which capital increases, or retarding the rate at which population increases ; augmenting, in short, the ratio which the means of employing the people bear to the number of people.
If it were the natural tendency of capital to increase faster than populatio'n, there would be no
SECT. II — WAGES. 45
difficulty in preserving a prosperous condition of the people. If, on the other hand, it were the natural tendency of population to increase faster than capital, the difficulty would be very great. There would be a perpetual tendency in wages to fall. The fall of wages would produce a greater and a greater degree of poverty among the people, attended with its in- evitable consequences, misery and vice. As poverty, and its consequent misery, increased, mortality would also increase. Of a numerous family born, a certain number only, from want of the means of well-being, would be reared. By whatever proportion the po- pulation tended to increase faster than capital, such a proportion of those who were born would die : the ra- tio of increase in capital and population would thence remain the same, and wages would cease to fall.
That population has a tendency to increase faster, than, in most places, capital has actually increased, is proved, incontestably, by the condition of the popu- lation in almost all parts of the globe. In almost all countries the condition of the great body of the people is poor and miserable. This would have been im- possible, if capital had increased faster than popu- lation. In that case wages, of necessity, would have risen, and would have placed the labourer in a state of affluence, far above the miseries of want.
This general misery of mankind is a fact which can be accounted for upon one only of two supposi-
46 CHAP. II — DISTRIBUTION.
tions: either that there is a natural tendency in population to increase faster than capital, or that capital has, by some means, been prevented from in- creasing so fast as it has a tendency to increase. This, therefore, is an inquiry of the highest importance.
2. Proof of the tendency of Population to increase
rapidly.
The natural tendency of population to increase is to be collected from two sets of circumstances ; the physiological constitution of the female of the human species, and the statements respecting the rate of increase in different countries.
The facts respecting the physiological constitution of the human female are well ascertained, and are indubitable grounds of conclusion. The statements respecting the rate of increase in different coun- tries will be found to be, either suppositions with respect to matters of fact, upon the conformity of which suppositions to any real matters of fact we can have no assurance ; or statements of facts, of such a nature, as prove nothing with regard to the points in dispute.
That the possible rate of increase in the numbers of mankind depends upon the constitution of the fe-
SECT. 11 — WAGES. 47
male, will not be disputed. The facts, which are fully ascertained in regard to the female of the hu- man species, with the additions which the sciences of physiology and comparative anatomy enable that knowledge to derive from the analogy of other ani- mals, whose anatomy and physiology resemble those of the human species, afford the means of very satis- factory conclusions on this subject.
The females of those species of animals whose period and mode of gestation are similar to those of the female of our own species, and which bring forth one at a birth, are capable, when placed in the most favourable circumstances, of a birth every year, from the time when the power of producing begins, till the time when it ends, omitting one year now and then, which, at the most, amounts to a very small pro- portion on the whole. .
The suckling of the infant, in the case of the female of the human species, if continued more than three months, has a tendency to postpone the epoch of conception beyond the period of a year. This, it is to be observed, is the only physiological peculiarity which authorizes an inference of any difference in the frequency of the births in the case of the female of the human species, and that of those other species to which we have referred.
To reason correctly, we should make an allowance
48 CHAP. II— DISTRIBUTION,
for that peculiarity. Let such ample allowance be made as will include all interruptions ; let us say that one birth in two years is natural to the female of the human species. In Europe, to which we may at present confine our observations, the period of child- bearing in women extends, from sixteen or seventeen, to forty-five, years of age. Let us make still more allowance, and say it extends only from twenty to forty years of age. In that period, at the great allowance of two years to one birth, there is time for ten births, which may be regarded as not more than the number natural to the female of the human species.
Under favourable circumstances, the mortality among children is very small. Mortality among the children of very poor people is unavoidable, from want of the necessary means of health. Among the children of people in easy circumstances, who know and practise the rules for the preservation of health, the mortality is small ; and there can be no doubt, that, under more skilful modes of managing the food, and clothing, the air, the exercise, and education of children, even this mortality would be greatly di- minished.
We may conclude, therefore, that, in the most favourable circumstances, ten births are the measure of fecundity in the female of the human species ; and that of the children born a small proportion would die before the age of maturity. For occa-
SECT, XI— WAGES. 49
sional instances of barrenness, and for this small degree of mortality, let us make much more than the necessary allowance, a deduction of one-half, and say, that every human pair, united at an early age, com- manding a full supply of every thing necessary for physical welfare, exempt from the necessity of oppres- sive labour, and sufficiently skilled to make the best use of their circumstances for preventing disease and mortality among themselves and their children, will, one with another, rear five children. If this is the case, it is needless to exhibit an accurate calculation, to show that population would double itself in some moderate portion of years. It is evident, at once, that it would double itself in a small number of years.
To meet a conclusion so well established as this, recourse has been had to certain tables, respecting population, and respecting births and deaths, in various countries. The reasoning from these tables avoids the point in dispute. I know no tables which exhibit any thing, even if we give them, what they never deserve, credit for exactness, except the mere fact with regard to the state of increase. They show, or pretend to show, whether a certain population is increasing or not increasing; and, if increasing, at what rate. But if it appeared from such tables, that the population of every country in the world were stationary, no man, capable of reasoning, would infer, that the human race is incapable of increasing. Every body knows the fact, that in the greater numl>er
E
50 CHAP. II — DISTRIBUTION.
of countries, the population is stationary, or nearly so. But what does this prove, so long as we are not in- formed by what causes it is prevented from increasing? We know well that there are two causes by which it may be prevented from increasing, how great soever its natural tendency to increase. The one is poverty ; under which, let the number born be what it may, all but a certain number undergo a premature destruction. The other cause is prudence ; by which, either marriages are sparingly contracted, or care is taken that children, beyond a certain number, shall not be the fruit. It is useless to inform us that there is little or no increase of population in certain coun- tries, if we receive not, at the same time, accurate information of the degree in which poverty, or pru- dence, or other causes, operate to prevent it.
That population, therefore, has such a tendency to increase as would enable it to double itself in a small number of years, is a proposition resting on the strongest evidence, whicli nothing worth the name of evidence has been brought to controvert.
3. Proof that capital has a less tendency than Population to incixase rapidli/.
We come next to consider the tendency which ca- pital may have to increase. If that should increase
SECT. II- WAGES. 51
as fast as population, for every labourer produced the means of employment and subsistence would also be produced, and no degradation of the great body of the people would ensue.
As soon as it is understood from what source all increase of capital must be derived, the opinion of its rapid increase can no longer be retained. All increase of capital is from savings.
Now, though it is found, that, where property is secure, there is a considerable disposition in mankind to save ; sufficient, where vast sources of consumption are not opened by the government, and where the difficulties of production are not very greats to make capital progressive ; this disposition is still so weak, in almost all the situations in which human beings have ever been placed, as to make the progression slow.
That the same will continue to be the case, ap- pears to be secured by the strongest principles of human nature.
The annual produce is always distributed in such a manner, that, either the great body of the people are liberally provided with what is necessary for sub- sistence and enjoyment, when of course a smaller portion goes to swell the incomes of the rich ; or, the great body of the people are reduced to mere neces-
E 21
58 CHAP. II— DISTRIBUTION.
saries, and there is naturally a class of people whose incomes are large. To one or other of these two cases, the state of every community approximates. Let us search for the motives to saving in both.
1. In the case, in which there is a class reduced to necessaries, and a class of rich, it is evident that the first have not the means of saving. The consi- deration of their motiv^es, therefore, is needless. It is well known, however, that a class of rich men, in the middle of a class of poor, are not apt to save. The possession of a large fortune generally whets the appetite for immediate enjoyment. And the man who is already in possession of a fortune yielding him all the enjoyments which fortune can command, has a feeble inducement to save. Why should he deprive himself of present enjoyment, to accumulate that of which the use to him is so insignificant ? Even that command over the sentiments of others, the only thing which riches beyond a moderate com- pass ever give, is, at a certain elevation of fortune, yielded in sufficient quantity, if not to satisfy the minds of most men, at least to render the desire of accumulation a motive insufficient to counteract the powerful demand of immediate indulgence. In such a state of the social order, any rapid increase of capital may be regarded as morally impossible.
2. We are next to consider the state of the social order in which a large share of the annual produce
SECT. II— WAGES. 53
is distributed among the great body of the people. In that situation neither the class which labours, nor that which is maintained without labouring, has any- forcible motives to save.
When a man possesses, what we are now supposing possessed by the great body of the people, food, clothing, lodging, and all other things sufficient not only for comfortable, but pleasurable existence, he possesses the means of all the substantial enjoy- ments of human life. The rest is in a great measure fancy. The pleasures which can be added to those of which he is thus in possession are comparatively neither numerous nor strong. That any consider- able proportion of mankind, with all the temptations of instant enjoyment, w^ill forego, to any considera- ble degree, the most substantial pleasures, in order to accumulate the means of a few fanciful pleasures at a distant period, our experience of the laws of human nature forbids us to suppose. There are two sets of men ; one, in whom the reasoning power is strong, and who are able to resist a present pleasure for a greater one hereafter ; another, in w^hom it is weak, and who can seldom resist the charm of im- mediate enjoyment. Of course, it is not in the latter class that the motive to save can be expected to prevail. The class, on the other hand, in whom reason is sufficiently strong to form a due estimate of pleasures, cannot fail to perceive that those which they can obtain by adding penny to penny, after all
54 CHAP. II — DISTRIBUTION.
the rational desires are satisfied, are not equal to the pleasures which, in the circumstances we have sup- posed, they must relinquish to ohtain them. Both the higher and the lower principles of our nature are in such circumstances opposed to accumulation ; much of it, therefore, cannot take place. Even the love of ease, one of the most powerful of all the principles by which we are actuated, is here the steady foe of accumulation ; because if any man is willing to dispense vi^ith the use of a certain portion of the good things which he may command by the fruits of his labour, he may to that extent dispense with labour, and indulge himself in all the luxury of ease. Command over the sentiments of other men by the possession of riches, it is un- necessary to mention ; because all that can be obtained of it by the accumulations of the labourer, cannot constitute a prospect sufficiently brilliant to operate as a powerful incentive.
So far, as to the strength of the motive which in the supposed circumstances can operate upon the labouring class. What remains of the annual pro- duce, after the share of that class is deducted, is either distributed in large portions among a small number of very rich men, or among a large number of men of moderate fortunes.
We have already examined the state of the motives to accumulate when fortunes are large ; and have found that it never can be such as to produce
CHAP. II — WAGES. 55
very considerable effects. We have now to examine the state of the motives to accumulate, in a society, in which there is a great number of moderate for- tunes without the prevalence of large. In the way of physical enjoyment, these fortunes yield every thing which the largest fortunes can bestow. There are only two motives, therefore, which in this situa- tion can counteract the strong tendency to immediate enjoyment : either the desire of a command over the sentiments of mankind [ or the wish to make a pro- vision for children.
The classes of men in such a state of society are two : men of easy, but moderate fortunes ; and a well paid body of labourers and artisans.
The first class, men with fortunes equal to all the purposes of independence, of physical enjoyment, even of taste and elegance, constituting the governing portion of society, and giving the tone to its senti- ments and amusements, are not in the situation of men whose imaginations are apt to be dazzled by the glare of superior riches, and likely to pay to their owners any remarkable devotion. The labouring classes are cringing and servile, where the frown of the rich man is terrible, and his little favours impor- tant. When placed in circumstances which give them completely the feeling of independence, and allow them opportunity for the cultivation of their minds, they are little affected by the glare of riches.
56 CHAP. II-*DISTRIBUT10N.
This, therefore, is a state of society in which the possession of extraordinary wealth gives little com- mand over the sentiments of others, and cannot constitute a powerful motive for saving.
With respect to the provision for children, if a man feels no great desire to make a larger than the ordinary moderate fortune for himself, he feels as little desire at the least to make it for his children. The provision which he desires to make for them can only, therefore, be such as to place them in the same situa- tion which is held by himself. He will be anxious to afford to them the same means for beginning life advantageously, as were afforded, or would have been desirable, to himself To this extent the desire of making a provision for children might be expected to be very general, and it would ensure a certain mode- rate increase of capital. This may therefore be con- sidered, as perhaps the most favourable state of society for accumulation ; with the exception of those cases in which people, with all the knowledge and power of civilized life, are transported into a country unin- habited, or nearly so, and have the power of culti- vating without limit the most productive species of land. These are coincidences so extraordinary and so rare, that, in tracing the general laws of human society, it is only necessary to show that they are not forgotten.
These considerations prove that more than mode-
SECT. II— WAGES. 57
rate effects can rarely flow from the motives to accu- mulation : but the proof, that population has a tendency to increase faster than capital, does not depend upon this foundation, strong as it is. The tendency of population to increase, whatever it may be, greater or less, is at any rate an equable tendency. At what rate soever it has increased at any one time, it may be expected to increase at an equal rate, if placed in equally favourable circumstances, at any other time. The case with capital is the reverse. As capital continues to accumulate, the difficulty of increasing it becomes gradually greater and greater, till, finally, increase becomes impracticable. The evi- dence of this proposition results immediately from the law, as already explained, which determines the return to capital employed in successive doses upon the land.
Whether, after land of superior quality has been exhausted, capital is applied to new land of inferior quality, or in successive doses with diminished re- turns upon the same land, the produce of it is con- tinually diminishing in proportion to its increase. If the return to capital is, however, continually de- creasing, the annual fund from which savings are made is continually diminishing. The difficulty of making savings is thus continually augmented, and at last they must totally cease.
It thus sufficiently appears that there is a tendency
58 CHAP. II — DISTRIBUTION.
in population to increase faster than capital. If this be established, it is of no consequence to the present purpose to inquire about the rapidity of the increase. How slow soever the increase of population, provided that of capital is still slower, wages will be reduced so low that a portion of the population will regularly die from the consequences of want. Neither can this dreadful consequence be otherwise averted than by finding means to prevent the increase of capital from falling short of that of population.
4. That forcible means employed to make capital in,' crease faster than its ?iatural tendency zvould 7iot produce desirable effects.
There are two modes in which artificial means may be employed to make population and capital keep pace together : expedients may be sought, either to diminish the tendency of population to increase ; or to accelerate beyond its natural pace the increase of capital.
The principal means by which legislatures have it in their power to alter the course of human ac- tions, is by rewards and punishments. Neither is very applicable to the purpose of counteracting the tendency in the human species to multiply. Sup- pose a law were proposed for annexing penalties to
.-SECT. II — WAGES. ^^Br3 59
the father and mother of a child, the circumstances of whom were inadequate to its maintenance, it would not be easy to find a mode of punishing which would he equal to the effect, without pro- ducing almost as much uneasiness in society as that which it would propose to remedy: neither would it be very possible to ascertain and define the state of circumstances which is, 'and 'that which is not, adequate to the maintenance of one, or two, or any other number of children. To apply rewards to the case of not having any children, in such a manner as to operate usefully upon the principle of population, w^ould be still more difficult.
Legislation, in cases ill adapted to its direct, can sometimes produce considerable effects by its in- direct operation ; as when a desire which gra- tifies itself in a hurtful course of action, and cannot easily be counteracted by reward and punish- ment, is called to gratify itself in a less hurtful or an innocent direction. If legislatures have taken measures, as they very often have done, sometimes by direct, more frequently by indirect means, to sti- mulate the principle of population, such mischievous legislation may be corrected.
The pow^erful agency of the popular sanction might in this, as in other cases, be turned to great ac- count ; if an intense degree of disapprobation were
@Q CHAP. II— DISTRIBUTION.
directed upon the men, who, by their folly, involved themselves, through a great family, in poverty and dependence, of approbation upon those who, by their self command, preserved themselves from this misery and degradation, much of this folly would unques- tionably be prevented.
The result to be aimed at is, to secure to the great body of the people all the happiness which is capable of being derived from the matrimonial union, with- out the evils which a too rapid increase of their numbers involves. The progress of legislation, the improvement of the education of the people, and the decay of superstition, will, in time, it may be hoped, accomplish the difficult task of reconciling these im- portant objects.
Such are the modes in which legislation can weaken the tendency in population to increase. It remains to inquire by what means it can strengthen the tendency in capital to increase. These are, also, direct and indirect. As the legislature, if skilful, has great power over the tastes of the community, it may contribute to render frugality fashionable, and ex- pense disgraceful. The legislature may also produce that distribution of property which experience shows to be the most favourable to saving. Sumptuary laws have been adopted in several countries ; but it is not easy to contrive sumptuary laws, the effect of which would be very considerable, without a minute
SECt. II — WAGES. 61
and vexatious interference with the ordinary business of life.
There is certainly one course by which the legis- lature might produce considerable effects upon the accumulation of capital ; because it might lay hold of any portion which it pleased of the net produce of the year, and convert it into capital. We have only, therefore, to inquire, in what manner this could be performed, and what effects it would produce.
The mode of taking whatever portion it tnight find expedient, is obvious and simple. An income tax, of the proper amount, would effectually answer the purpose.
The legislature might employ the capital thus forcibly created in one or other of two w^ays : it might lend it to be employed by others : or it might retain the employment in its own hands.
The simplest mode, perhaps, would be, to lend it to those manufacturers and capitalists who might apply for it, and could give security for the re- payment. The interest of what w^as thus laid out in one year might be employed as capital the next. Every annual portion would thus make compound interest, and,- so long as interest remained pretty high, would double itself in a small number of years. If wages appeared likely to fall, a higher
62 CHAP. II— DISTRIBUTION
income tax would be required. If wages rose higher than seemed to be necessary for the most desirable condition of the labourer, the income tax might be reduced.
Without waiting to inquire, whether a machinery, capable of producing these effects, be or be not practicable, we may proceed to another considera- tion, which seems calculated to decide the merits of the scheme.
According to the progress above supposed, the in- crease of population would be rapid. The progress would also be rapid, in the application of capital to land of a worse and worse quality, or in doses attended with a less and less return.
In proportion as capital is attended with less and less of annual return, the owners of capital have less and less income. If the income from capital be conti- nually diminished, in process of time none but the owners of large masses of capital will derive from it the means of existence. This is the extreme state of things to which the operation of the scheme, sup- posing it not impracticable, certainly tends.
It remains to inquire how far these effects are to be considered as good.
Let us suppose that the command of the labourer
SECT. II — WAGES. 6S
over the articles of his consumption remains unal- tered. All who are not subsisted by the wages of labour, live either upon the produce of stock, or upon the rent of land. In the case supposed, the tendency is to impoverish those who live upon the produce of stock : but to increase the rent of land. With the exception of the owners of land, all the rest of the community would be either labourers, or capitalists almost equally poor. As often as land were offered to sale, a great amount of capital would of course be given for it ; nobody, therefore, would be able to buy more than a very limited portion.
In this state of things, sales of land would either be frequent, or they would be rare. It is necessary to consider what would be the effects in either case.
The effects which would arise in the case in which the sales of land would be rare, are simple. The owners of land would be a comparatively small number of rich people, in the midst of a population, all equally, and hopelessly, poor. That there is scarcely any state of society less conducive to hu- man happiness, we need not here spend any time to prove.
If sales went on, it being the nature of land, as of other property, to change hands continually, the whole land would be divided, at last, into very small portions ; covered by a dense population, no portion
64 CHAP, II — DISTRIBUTION.
of whom would be in circumstances much better than those of the labourer. Is this, in itself, a desirable state of things ? Is it either followed or preceded by a desirable state of things ?
When any of those accidents occur by which the annual produce is for one year, or a few years, reduced considerably below the usual standard, in a country in which a considerable proportion of the people have better incomes than those who live upon wages, con- siderable savings may be made from their expen- diture, to mitigate the effects of the deficiency. In a country in which all were reduced to the state of wages, any considerable diminution of the usual supply would diffuse general, irremediable calamity.
All the blessings which flow from that grand and distinguishing attribute of our nature, its progress- iveness, the power of advancing continually from one degree of knowledge, one degree of command over the means of happiness, to another, seem, in a great measure, to depend upon the existenceof a class of men who have their time at their command ; that is, who are rich enough to be freed from all solicitude with respect to the means of living in a certain state of en- joyment. It is by this class of men that knowledge is cultivated and enlarged ; it is also by this class that it is diffused ; it is this class of men whose chil- dren receive the best education, and are prepared for all the higher and more delicate functions of society.
•WAGES. 65
as legislators, judges, administrators, teachers, inven- tors in all the arts, and superintendents in all the more important works, by which the dominion of the human species is extended over the powers of nature.
It is also, in a peculiar manner^ the business of those whose object it is to ascertain the means of raising human happiness to its greatest height, to consider, what is that class of men by whom the greatest hap- piness is enjoyed. It will not probably be disputed, that they who are raised above solicitude for the means of subsistence and respectability, without being exposed to the vices and follies of great riches, the men of middling fortunes, in short, the men to whom society is generally indebted for its greatest improve ments, are the men, who, having their time at their own disposal, freed from the necessity of manual la- bour, subject to no man's authority, and engaged in the most delightful occupations, obtain, as a class, the greatest sum of human enjoyment. For the happiness, therefore, as well as the ornament of our nature, it is peculiarly desirable that a class of tliis description should form as large a proportion of each community as possible. For this purpose it is abso- lutely necessary that population should not, by a forced accumulation of capital, be made to go on, till the return to capital from the land is very small. To enable a considerable portion of the community to enjoy the advantages of leisure, the return to ca-
F
66 CHAP. II — DISTRIBUTION.
pital must evidently be large. There is a certain density of population which is convenient, both for social intercourse, and for that combination of powers by which the produce of labour is increased. When these advantages, however, are attained, there seems little reason to wish that population should proceed any further. If it does proceed further, instead of increasing the net revenue derived from the land and labour of the country, or that portion of the annual produce which exceeds what is necessary for replacing the capital consumed, and maintaining the labourers, it lessens that important fund, on the largeness of which the happiness of society to a great degree depends.
It appears, therefore, by strong evidence, that the state of society in which the increase of population has reduced the whole, or nearly the whole, of the community, to the state of those who live even upon liberal wages, is not, in itself, a desirable state.
The evidence which proves this to be a state of things unfavourable to human happiness, proves also, that the state which precedes it is unfavourable. It is evident, that whatever be the disadvantages adher* ing to the state of things in which the income of all, except the receivers of rent, is reduced to the level of wages, the disadvantages of the state which imme- diately precedes it are, with a slight diminution, the same.
STECT. II— WAGES. 67
What state of things succeeds to that in which an income not above the rate of liberal wages is with a slight exception the lot of all, is the third and last of the questions involved in this part of the inquiry. If the forcible mode of accumulation, by means of the income tax, is carried beyond that boundary, there is immediately a diminution of the income of those who live upon the profits of stock below the rate of liberal wages, followed by all the miseries which such a state of poverty implies : If the forcible accumula- tion of capital is abandoned, either the rate of births must be diminished, or population increases beyond capital, wages fall, and all the evils of insufficient wages fall upon the labouring class.
This analysis has been long and tedious. It thence, however, appears, that human happiness cannot be secured by taking forcible methods to make capital increase as fast as population. On the other hand, it has been seen, that if births take place, more numerous than are required to uphold a population corresponding to the state of capital, human happiness is immediately impaired. The grand practical pro- blem, therefore, is, to find the means of limiting the number of births. It has also appeared, that, beyond a certain state of density in the population, such as to afford in perfection the benefits of social inter- course and of combined labour, it is not desirable that population should increase. The precise pro- blem, therefore, is, to find the means of limiting
F 2
68 CHAP, II — DISTRIBUTION.
births to that number which is necessary to keep up the population, without increasing it. Were that accomplished, while the return to capital from the land was yet high, the reward of the labourer would be ample, and a large surplus would still remain. If the natural laws of distribution were allowed to ope- rate freely, the greater part of this net produce would find its way, in moderate portions, into the hands of a numerous class of persons, exempt from the neces- sity of labour, and placed in the most favourable circumstances both for the enjoyment of happiness, and. for the highest intellectual and moral attain- ments. Society would thus be seen in its happiest state.
We have yet to mention, that government, instead of lending, may itself employ the capital which it forcibly creates. It is evident, however, that whether government employs this capital, or lends it to be employed by others, all the effects, which we have traced as arising necessarily from its increase, will be the same. The best mode, perhaps, which could be invented for employing, by government itself, a por- tion of the annual produce, forcibly taken from the owners, to accelerate the growth of capital, would be that which has been so earnestly pressed upon the public attention by Mr. Owen, of New Lanark. Mr. Owen proposes, that the portion of the annual pro- duce thus converted into capital should be employed by government in making certain establishments;
SECT. II — WAGES. 69
each of a mixed nature, partly for agricultural, partly for manufacturing industry ; in erecting the houses, in providing the instruments or machinery, the pre- vious subsistence, and raw materials which might be required. In these establishments, Mr. Owen is of opinion that labour might be employed under great advantages, and with unexampled means of felicity to the individuals employed. Mr. Owen, however, must intend one of two things ; — either that popula- tion should go on, or that it should stop. If it is to go on, capital of course holding pace with it, all the evils which would, as above, result from the forcible increase of capital, when lent by government, would result from its forcible increase, when employed in those establishments. If Mr. Owen means that po- pulation should not go on, and if expedients can be employed to limit sufficiently the number of births, there is no occasion for these establishments, still less for the forcible and painful abduction of a part of their income from the people. The limitation of the number of births, by raising wages, will accomplish every thing which we desire, without trouble and without interference. The limitation of the numbers, if that object can be attained, may be carried so far as not only to raise the condition of the labourer to any state of comfort and enjoyment which may be desired, but to prevent entirely the accumulation of capital.
7€ C1IA1\ li — BISTllIBUTION.
SECTION II L
PROFITS.
When it is established that the whole of the annual produce is distributed as rent, wages of labour, and profits of stock ; and when it is ascertained what regulates the portion which goes to rent, and what the portion which goes to wages, the question is also determined with regard to profits of stock ; for it is evident that the portion which remains is profits.
From what has been already explained with regard to rent, it appears, that it is something alto- gether extraneous to what may be considered as the return to the productive operations of capital and labour. As soon as it is necessary to apply capital to land of an inferior quality, or in a further dose with inferior return, all that is yielded more than this inferior return, is as if it did not exist, with respect to the capitalist and labourer. Whatever is yielded beyond this lowest return, either on particular spots of ground, or to particular portions of capital, might be annihilated, the moment it is produced, without affecting the portion which goes to either of those two classes. As soon as a new portion of capital has to be employed with inferior return, it is the same thing, as if the productive powers of all the capital employed upon the land were reduced to the
SECT, in — PROFITS. 71
same standard, as if no difference existing in the re- turn made from one portion of land, or to one por- tion of capital, and another, a quantity of produce, equal to the additional return which used to be made to the former portions of capital, were, by miracle, rained down from heaven upon the possessors of the land which yielded it. The portion which goes in the shape of rent to the landlord, and is over and above that return which is made to the whole of the capital and labour employed upon the land, is, in fact, the result of an accident. Suppose that all the land cultivated in the country were of one uniform quality, and yielded the same return to every portion of the capital employed upon it, with the exception of one acre : that acre, we shall suppose, yields six times as much as any other acre. What, in this case, would be produced upon all the other acres, might justly be regarded as the return made to the labour and capital employed upon the land ; and the whole of that return. The additional five-sixths, accruing from the singular acre, would not be con- sidered as return made to labour and capital ; it would be considered as the accidental product of a particular virtue in that particular spot. But what is true of this single acre is equally true of any number of acres, as soon as that event occurs which dimi- nishes the return to any portion of capital, and induces all the owners of capital to limit their receipts from their capital to the measure of that diminished return.
72 CHAP. II — DISTRIBUTION.
If there is any portion of capital employed upon the land whic?i pays no rent, it is evident that the wages and profits, derived in that case, must regulate the wages and profits in other cases.
It thus fully appears, that all which can be consi- dered as the produce of the joint operations of capital and labour upon the land, is the return to that por- tion of capital which is applied without paying any rent, and which measures the quantity of the produce allowed to remain, after the rent is deducted, as the return to all the other portions of labour and capital employed upon the land. All, therefore, which can be considered as the real product of labour and capi- tal, remains to be shared between the labourer and capitalist, after the rent is withdrawn. It follows that, in considering what regulates wages and profits, rent may be left altogether out of the question. Rent is the effect, and not the cause, of the dimi- nished produce which the capitalists and labourers have to divide between them.
When any thing is to be divided wholly between two parties, that which regulates the share of one, regulates also, it is very evident, the share of the other ; for whatever is withheld from the one, the other receives ; whatever, therefore, increases the share of the one diminishes that of the other, and vice versa. We might, therefore, with equal pro- priety, it should seem, aflfirm that wages determine
SECT, in — PROFITS. * 73
profits, or that profits determine wages ; and, in framing our language, assume whichever we pleased, as the regulator or standard.
As we have seen, however, that the proportion of the shares between the capitalist and labourer de- pends upon the relative abundance of population and capital, and that population, as compared with capi- tal, has a tendency to superabound, the active princi- ple of change is on the side of population, and consti- tutes a reason for considering population, and conse- quently wages, as the regulator.
As, therefore, the profits of stock depend upon the share which is received by its owners of the joint produce of labour and stock, profits of stock depend upon wages ; rise as wages fall, and fall as wages rise.
It may be said, however, that profits of stock de- pend not solely upon the share received of that which is divided, but also upon the magnitude of the whole that is to be divided : that profits, therefore, depend upon two things ; upon the share which goes to the capitalist of the joint produce of capital and labour, and also upon the magnitude of the return which is made to labour and capital.
To speak clearly on this point, we must remove an ambiguity which adheres to the word profits. Profits
74 * CHAP. II — DISTRIBUTION.
may mean the quantity of commodities, the number of quarters of corn, or yards of cloth, which the capi- talist receives, as the return for a certain quantity of food, raw materials, and tools employed : or the term profits may, as it most commonly does, refer not to the commodities themselves, but their relative values. In this latter sense it is that we use the term when we speak of the rate of profits ; or when we say that profits are so much per cent. When we say that profits are so much per cent, we only mean to say that the value of that share of the produce which comes to the capitalist, bears a certain ratio to the value of all the commodities employed, as capital, in effecting the production. When we say, for ex- ample, that profits are ten per cent, we say that the share of the produce which comes to the capitalist would exchange for one-tenth of all the commodities employed, as capital, in the production of it.
Now, there can be no doubt, if we employ the term profits in the first sense, as denoting merely the quantity of commodities, that the same quantity of food, for example, and of implements of husbandry, employed as capital, will yield a greater number of quarters of corn, for any particular share of the pro- duce, whether it be one-half, or one-third, or any other share, which comes to the capitalist, when the return to capital from the land is great, than when it is small. In this sense, therefore, of the term profits, profits do depend upon two things ; upon the quan-
SECT. Ill— PROFITS. 75
tity of return, as well as the state of wages. If, however, we use the term in the usual sense, to de- note the ratio of values, it may be shown that profits, in that sense, depend wholly upon wages.
When the same quantity of labour and capital is employed upon two commodities, they will exchange for one another ; in other words, the exchangeable value of the one is equal to that of the other. This is the same thing as saying, that, when two com- modities have been produced at the same cost, they will exchange for one another. What is the reason that the half of a commodity is equal in value to the other half, but that an equal quantity of labour and capital was required to produce it ? *
The value of commodities, therefore, is determined by the quantity of capital and labour necessary to produce them. If the same quantity of capital and labour, which previously produced a certain quantity of a particular commodity, becomes, by means of some discovery, capable of producing double the former quantity, the whole of the enlarged quantity is of no more value than the small quantity had been before ; the value of each ounce, or yard, sinking one half. In like manner, when the case is reversed, as in land, and when the same quantity of labour
* It has been found necessary here to anticipate a little what is contained^in the chapter where the causes which regulate the exchangeable value of commodities are explained at length. The reader is referred to that chapter for fuller satisfaction.
76 CHAP. II — DISTRIBUTION.
and capital yields a diminished quantity of produce, the value of the diminished quantity remains as great as that of the larger quantity had been before. But if the value of that which is divided as wages of labour and profits of stock remains the same, it is obvious and certain, that the proportion of that value which goes as profits of stock depends wholly upon that which goes as wages. The rate of profits, therefore, or the ratio which the value of that which is received by the capitalist bears to the value of the capital, depends wholly upon wages.
A case may be supposed, in which the productive powers of labour and capital would be increased, not in one department only, but in all departments of production at once. The same quantity of labour and capital which produced 10 quarters of corn, may be supposed to produce 20; the same quantity of labour and capital which produced 100 yards of cloth, to produce 200 ; and so on.
It is sufficiently evident that if there was a quantity of labour and capital employed in producing corn, the produce of which exchanged exactly against the produce of a certain quantity of labour and capital, employed in making cloth, the produce of these respective quantities of labour and capital would exchange against one another, in the same manner after the augmented production as be- fore. The same would be the result in every other
SECT. Ill — PROFITS. 77
case. If the produce of a certain capital A, ex- changed exactly against the produce of a certain ca- pital B, before the augmentation of produce, it would do so after that augmentation ; if 100 pair of stock- ings were the produce of A, and 50 pair of shoes the produce of B ; and if one of these products exchanged against the other, they would equally do so after the product was augmented to 200 pair of stockings on the one side, and 100 pair of shoes on the other. It is evident, in this case, that not only the whole of each of these two products would have the same value relative to the other as it had before, but each por- tion of the two. As one pair of shoes was worth two pair of stockings, before the augmentation, so it would be after the augmentation ; and if the same changes are supposed to have taken place in every thing, the value of every article of produce, relative , to every other, would be exactly the same as before.
We have next to inquire what would be the effects in this case, with regard to wages and profits. The quantity of produce, to be divided between the two, being doubled, if it was shared in the same proportion, each capitalist, and each labourer, would receive twice as much produce as he received before ; the command of commodities obtained by each would be exactly doubled.
If reference is made to the cost of production, they stand exactly as they did before ; each has re-
78 CHAP, n — BISTRIEUTION.
ceived the same share as before of what the same in^ struments of production have yielded. If reference is made to produce, each has received a great aug- mentation. In one sense, wages and profits have both been increased ; in another, neither of them has.
The diminution of the return which is made to capital employed upon the land, by" the necessity of having recourse to less fertile land, or successive doses of capital upon the same land, diminishes the return which is made to capital in manufacturing, and all other species of industry.
We have seen, that the diminution of the return to capital employed upon the land is inevitable ; but what is the rate of profits in any one employment must be the rate of profits in all employments. No one would continue to employ his capital in agri- culture, if, by withdrawing it to another occupation, he could obtain greater advantages. All other profits, therefore, must sink to the level of agri- cultural profits. The steps by which this effect i^ produced remain to be explained.
When the demand arrives for such an additional quantity of corn as can only be produced by recourse to inferior lands, or fresh doses of capital on the same land with inferior returns, the cultivators, of course, demur to employ their capital less produc-
SECT. Jll— *PI10FITS. 79
lively than before ; the demand for corn, therefore, increases, without a proportional increase of supply. The exchangeable value of corn, by consequence, rises; and when it has risen to a certain height, the cultivator can obtain as high profits by raising it under the necessity of a diminished produce, as are obtained by any other owners of stock.
By this process his profits are not kept up to their former level, but all other profits are brought down to that to which he has been reduced. By the rise in the value of corn, the cost of maintaining labour is increased. A certain quantity of the necessaries of life must be consumed by the labourer, whether they cost little or much. When they cost more than they did before, his labour costs more than it did before; though the quantity of commodities which he consumes may remain precisely the same. His wages, therefore, must be considered as rising, though his real reward may not be increased.
By this change, in the cost of producing and in the value of com, all the owners of capital are con- strained to give higher wages to their labourers. Their profits, therefore, as we have just seen, are reduced. The farmer, also, is obliged, and for the same reason, to give higher wages. Of the produce of the labour and capital which he employs, he is obliged to give a greater share to his labourers ; his profits, therefore, are reduced, in the same manner and to
80 CHAP. II — DISTRIBUTION.
the same degree, as those of other capitalists. The price of his commodity has risen ; but that is only so far as to compensate for the peculiar disadvantage under which he has fallen. The quantity of pro- duce which his capital returns is diminished. The quantity of produce which is returned to the capital of others is not diminished. The value of his commodity rises so far as to compensate for this diminished return which is peculiar to himself. But that diminution of profits which arises from increase of wages he has. to share in common with all. There is no increase of value to compensate for that en- hancement of expense.
It thus appears, that in proportion as population increases, and as capital is forced upon land of less and less fertility, the profits of stock are gradually and incessantly reduced.
It may here be useful to the learner to look back upon his progress, and ascertain the number and im- portance of the steps which he has made. He has discovered, what are the laws according to which those commodities which form the riches of nations are produced ; and what are the laws, according to which, when produced, they are distributed.
He has seen that there are two instruments of
.'- SECT. Ill — PROFITS. 8l
production ; one primary, the other secondary : that labour is the primary instrument of production, and that, abstracted from those aids which it derives from capital, its productive powers are augmented chiefly by limiting the number of each man's productive operations ; in other words, by what has been called the division of labour : that capital is secondary to labour, not only because it is subsequent in order of time, but because it owes its existence to labour; because the first capital is the result of pure labour, and because that which is subsequently the result of labour and capital combined, may thence be resolved into labour, the ultimate principle of all production.
The learner has now also seen, that, what is pro- duced by the operations of labour and capital, di- vides itself, in tlie first instance, into three portions ; the rent of land ; the wages of labour ; and the pro- fits of stock. Till the laws were discovered which determine the boundaries of these several portions, the amount of what goes respectively as rent, as profits, and as wages, almost all the eonclusions of Political Economy were vague and uncertain. It has been seen, that rent is something which may be considered as independent of the general result of the productive powers of labour and capital ; that it is the result of a peculiar defect of the earth, which does not continue to yield its produce in equal abundance to successive portions of capital ; and that it is the excess of what is yielded to the more pro-
G
82 CHAP. II— DISTRIBUTION.
ductive portions, above what is equal to the produce of the least productive portion, of capital employed upon the land. After the limits were thus fixed of this one of the three portions into which the pro- duce of industry divides itself, whence it appeared that what may be regarded as the genuine effect of labour and capital in co-operation is left to be divided between the labourer and the capitalist ; it was easy for the learner to see, that, in respect to proportions, as what fell to the share of the one was increased, what went to the share of the other was diminished, and that in this sense, wages and profits depend on one another ; that in respect, however, to the quan- tity of produce which these shares may contain, the productive power of the instruments of production is the determining cause.
CHAPTER til
INTERCHANGE.
SECTION I.
NATURE OF THE ADVANTAGE DERIVED FROM THE INTERCHANGE OF COMMODlTfES, AND THE PRINCIPAL AGENTS EMPLOYED IN IT.
When two men have more than they need, one, for example, of food, another of cloth, while the fil*st desires more of cloth than he possesses, the second more of food ; it is a great accommodation to both, if they can perform an exchange of a part of the food of the one for a part of the cloth of the other ; and so in other cases.
G SI
84 CHAP. Ill — INTERCHANGE.
In performing exchanges there are two sets of persons, the intervention of whom is of great advan- tage : the first are Carriers, the second Mercliants.
When the division and distribution of labour has been earned to any considerable extent, goods are produced at some, often at a very considerable distance, from the place where they are wanted for consumption. It is necessary that they should be conveyed from the one place to the other. Carriers are of two sorts : Carriers by Land, and Carriers by Water. For the business of carriage, both capital and labour are required. In carriage by land, the waggons or carts, the horses or other cattle, and the maintenance both of them and of the necessary number of men ; in carriage by water, the ships, and the maintenance of the men who navigate them, con- stitute the capital required.
To procure articles, as men have occasion to consume them, it would be very inconvenient to repair, in each instance, to the several manufacturers and producers of each, who may often live at a very considerable distance from one another. A great deal of trouble is saved to consumers, when they find assembled in one place the whole, or any considerable portion, of the articles which they use. This con- venience gives rise to the class of merchants, who buy from the manufacturers, and keep ready for
SECT. I — CARRIERS AND MERCHANTS. 85
use, all those articles for which they expect a pro- fitable sale.
In small towns, where one or a few merchants can supply the wants of all the population, the shop or store of one merchant contains articles of all, or most of the kinds in general demand. In places where the population is large, instead of a great number of shops, each dealing in almost all kinds of articles, it is found more convenient to divide the articles into classes, and for each shop to confine itself to a particular class ; one, for example, to hats, another to hosiery ; one to glass, another to iron ; and so on.
86 CHAP. Ill— INTEllCHANGE.
SECTION IL
WHAT DETERMINES THE QUANTITY IN WHICH COMMODITIES EXCHANGE FOR ONE ANOTHER.
When a certain quantity of one commodity is ex- changed for a certain quantity of another commodity ; a certain quantity of cloth, for example, for a certain quantity of corn; there is something which deter- mines the owner of the cloth to accept for it such and such a quantity of corn ; and, in like manner, the owner of the corn to accept such and such a quantity of cloth.
This is, evidently, the principle of demand and supply, in the first instance. If a great quantity of corn comes to market to be exchanged for cloth, and only a small quantity of cloth to be exchanged for corn, a great quantity of corn will be given for a small quantity of cloth. If the quantity of cloth, which thus comes to market, is increased, without any increase in the quantity of corn, the quantity of corn which is exchanged for a given quantity of cloth will be proportionally diminished.
This answer, however, does not resolve the whole of the question. The quantity in which commo- dities exchange for one another depends upon the
SECT, ir — EXCHANGEABLE VALUE. 87
proportion of supply to demand. It is evidently therefore necessary to ascertain upon what that pro- portion depends. To determine the laws according to which supply is furnished to demand, is one of the most important inquiries in Political Economy.
Demand creates, and the loss of demand annihi- lates, supply. When an increased demand arises for any commodity, an increase of supply, if the supply is capable of increase, follows, as a regular effect. If the demand for any commodity altogether ceases, the commodity is no longer produced.
The connexion here, of causes and effects, is easily explained. If corn is brought to market, the cost of bringing it has been so much. If cloth is brought to market, the cost of bringing it has been so much. For the benefit of simplicity, the number of commodities in the market are here supposed to be two : it is of no consequence, with regard to the result, whether they are understood to be few or many.
The cost of bringing the corn to market has been either equal to that of bringing the cloth, or unequal. If it has been equal, there is no motive, to those who bring the cloth or the corn, for altering the quantity of either. They cannot obtain more of the commodity which they receive in exchange, by tra[nsferring their labour to its production. If the
88 CHAP. HI— INTERCHANGE.
cost has been unequal, there immediately arises a motive for altering the proportions. Suppose that the cost of bringing the whole of the corn has been greater than that of bringing the whole of the cloth ; and that the whole of the one is exchanged against the whole of the other, either at once, or in parts : the persons who brought the cloth have in that case possessed themselves of a quantity of corn at less cost, than that at which it was brought to market, by those who produced it ; those, on the other hand, who brought the corn have possessed themselves of a quantity of cloth, at a greater cost than that at which it can be made and brought to market.
Here motives arise, to diminish the quantity of corn, and increase the quantity of cloth ; because the men who have been producing corn, and pur- chasing cloth, can obtain more cloth, by transferring their means of production from the one to the other. As soon, again, as no more cloth can be obtained by applying the same amount of means to the production of cloth, than by applying them to corn, and ex- changing it for cloth, all motive to alter the quantity of the one as compared with that of the other is at an end. Nothing is to be gained by producing corn rather than cloth, or cloth rather than corn. The cost of production on both sides is equal.
It thus appears that the relative value of commo- dities, or, in other words, the quantity of one which
SECT. II — EXCHANGEABLE VALUE. 89
exchanges for a given quantity of another, depends upon demand and supply, in the first instance ; but upon cost of production, ultimately ; and hence, in accurate language, upon cost of production, entirely. An increase or diminution of demand or supply, may temporarily increase or diminish, beyond the point of productive cost, the quantity of one commodity which exchanges for a given quantity of another; but the law of competition, wherever it is not obstructed, tends invariably to bring it to that point, and to keep it there.
Cost of production, then, regulates the exchange- able value of commodities. But cost of production is itself involved in some obscurity. It is probable that different ideas are very often included under that term by different persons.
Two instruments are commonly combined in pro- duction ; Labour and Capital.
It follows, either that cost of production consists in labour and capital combined; or that one of these may be resolved into the other. If one of them can be resolved into the other, it follows that cost of production does not consist in both combined.
The opinion, which is suggested by first appear- ances, undoubtedly is, that cost of production con- sists in capital alone. The capitalist pays the wages
90 CHAP. Ill — INTERCHANGE.
of his labourer, buys the raw material, and expects that what he has expended shall be returned to him, in the price, with the ordinary profits upon the whole of the capital employed. From this view of the subject, it would appear, that cost of production consists exclusively in the portion of capital expended, together with tlie profits upon the whole of the capital employed in effecting the production.
It is easy, however, to see, that in the term capital, thus understood, an ambiguity, and hence a fallacy, is involved. When we say that capital and labour, the two instruments of production, belong to two classes of persons ; we mean that the labourers have contributed so much to the production, and the ca- pitalists so much ; and that the commodity, when produced, belongs, in certain proportions, to both. It may so happen, however, that one of these parties has purchased the share of the other, before the pro- duction is completed. In that case, the whole of the commodity belongs to the party who has purchased the share of the other. In point of fact, it does happen, that the capitalist, as often as he employs labourers, by the payment of wages, purchases the share of the labourers. When the labourers receive wages for their labour, without waiting to be paid by a share of the commodity produced, it is evident that they sell their title to that share. Tlie capitalist is then the owner, not of the capital only, but of the labour also. If what is paid as wages is included, as it commonly is, in the term capital, it is absurd
SECT. II — EXCHANGEABLE VALUE. 91
to talk of labour separately from capital. The word capital, as thus employed, includes labour and capital both. To say, therefore, that the exchangeable value of commodities is determined by capital, understood in this sense, is to say that it is determined by labour and capital combined. This, however, is returning to the point from which we set out. It is nugatory to include labour in the definition of the word capital, and then to say that, capital without labour, deter- mines exchangeable values. If capital is under- stood in a sense which does not include the purchase money of labour, and hence the labour itself, it is obvious that capital does not regulate the exchange- able value of commodities.
If labour were the sole instrument of production, and capital not required, the produce of one day's labour in one commodity would exchange against the produce of one day's labour in another commodity. In the rude state of society, if the hunter and the fisherman desired to vary their food, the one by a portion of game, the other by a portion of fish, the average quantity which they took in a day would form the standard of exchange. If it did not, one of the two would be placed in a more unfavourable situation than his neighbour, with perfect power, which he would of course employ, to pass from the one situation to the other. •«?
In estimating equal quantities of labour, an allow- ance would, of course, be included for different degrees
92 CHAP. Ill — INTERCHANGE.
of hardness and skill. If the products of each of two days' labour of equal hardness and skill exclian^ed for one another, the product of a day's labour, which was either harder, or required a greater degree of skill, would exchange for something more.
All capital consists really in commodities. The capital of the farmer is not the money which he may be worth, because that he cannot apply to pro- duction. His capital consists in his implements and stock.
As all capital consists in commodities, it follows, of course, that the first capital must have been the result of pure labour. The first commodities could not be made by any commodities existing before them.
But if the first commodities, and of course the first capital, were the result of pure labour, the value of this capital, the quantity of other commodities for which it would exchange, must have been esti- mated by labour. This is an immediate consequence of the proposition which we have just established, that where labour was the sole instrument of pro- duction, exchangeable value was determined by the quantity of labour which the production of the com- modity required.
If this be established, it is a necessary consequence.
SECT. II — EXCHANGEABLE VALUE. 93
that the exchangeable value of all commodities is determined by quantity of labour.
The first capital, as has just been seen, being the result of pure labour, bears a value in proportion to that labour. This capital concurs in pi'oduction. And it is contended that as soon as capital concurs in production, the value of the commodity produced is determined by the value of the capital. But the value of that capital itself, we have just allowed, is determined by labour. To say, therefore, that the value of a product is determined by the value of the capital, is of no use, when you have to go beyond the value of the capital, and ask what it is by which that value is itself determined. To say that the value of the product is determined by the value of the capital, but the value of the capital is determined by the quantity of labour, is to say that the value of the product is determined by the quantity of labour.
It thus undeniably appears, that not only the value of the first capital, but, by equal necessity, that of the commodities which are produced by the first capital, is determined by quantity of labour. Capital of the second stage must consist in the commodities which are produced by that of the first stage. It must, therefore, be estimated by the quantity of labour. The same reasoning applies to it in every subsequent stage. The value of the first capital
94 CHAP. Ill — INTERCHANGE.
was regulated by quantity of labour: the value of that which was produced by the first capital was regulated by the value of the first : that, however, was valued by labour : the last, therefore, is valued by labour ; and so on, without end, as often as succes- sive productions may be supposed to be made. But if the value of all capital must be determined by labour, it follows, upon all suppositions, that the value of all commodities must be determined by labour.
' To say, indeed, that the value of commodities depends upon capital as the final standard, implies one of the most obvious of all absurdities. Capital is commodities. If the value of commodities, then, depends upon the value of capital, it depends upon the value of commodities ; the value of commodities depends upon itself. This is not to point out a standard of value. It is to make an attempt for that purpose clearly and completely abortive.
It thus appears by the clearest evidence, that quantity of labour in the last resort, determines the proportion in which commodities exchange for one another.
There is one phenomenon which is brought to controvert these conclusions, and which it is, there- fore, necessary to explain.
' It is said that the exchangeable value of commo-
SECT. II — EXCHANGEABLE VALUE. 95
dities is affected by time, without the intervention of labour ; because, when profits of stock must be in- cluded, so much must be added for every portion of time which the production of one commodity requires beyond that of another. For example, if the same quantity of labour has produced in the same season a cask of wine, and 20 sacks of flour, they will ex- change against one another at the end of the season : but if the owner of the wine places the wine in his cellar, and keeps it for a couple of years, it will be worth more than the W sacks of flour, because the profits of stock for the two years must be added to the original price. Here, it is affirmed, there has been no new application of labour, but here there is an addition of value : quantity of labour, therefore, is not the principle by which exchangeable value is regulated.
To this objection I reply, that it is founded upon a misapprehension with respect to the nature of pro- fits. Profits are, in reality, the measure of quantity of labour ; and the only measure of quantity of labour to which, in the case of capital, we can resort. This can be proved by the most rigid ana- lysis.
If two commodities are produced, a bale of silk, for example, for immediate consumption, and a machine, which is an article of fixed capital ; it is certain, that if the bale of silk and the machine were produced by the same quantity of labour, and in the
96 CHAP. Ill — INTERCHANGE.
same time, they would exactly exchange for one another : quantity of labour would clearly be the re- gulator of their value. But suppose that the owner of the machine, instead of selling it, is disposed to use it, for the sake of the profits which it brings, what is the real character and nature of his action ? Instead of receiving the price of his machine all at once, he takes a deferred payment, so much per annum : he receives, in fact, an annuity, in lieu of the capital sum; an annuity, fixed by the competition of the market, and which is therefore an exact equivalent for the capital sum. Whatever the proportion which the capital sum bears to the annuity, whether it be ten years* purchase, or twenty years' purchase, such a proportion is each year's annuity of the original value of the machine. The conclusion, therefore, is incontrovertible : as the exchangeable value of the machine, had it been sold as soon as made, would have been the practical measure of the quantity of labour employed in making it, one-tenth or one- twentieth of that value measures also a tenth or a twentieth of the quantity of labour.
If a piece of machinery, which has cost 100 days' labour, is applied in making a commodity, and is worn out in the making of it ; and if 100 days' pure labour are employed in making another commodity ; the produce of the machine, and the produce of the labour, supposing no adjustment necessary for dif- ference of time, will exchange against one another.
SECT. II — EXCHANGEABLE VALUE. 97
Make now a different supposition : that the machine is an article of fixed capital, and not worn out : 100 days' labour were correctly supposed to be expended by using the machine as in the first case; but 100 days' labour have not been expended by using it as in the second, because the machine is not worn out. Some labour, however, has been expended, because 100 days' labour in a mass has been applied. How much of it shall we say has been expended ? We have an exact measure of it in the equivalent which is paid. If the equivalent which was obtained when the machine was worn out, was a measure of the 100 days' labour, whatever proportion of such equivalent is received as a year's use of the machine when not worn out, must represent a corresponding proportion of the labour expended upon the machine.
Capital is allowed to be correctly described under the title of hoarded labour. A portion of capital produced by 100 days' labour, is 100 days' hoarded labour. But the whole of the 100 days' hoarded labour is not expended, when the article constituting the capital is not worn out. A part is expended, and what part ? Of this we have no direct, we have only an indirect measure. If capital, paid for by an an- nuity, is paid for at the rate of 10 per cent, one- tenth of the hoarded labour may be correctly con- sidered as expended in one year. If the wine which is put in the cellar is increased in value one-tenth by
H
98 CHAP. Ill — INTERCHANGE.
being kept a year, one-tenth more of labour may be correctly considered as having been expended upon it.
In the simple cases, which political economists ad- duce, for the sake of more convenient illustration, one is, that of commodities made purely by capital, with- out the aid of immediate labour ; made, for example, by a machine, which is of great duration, and com- pletes the commodity by its own operation. It is evident that if a commodity could be so made, its whole price would consist of profits. But it would surely be absurd to say, that labour had nothing to do in creating the value of such a commodity : since, demonstratively, it is labour which gives to it the whole of its value ; and if it could be got without labour, it would have no value at all. It is, hoarded labour, indeed, not immediate labour, which has created its value. But as immediate labour creates value in proportion to the quantity of it applied, so also does hoarded labour ; nor is there any other principle upon which it can be conceived to do so. If there are two machines of the nature supposed above, the one of which is 100 days' hoarded la- bour, the other 200, the day's produce of the one will be twice the value of the day's produce of the other. Why ? because twice the quantity of labour has been applied to it. The case is precisely the same, when what they call allowance for time is taken into account. If the 100 days' hoarded labour
SECT. II — EXCHANGEABLE VALUE. 99
is applied for two days, its produce will be equal in value to one day's produce of the 200 days' hoarded labour. Why? because 100 days' hoarded labour, applied for two days, is equal in quantity to 200 days, applied for one day.
What is called time, in this case, is the mere com- putation of the annuity, the measure of the quantity of labour which had been applied. *
It has been most pertinently and conclusively re- marked by Mr. Mc. Culloch, that time does nothing. How then can it create value? Time is a mere abstract term. It is a word, a sound. And it is the very same logical absurdity, to talk of an abstract unit measuring value, and of time creating it.
H
100 CHAP. Ill — INTERCHANGE.
. SECTION III.
EFFECT UPON EXCHANGEABLE VALUES OF A FLUCTUATION IN AVAGES AND PROFITS.
In stating that commodities are produced by two instruments, Labour and Capital, of which the last is the result of labour, we, in effect, mean, that com- modities are produced by two quantities of labour, differently circumstanced; the one, i77imediate labour, that which is applied at once by the hand of the labourer; the other, hoarded labour, that which has been the result of former labour, and either is applied in aid of the immediate labour, or is the subject-matter upon which it is bestowed.
Of these two species of labour, two things are to be observed : First, that they are not always paid according to the same rate; that is, the payment of the one does not rise when that of the other rises, or fall when that of the other falls : And, secondly, that they do not always contribute to the production of all commodities in equal proportions.
If there were any two species of labour, the wages of which did not rise and fall in the same proportion, and which, contributing to the production of all commodities, did not contribute to them all in equal
SECT. Ill— EXCIiANGEABLfe YALUE. 101
degrees, this circumstance, of their not contributing in equal degrees, would create a difference in ex- changeable values, as often as any fluctuation took place in the rate of wages.
If all commodities were produced by a portion of skilled, and a portion of unskilled labour, but the ratio which these portions bore to one another were different in the case of different commodities ; and if, as often as the wages of skilled labour rose, the wages of unskilled labour rose twice as much ; it is very obvious, that, upon a rise of wages, those commodities, to the production of which a greater proportion of un- skilled labour was applied, would rise in value as com- pared with those to which a less proportion was applied. It is evident, however, that though this difference in the ratios according to which the wages of two kinds of labour were changed, and the different proportions in which they were applied in the production of dif- ferent commodities, would, upon a rise or fall in wages, alter the relative value of the commodi- ties, it would do so, without in the least degree affecting the truth of the previous proposition, that quantity of labour determined exchangeable values.
The case is precisely the same when we consider that it is the two species of labour, called immediate and hoarded, which are applied in different propor- tions.
102 CHAP. Til — INTERCHANGE.
Three cases will conveniently exemplify the different degrees in which labour and capital respectively con- tribute to production. These are the two extreme cases, and the medium. The first is that of commodities which are produced by immediate labour alone with- out capital; the second, that of commodities produced, one half by capital, one half by immediate labour ; the third, that of commodities produced by capital alone without immediate labour. There are perhaps no species of commodities which perfectly coincide with either of the extremes. There are species, however, which approximate to both ; and when the most simple cases are illustrated, as examples, allowance can easily and correctly be made for the differences of the rest.
If two species of labour are employed in the pro- duction of commodities; and if, when the payment of the one species of labour rises, that of the other falls ; a commodity, in the production of which a greater pro- portion of the first species of labour is employed, will, upon a rise in the payment of that species of labour, rise in exchangeable value, as compared with a com-^ modity in which less is employed. The degree, how- ever, in which it will rise, will depend upon two cir- cumstances : first, upon the degree in which the pay- ment of the one species of labour falls when the other rises; and, secondly, upon the degree in which the proportion of the labour of the first kind, employed in its production, exceeds the proportion of it which
SECT. Ill — EXCHANGEABLE VALUE. 103
is employed in the production of the other commo- dity.
The first question, then, is, in what degree, when wages rise, do profits fall ? And this is the only general question ; for the degree in which the two species of labour combine in the production of dif- ferent commodities, depends upon the circumstances of each particular case.
If all commodities corresponded with the first of the cases, assumed above as examples, and which we may, for the sake of aljbreviation, designate by the terms No. 1, No. 2, and No. 3 ; in other words, if all commodities were produced wholly by labour; and capital were solely employed in the payment of wages; in that case, just as much as wages of labour rose, profits of stock would fall.
Suppose a capital of 1000/. to be thus employed, and profits to be 10 per cent., the value of the com- modity would be 1100/., for that would replace the capital with its profits. The commodity may be re- garded as consisting of 1100 parts, of which 1000 would belong to the labourers, and 100 to the capi- talist. Let wages, upon this, be supposed to rise 5 per cent. ; in that case, it is evident, that instead of 100 parts of the 1100, the capitalist would receive only 50 ; his profits, therefore, instead of 10 would be only 5 per cent. Ijystead of 1000/. he would have
104! CHAP, tn — INTERCHANGE.
to pay 1050/. in wages. The commodity would not rise in value to indemnify him, because we have sup- posed that all commodities are in the same situation ; it would, therefore, be of the value of 1100/., as before, of which 50/. alone would remain for himself.
If all commodities corresponded with the case No. 2, profits would fall only half as much as wages rose. If we suppose that 1000/. were paid in wages, and 1000/. employed in fixed capital ; that profits, as before, were 10 per cent., and this the whole expendi- ture; the value of the commodity would be 1200/. because that is the sum which would replace the capital expended and pay the profits of the whole. In this case the commodity might be considered as di- vided into 1200 parts, of which 200 would belong to the capitalist. If wages rose 5 per cent., and instead of 1000/. as wages, he paid 1050/. he would still retain 150/. as profits ; in other words, he would sustain a reduction of only 2|^ per cent.
The case would be precisely the same^ if we sup- posed the 1000/. of capital, which is not employed in the payment of wages, to be employed, in any pro- portion, in the shape of circulating capital consumed in the course of the productive process, and requiring to be replaced. Thus, while 1000/. were employed in the payment of wages, 500/. might be employed as fixed capital in durable machinery, 500/. in raw material, and other expenses. If this were the state of the
SECT» III — EXCSA^GEABLU VALUE. 105
expenditure, the value of the article would be 1700/. ; being the amount of the capital to be replaced, and 10 percent, profits upon the whole. Of these 1700 parts, 1000 would be the share of the labourers, though paid in advance, and 700 the share of the capitalist, 200 being profits. If, now, wages were to rise 5 per cent., 1050 of the above 1700 parts would be the share of the labourers, and 650 only would remain to the capitalist, of which, after replacing his 500/. of circulating capital, 150 would remain as profits ; a reduction of 2^ per cent, as before.
If all commodities corresponded with the third case, as no wages would be paid, profits could not be affected by the rise of them : and it is obvious, that, in proportion as commodities may be supposed to approach that extreme, profits would be less and less affected by such a rise.
If we suppose, what is most probable, that, in the actual state of things, as many cases are on the one side of the medium as on the other, the result would be, in consequence of the mutual compensations that would take place, that profits would be reduced exactly half as much as wages rose.
The steps may be traced as follows :
When wages rise, and profits fall, it is evident that all commodities, made with a less proportion of
106 CHAP. HI — INTERCHANGE.
labour to capital, will fall in value, as compared with those which are made with a greater. Thus, if No. 1 is taken as the standard, that in which commodi- ties are produced wholly by labour; all commodities belonging to that case will be said to remain of the same value ; all belonging to any of the other cases will be said to fall in value. If No. 2 is taken as the standard^ all commodities appertaining to that case will be said to remain of the same value ; all belong- ing to any case nearer the first extreme, will be said to rise in value ; all to any nearer the last extreme, to fall.
Those capitalists, who produce articles of case No. 1, have sustained an additional cost of 5 per cent. ; but they exchange their commodity against other commodities. If they exchange them against those of case No. 2, where the capitalists have sustained an additional cost of only 2^ per cent., they will receive 2^ per cent, additional quantity. Thus, in obtaining goods, produced under the circumstances of case No. 2, they obtain a certain degree of compen- sation, and sustain, by the rise of wages, a disad- vantage of only 2^ per cent. In this exchange, however, the result, with respect to the capitalists who produce goods under the circumstances of case No. 2, is reversed. They have already sustained a disadvantage of 2| per cent., in the production of their goods, and are made to sustain another disad- vantage of 2^ per cent, in obtaining, by exchange.
SECT. Ill — EXCHANGEABLE VALUE. 107
the goods produced under the drcumstances of case No. 1.
The result, then, upon the whole, is, that all pro- ducers, who possess themselves, either by production or exchange, of goods produced under the circum- stances of case No. 2, sustain a disadvantage of 2^ per cent ; those who possess themselves of goods in cases approaching the first extreme, sustain a greater ; those in cases approaching the last, a less disadvantage : that, if the cases on the one side are equal to those on the other, a loss of 2^ per cent, is sustained upon the whole ; that this, accordingly, is the extent to which, in practice, it may be supposed that profits are reduced.
From these elements it is easy to compute the effect of a rise of wages upon price. All commodi- ties are compared with money, or the precious metals. If money be supposed to correspond with case No. 2, or to be produced, which is probably not far from the fact, by equal proportions of labour and capital, then all commodities produced under these medium circumstances are not altered in price by a rise of wages : those commodities which approach nearer the first extreme, or admit a* greater proportion of labour than capital in their formation, rise in price : those which approach the second, that is, have a greater portion of capital than labour, fall : and, upon the aggregate of commodi-
108 CHAP. Ill— INTERCHANGE.
ties, or all taken together, there is neither fall nor rise.
From the explanations, here afforded, it will be easy to see what is meant by the term " measure of value," and wherein it differs from that which we have already endeavoured to explain, the ** regu- lator of value."
Money, that is, the precious metals in coin, serves practically as a measure of value, as is evident from what has immediately been said. A certain quan- tity of the precious metal is taken as a known value, and the value of other things is measured by that value ; one commodity is twice, another thrice the value of such a portion of the metal, and so on.
It is evident, however, that this can remain an ac- curate measure of value, only if it remains of the same value itself. If a commodity, which was twice the value of an ounce of silver, becomes three times its value, we can only know what change has taken place in the value of this commodity, if we know that our measure is unchanged.
But there is no commodity to be taken as a mea- sure of value, which is not itself liable to alterations in value, from both sources of such alteration, from a change in the quantity of labour and capital required
SECT. Ill — EXCHANGEABLE VALUE. 109
for its production, and also from a change in wages and profits.
The alteration of value arising from a change in the quantity of labour required for production is the most important ; for if we could be sure, that the commodity chosen for our measure of value was it- self always produced under the same circumstances, that is, by thdRiame quantity of immediate, and the same quantity of hoarded, labour, it would always, as we have seen by the preceding explanations, be an accurate measure immediately of the value of all commodities produced under the same circumstances, and might, under the changes produced in the value of other commodities by an alteration in wages and profits, be accommodated to them by calculation.
Thus, if gold were produced under the circum- stances of case No. 1, by mere labour, picked up, for example, by the hand, from the beds of rivers, and always in equal quantity, in return for an equal quantity of labour, it would always be a measure, exactly and immediately, of all commodities produced by pure labour. In the case, however, of a rise of wages, and a fall in the profits of stock, gold would in these circumstances rise as compared with commodi- ties produced under the circumstances of case No. 2, though no alteration should have taken place in the amount of the labour and capital required for their
110 CHAP, in — INTERCHANGE.
production. It is evident, therefore, that in these circumstances, gold, fluctuating in value with every fluctuation in the wages of labour, would very im- perfectly serve the purposes of a measure of value. If a contract, for example, were made, to pay an an- nuity of so much gold for twenty years, it might be 10 per cent, more, or 10 per cent, less, at the end of that period, than it was at the beginning. Of labour it would all the time command e^ictly the same quantity, but of all commodities prodiiced by aid of capital it would command a difterent quantity, and that in proportion to the degree in which capital, not labour, was the instrument of their production.
Though we can by strict analysis discover, that exchangeable value is proportioned to quantity of la- bour expended in production, yet there are two rea- sons why we cannot have recourse to this as the mea- sure of value.
In the first place, there are two kinds of labour employed in production, and the degree in which the produce is shared between them often varies, and occasions, as we have seen, a corresponding variation in the exchangeable values of commodi- ties produced by different proportions of these two kinds of labour. In the next place, we have no practical means of ascertaining before hand the ex- act quantity of hoarded labour which goes to produc- tion, since the only measure we have of its quantity
SECT. Ill — ^EXCHANGEABLE VALUE. Ill
is the price which it brings. These two circum- stances render it impossible, that we should employ the regulator of value as the measure of it.
From these explanations it also appears, that we can have no accurate measure of value.
Every commodity may be considered as produced under one of tWk three sets of circumstances specified above. If we take as our measure a commodity, produced under the circumstances No. 1, the gold, for example, picked up by the hand, this will always purchase the same quantity of such commodities as are produced by pure labour, and it will always pur- chase the same quantity of that labour ; but it will not purchase the same quantity of the produce of Jioarded labour, but less of it in proportion as wages ^
flWr, more as wages Jiflfe Could we take as our v hI' measure a commodity produced under the circum- stances No. 3, that is, by hoarded labour alone, it would always purchase the same quantity of the produce of hoarded labour, but i%m or m&iie of the ' ' produce of immediate labour, according as profits, 7/ the wages of hoarded labour, rose or fell. A '^"^\fc^ commodity produced under the medium circum- stances answers the purpose best ; because by far the greater number of commodities are produced under circumstances more nearly approaching to the medium than any of the extremes. Gold, therefore, which
112 CHAP. III--.INTERCHANGE.
is produced in these circumstances, and with less va- riation in the quantity of the two kinds of labour applied to its production, than almost any other com- modity, has this recommendation among others, to be the medium of exchange, that it is less imperfect as a measure of value than any other commodity, perhaps, which could be taken. Such aberrations as are obvious, and capable of being in some degree fore- seen, practical sagacity corrects by the proper allow- ances. This cannot be done when great and un- expected changes take place ; much disorder is there- fore the consequence.
SECT. IV — FOREIGN TRADE. 113
SECTION IF.
OCCASIONS ON WHICH IT IS THE INTEREST OF NATIONS TO EXCHANGE COMMODITIES WITH ONE ANOTHER.
We have already seen, that the benefits, derived from the division and skilful distribution of labour, form part of the motives which give rise to the ex- change of commodities. Men will not confine them- selves to the production of one only of the various articles needed for the well-being of the individual, unless they can, by its means, provide themselves with others.
There is another circumstance which very ob- viously affords a motive to exchange. Some com- modities can be produced only in particular places. Metals, coals, and various other commodities of the greatest importance, are the product of particular spots. The same is the case with certain vegetable productions, to which every soil and climate are not adapted. Some commodities, though not confined to particular spots, can yet be more conveniently and cheaply produced in some places than in otliers ; commodities, for example, which require a great consumption of fuel, in a coal country ; commodities,
I
114 CHAP. Ill — INTERCHANGE.
the manufacture of which requires a strong moving power, where a sufficient fall of water can be ob- tained ; commodities which require an extraordinary proportion of manual labour, where provisions, and consequently labour, are cheap.
These are all obvious causes. There is another cause which requires rather more explanation. If two countries can both of them produce two commodities, corn, for example, and cloth, but not both commo- dities, with the same comparative facility, the two countries will find their advantage in confining them- selves, each to one of the commodities, and barter- ing for the other. If one of the countries can pro- duce one of the commodities with peculiar advan- tages, and the other the other with peculiar advan- tages, the motive is immediately apparent which should induce each to confine itself to the commodity which it has peculiar advantages for producing. But the motive may no less decidedly exist, where one of the two countries has facilities superior to the other in producing both commodities.
By superior facilities, we mean the power of pro- ducing the same effect with less labour. The conclu- sion, too, will be the same, whether we suppose the labour to be more or less highly paid. Suppose that Poland, for example, can produce corn and clotli with less labour than England, it will not follow that it may not be the interest of Poland to import one of
SECT, IV — FOKEIGN TRAbE. 115
the commodities from England. If the degree in which it can produce with less labour, is the same in both cases ; if, for example, the same quantity of corn and cloth which Poland can produce, each with 100 days' labour, requires each 150 days* labour in England, Poland will have no motive to import either from England. But if, while the same quantity of cloth which, in Poland, is produced with 100 days' labour, can be produced in England with 150 days' labour, the facts are such, that the corn which is produced in Poland with 100 days' labour, requires 200 days' labour in England ; in that case, it will be the interest of Poland to import her cloth from Eng- land. The evidence of these propositions may thus be traced.
If the cloth and the corn, each of which required 100 days' labour in Poland, required each 150 days' labour in England, it would follow, that the cloth of 150 days' labour in England, if sent to Poland, would be equal to the cloth of 100 days' labour in Poland : if exchanged for corn, therefore, it would exchange for the corn of only 100 days' labour. But the corn of 100 days' labour in Poland was supposed to be the same quantity with that of 150 days' labour in England. With 150 day^' labour in cloth, there- fore, England would only get as much corn in Poland as she could raise with 150 days' labour at home ; and she would, on importing it, have the cost of
I 2
116 CHAP. Ill — INTERCHANGE.
carriage besides. In these circumstances no exchange would take place.
If, on the other hand, while the cloth produced with 100 days' labour in Poland was produced with 150 days* labour in England, the corn which was produced in Poland with 100 days' labour could not be produced in England with less than 200 days' labour ; an adequate motive to exchange would im- mediately arise. With a quantity of cloth which England produced with 150 days' labour, she would be able to purchase as much corn in Poland as was there produced with 100 days' labour; but the quan tity, which was there produced with 100 days' labour, would be as great as the quantity produced in Eng- land with 200 days' labour. England, therefore, would obtain her corn with less labour, through the medium of her cloth.
Poland would profit in the same manner. A quan- tity of corn which cost her 100 days' labour, being equal to the quantity produced in England by 200 days' labour, would purchase, in England, the pro- duce of 200 days' labour in any other commodity ; for example, in cloth. But the produce of 150 days' labour in England in the article of cloth, is equal to the produce of 100 days' labour in Poland. If, with the produce of 100 days' labour, she can purchase, not the produce of 150, but the produce of 200, she
SECT. IV— FOREIGN TRADE. 117
gains to the amount of 50 days' labour; in other words, a third.
To produce exchange, there must be two countries, and two commodities.
When both countries can produce both commodi- ties, it is not greater absolutCj but greater relative, facility, that induces one of them to confine itself to the' production of one of the commodities, and to import the other.
When a country can either import a commodity, or produce it at home, it compares the cost of pro- ducing at home with the cost of procuring from abroad; if the latter cost is less than the first, it imports.
The cost at which a country can import from abroad depends, not upon the cost at which the fo- reign country produces the commodity, but upon what the commodity costs which it sends in exchange, compared with the cost which it must be at to produce the commodity in question, if it did not import it.
If a quarter of corn is produced in England with 50 days' labour, it may be equally her interest to import corn from Poland, whether it requires, in Poland, 50 days' labour, or 60, or 40, or any other
118 CHAP. Ill— IKTEIICHAKGE.
number, to produce a quarter. Her only consideration is, whether the quantity of cloth with which she can import a quarter costs her less than 50 days' labour.
Thus, if labour in Poland produce corn and cloth, in the ratio of eight yards to one quarter ; but, in England, in the ratio of ten yards to one quarter, exchange will take place.
The practical conclusion may be commodiously and correctly stated thus :
Whenever the purchasing power of any commo- dity witli respect to another is less, in one of two countries, than it is in the other, it is the interest of those countries to exchange these commodities with one another.
If 10 yards of broad cloth in England can pur- chase 15 yards of linen, which means that they have cost an equal quantity of labour ; while in Germany 10 yards of broad cloth can purchase 20 yards of linen ; it is very evidently the interest of England to send broad cloth to purchase linen in Germany, be- cause with 10 yards of broad cloth, that is, as much cost of production as would produce 15 yards of linen, she can obtain 20 yards.
It is equally the interest of Germany to send linen to purchase broad cloth in England, because with 15
SECT. IV— FOREIGN TRADE. 119
yards of linen she can purchase 10 yards of broad cloth in England, which, if made at home, would cost her as much as 20 yards of linen.
This difference of purchasing power, which ren- ders it the interest of nations to barter commodities with one another, must be sufficiently great to cover the expense of carriage, and something more, other- wise no advantage is attained.
120 CHAP. Ill — INTERCHANGE,
SECTION F.
THE COMMODITIES IMPORTED ARE THE CAUSE OF THE BENEFITS DERIVED FROM A FOREIGN TRADE.
s.
From what is stated in the preceding chapter, one general, or rather universal, proposition may be de- duced. The benefit which is derived from exchang- ing one commodity for another, arises, in all cases, from the commodity receAved^^ioi from the commodity given. When one country exchanges, in other words, when one country traffics with another, the whole of its advantage consists in the commodities imported. It benefits by the importation, and by nothing else.
This seems to be so very nearly a self-evident pro- position, as to be hardly capable of being rendered more clear by illustration ; and yet it is so little in harmony with current and vulgar opinions, that it may not be easy, by any illustration, to gain it admission into certain minds.
When a man possesses a certain commodity, he cannot benefit himself by giving it away. It seems to be implied, therefore, in the very fact of his parting with it for another commodity, that he is benefited by
SECT. V— FOREIGN TRADE. 121
what he receives. His own commodity he might have kept, if it had been valued by him more than that for which he exchanges it. The fact of his choosing to have the other commodity rather than his own, is a proof that the other is to him more va- luable than his own.
The corresponding facts are evidence equally con- clusive in the case of nations. When one nation exchanges a part of its commodities for a part of the commodities of another nation, the nation can gain nothing by parting with its commodities; all the gain must consist in what it receives. If it be said, that the gain consists in receiving money, it will presently appear, from the doctrine of money, that a nation derives no advantage, but the contrary, from pos- sessing more than its due proportion of the precious metals.
In importing commodities which the country itself is competent to produce, as in the case, supposed above, of trade with Poland, we saw that England would import her corn from Poland, if she thus ob- tained with the produce of 150 days' labour in cloth, as much corn as it would have required 200 days' labour to produce in England. If it had so happened, that she could procure in Poland with the cloth, only as much corn as she could produce with the same quantity of labour at home, she would have had no advantage in the transaction. Her advantage would
122 CHAP. Ill— INTERCHANGE.
arise, not from what she should export, but wholly from what she should import.
The case in which a country imports commodities which she herself is incompetent to produce, is of still more simple investigation. That country, or, more properly speaking, the people of that country, have certain commodities of their own, but these they are willing to give for certain commodities of other countries. They prefer having those other commo- dities. They are benefited, therefore, not by what they give away ; that it would be absurd to say ; but by what they receive.
SECT. VI — FOREIGN TRADE. ISS
SECTION FL
CONVENIENCE OF A PARTICULAR COMMODITY, AS A MEDIUM OF EXCHANGE.
In exchanging commodities for one another di- rectly, or in the way of barter, the wants of indivi- duals could not be* easily supplied. If a man had only sheep to dispose of, and wanted bread, or a coat, he might find himself subject to either of two difficul- ties ; first, the man possessing the article which he wished to obtain, might be unwilling to accept of a sheep; or, secondly, the sheep might be of more value than the article which he wished to obtain, and could not be divided.
To obviate these difficulties, it would be fortunate if a commodity could be found which every man who had goods to dispose of, would be willing to receive, and which could be divided into such quantities as w^ould adapt themselves to the value of the article which he wished to obtain. In this case, the man who had the sheep, and wanted bread or a coat, instead of oflfering his sheep to obtain them, would exchange it, first, for the equivalent quantity of this other commodity, and with that he would purchase the bread and other things for which he had occasion.
1214 CHAP. Ill — INTERCHANGE.
This, then, is the true idea of a medium of ex- change. It is some one commodity, which, in order to effect an exchange between two other commodities, is first received in exchange for the one, and is then given In exchange for the other.
Certain metals, gold, for example, and silver, were found to unite, in a superior degree, all the qualities desired in a medium of exchange. They were com- modities which every man, who had goods to dispose of, was willing to receive for them in exchange. They could be divided into such portions as suited any quantity of other commodities which the purchaser desired to obtain. They possessed the further re- commendation, by including a great value in a small bulk, of being very portable. They were also very indestructible; and less than almost any other commodities liable to fluctuations of value. From- these causes, gold and silver have formed the prin- cipal medium of exchange in all parts of the globe.
The precious metals were liable to be mixed with baser metals in a manner which it was not easy to detect ; and thus a less value was apt to be received than that which was understood to be so. It was also found inconvenient to perform the act of weigh- ing every time that a purchase was to be made. An obvious expedient was calculated to remedy both inconveniences. Metal might be prepared of a de- termined fineness ; it might be divided into portions
SECT. VI — FOREIGN TRADE. 125
adapted to all sorts of purchases ; and a stamp might be put upon it, denoting both its weight and its fineness. It is obvious, that the putting of this stamp could only be entrusted to an authority in which the people had confidence. The business has generally been undertaken by governments, and kept exclusively in their own hands. The business of putting the precious metals in the most convenient shape, for serving as the medium of exchange, has been denominated coining ; and the pieces into which they are divided have obtained the appellation of money.
1136 CHAP. Ill — INTERCHANGE.
SECTION FIL
WHAT REGULATES THE VALUE OF MONEY.
By value of money, is here to be understood the proportion in which it exchanges for other commo- dities, or the quantity of it which exchanges for a certain quantity of other things.
It is not difficult to perceive, that it is the total quantity of the money in any country, which deter- mines what portion of that quantity shall exchange for a certain portion of the goods or commodities of that country.
If we suppose that all the goods of the country are on one side, all the money on the other, and that they are exchanged at once against one another, it is obvious that one-tenth, or one-hundredth, or any other part of the goods, will exchange against one- tenth, or any part of the whole of the money ; and that this tenth, kc. will be a great quantity or small, exactly in proportion as the whole quantity of the money in the country is great or small. If this were the state of the facts, therefore, it is evident that the value of money would depend wholly upon the quantity of it.
SECT. VII — MONEY. ' 127
It will appear that the case is precisely the same in the actual state of the facts. The whole of the goods of a country are not exchanged at once against the whole of the money ; the goods are exchanged in portions, often in very small portions, and at different times, during the course of the whole year. The same piece of money which is paid in one exchange to-day, may be paid in another exchange to-morrow. Some of the pieces will be employed in a great many exchanges, some in very few, and some, which hap- pen to be hoarded, in none at all. There will, amid all these varieties, be a certain average number of exchanges, the same which, if all the pieces had per- formed an equal number, would have been performed by each ; that average we may suppose to be any number we please ; say, for example, ten. If each of the pieces of the money in the country perform ten purchases, that is exactly the same thing as if all the pieces were multiplied by ten, and performed only one purchase each. As each piece of the money is equal in value to that which it exchanges for, if each performs ten different exchanges to effect one exchange of all the goods, the value of all the goods in the country is equal to ten times the value of all the money.
If the quantity of money, instead of performing ten exchanges to exchange all the goods once, were ten times as great, and performed only one exchange, it is evident that whatever addition were made to
128 CHAP. Ill — INTERCHANGE.
the whole quantity, would produce a proportional diminution of value, in each of the minor quantities taken separately. As the quantity of goods, against which the money is all exchanged at once, is sup- posed to be the same, the value of all the money is no more, after the quantity is augmented, than before it was augmented. If it is supposed to be augmented one-tenth, the value of every part, that of an ounce for example, must be diminished one- tenth. Suppose the whole quantity 1,000,000 ounces, and augmented by one-tenth ; whatever the loss of value to the whole must be communicated proportionally to every part ; but what one-tenth of a million is to a million, one -tenth of an ounce is to an ounce.
If the whole of the money is only one-tenth of the above supposed sum, and performs ten purchases in exchanging all the goods once^ it of course exchanges each time against one-tenth *of the goods. But if the tenth which exchanges against a tenth is in- creased in any proportion, it is the same thing as if the whole which exchanges against the whole were increased in that proportion. In whatever degree,' therefore, the quantity of money is increased or di- minished, other things remaining the same, in that same proportion, the value of the whole, and of every part, is reciprocally diminished or increased. This, it is evident, is a proposition universally true. Whenever the value of money has either risen or
SECT. VII — MONEY. 129
fallen, (the quantity of goods against which it is exchanged and the rapidity of circulation remaining the same,) the change must be owing to a corres- ponding diminution or increase of the quantity ; and can be owing to nothing else. If the quantity of goods diminish, while the quantity of money remains the same, it is the same thing as if the quantity of money had been increased ; and if the quantity of goods be increased, while the quantity of money remains unaltered, it is the same thing as if the quantity of money had been diminished.
Similar changes are produced by any alteration in the rapidity of circulation. By rapidity of cir- culation is meant, of course, the number of times the money must change hands to effect one sale of all the commodities.
The whole of the goods which fall to be ex- changed in the course of the year, is the amount con- templated in the above propositions. If there is any portion of the annual produce whicli is not exchanged at all, as what is consumed by the producer ; or which is not exchanged for money ; that is not taken into the account, because what is not exchanged for money is in the same state with respect to the money, as if it did not exist. If there is any part of what falls to be exchanged in the course of the year, which is exchanged two, or three, or more times, that also is not taken into the account,
K
130 CHAP. nr-^lNfERCHANGE.
because the effect is the same with respect to the money, as if the goods had been increased to the amount of these multiplications, and exchanged only once.
SECT. VIII— QUANTITY OF MONEY. 131
SECTION Fill.
WHAT REGULATES THE QUANTITY OF MONEY.
When we have ascertained that quantity deter- mines the value of money, we have effected little, till we have further ascertained what it is that regulates the quantity.
The quantity of money may seem, at first sight, to depend upon the will of the governments, which assume to themselves the privilege of making it, and may fabricate any quantity they please.
Money is made under two sets of circumstances ; either when government leaves the increase or dimi- nution of it free ; or when it endeavours to control the quantity, making it great or small as it pleases.
When the increase or diminution of money is left free, government opens the mint to the public at large, making bullion into coins for as many as require it.
It is evident that individuals possessed of bullion, will desire to convert it into coins, only when it is their interest to do so ; that is, when their bullion,
K 2
132 CHAP. Ill— INTERCHANGE.
converted into coins, will be more valuable to them than in the shape of bullion.
This can only happen when the coins are peculiarly valuable, and when the same quantity of metal, in the state of coin, will exchange for more than in the state of bullion.
As the value of the coins depends upon the quan- tity of them, it is only when they are small in quan- tity that they have this value : it is the interest of individuals, when coins are thus high in value, to caiTy bullion to be coined ; but by every addition to the number of the coins, the value of them is diminished, and at last the value of the metal in the coins, above the bullion, becomes too small to afford a motive for carrying bullion to be coined. If the quantity of money, there/ore, should at any time be so small as to increase its value above that of the metal of which it is made, the interest of individuals operates immediately, in a state of freedom, to aug- ment the quantity.
It is also possible for the quantity of money to be so large, as to reduce the value of the metal in the coin, below its value in the state of bullion ; in that case, the interest of individuals operates immediately to reduce the quantity. If a man has possessed himself of a quantity of the coins, containing*, we shall say, an ounce of the metal, and if these coins
SECT. VIII— QUANTITY OF MONEY. 133
are of less value than the metal in bullion, he has a direct motive to melt the coins, and convert them into bullion : and this motive continues to operate till by the reduction of the quantity of money, the value of the metal in that state is so nearly the same with its value in bullion, as not to afford a motive for melting.
Whenever the coining of money, therefore, is free, its quantity is regulated by the value of the metal, it being the interest of individuals to increase or diminish the quantity, in proportion as the value of the metal in coins is greater or less than its value in bullion.
But if the quantity of money is determined by the value of the metal, it is still necessary to inquire what it is which determines the value of the metal. That is a question, however, which may be consi- dered as already solved. Gold and silver are in reality commodities. They are commodities for the attain- ing of which labour and capital must be employed. It is cost of production, therefore, which determines the value of these, as of other ordinary productions.
We have next to examine the effects which take place by the attempts of government to control the increase or diminution of money, and to fix the quan- tity as it pleases. When it endeavours to keep the quantity of money less than it would be, if things
134 CHAP. Ill— INTERCHANGE.
were left in freedom, it raises the value of the metal in the coin, and renders it the interest of every body, who can, to convert his bullion into money. By sup- position, the government will not so convert it. He must, therefore, have recourse to private coining. This the government must, if it perseveres, prevent by punishment. On the other hand, were it the object of government to keep the quantity of money greater than it would be if left in freedom, it would reduce the value of the metal in money, below its value in bullion, and make it the interest of every body to melt the coins. This, also, the government would have only one expedient for preventing, namely, punishment.
But the prospect of punishment will prevail over the prospect of profit, only if the profit is small. It is well known, that, where the temptation is con- siderable, private coinage goes on, in spite of the endeavours of government. As melting is a more easy process than coining, and can be performed more secretly, it will take place by a less temptation than coinage.
It thus appears, that the quantity of money is naturally regulated, in every country, by the value, in other words, by the productive cost, in that country, of the metals of which it is made ; that government may, by forcible methods, reduce the actual quantity of money to a certain, but an inconsiderable extent.
SECT. VIII—QUANTITY OF MONEY. 135
below that natural quantity ; that it can also, but to a still less extent, raise it above that quantity.
When it diminishes the quantity below what it would be in a state of freedom, in other words, raises the value of the metal in the coins, above its value in bullion, it in reality imposes a seignorage. la practice, a seignorage is commonly imposed by issuing coins which contain rather less of the metal than they profess to contain, or less than that quantity to which they are intended to be an equivalent. By coining upon this principle, government makes a profit of the difference between the value of the metal in tha coins, and that in bullion. Suppose the difference to be five per cent., the government obtains bullion at the market price, and makes it into coins which ar^ worth five per cent, more than the bullion. Coins, however, will retain this value, only, if, as we have shown in the preceding section, they are limited in amount. To be able to limit them in amount, it is necessary that seignorage should not be so high as to compensate for the risk of counterfeiting ; in short, that it should not greatly exceed the expense of coining.
136 CHAP. Ill — INTEUCHANGE.
SECTION IX.
THE EFFECT OF EMPLOYING TWO METALS BOTH AS STANDARD MONEY, AND OF USING SUBSIDIARY COINS, AT LESS THAN THE METALLIC VALUE.
Some nations have made use of two metals, gold and silver, both, as standard money, or legal tender to any amount.
For this purpose it was necessary to fix a certain relative value between them. A certain weight of the one was taken to be equal in value to a certain weight of the other.
If the proportion thus fixed for the coins were accurately the proportion which obtained in the market, and continued so invariably, there would be no inconvenience in the two standards. The value of any sum would always be the same in either set of coins.
The relative value, however, of the two metals in the market is fluctuating.
Suppose that the value fixed for the coins is that of
SECT. IX — DOUBLE STANDARD. 137
15 to 1 ; in other words, that one piece of gold is equal to 15 pieces of silver of the same weight. A change takes place in the market, and this value be- comes as 16 to 1. What follows ?
A man who had a debt to pay, equal, let us say, to 100 of the gold pieces, or 1500 of the silver, finds it his interest to pay his debt not with gold. With his 100 pieces of gold he can go into the market and purchase as much silver as may be coined into 1600 pieces, with 1500 of which he may pay his debt, and retain 100 to himself. In this manner silver coins would be multiplied ; and the quantity of the cur- rency would be increased ; its value would, therefore, be diminished ; the gold in coins would thus become of less value than in bullion ; hence the gold coins would be melted atid would disappear.
After a fluctuation in one direction it may take place in another. Silver may rise, instead of falling, as compared with gold. The relative value may be- come as 14 to 1. In this case it would be the in- terest of every man to pay in gold, rather than silver ; and in this case it would be the silver coins which would disappear.
Two inconveniences are therefore incurred by the double standard. First, the value of the currency, instead of being rendered as steady in value as pos- sible, is subjected to a particular cause of variation.
138 CHAP. HI — mXERCHANGE.
And, secondly, the country is put to the expence of a new coinage, as often as a change takes place in the relative value of the metals.
The case would be exactly the same if a seignor- age existed. Suppose that 10 per cent, were imposed as seignorage ; it would be equally true, that the 100 pieces of gold, were the proportion changed from 15 to 1 to 16 to 1, would purchase as much silver as would be exchanged at the mint for 1600 pieces of silver. While the market value of the two metals was the same as the mint value, one piece of gold purchased not only as much silver as was contained in 15 pieces of silver, but one- tenth more ; after the change which we have just supposed, it purchases in the proportion of 16 to 15, that is, as much as will be contained in 16 pieces, and a tenth more.
The use of silver coins, for the purpose of small payments, or change, as it is called, of the more va- luable coins, if legal tender only to a small amount, is not liable to the objections which apply to a double standard.
It has, indeed, been affirmed, that if they are is- sued at a higher value than that of the metal con- tained in them, they will occasion the exportation of the gold coins. But it is easy to see that this is a mistake.
[ Suppose that our silver coins in this country are
SECT, IX — SUBSIDIARY COINS. 139
10 i^er cent, above the value of the metal, but legal tender only to the extent of 40 shillings ; every man, it is affirmed, has hence an interest in sending gold to Paris to buy silver.
The relative value of gold to silver in Paris and England is naturally pretty nearly the same ; let us say as 15 to 1. An ounce of gold, therefore, will in Paris purchase 15 oz. of silver. But so it will in England. Where then is the advantage in going to France to purchase it ?
You propose to coin it, because it is 10 per cent more valuable as coin.
But 10 per cent, of it is taken from you, and hence to you the advantage of the high value is lost.
Your silver coins, with 10 per cent, added to them, would make the coins of full weight.
Suppose the price of silver to have sunk below the mint pi^oportion, it would then be your interest to pay in silver if you could ; but you can only pay to the extent of 40 shillings ; it is therefore worth no- body's while to surcharge the market.
Besides, government reserves to itself the right of refusing to coin silver, when it pleases ; it can there- fore retain it of a high value.
140 CHAP. Ill — INTEttCHANGE.
Subsidiary coins cannot send the standard coins out of the country, unless the increased amount of them sink the value of the currency. The standard coins will not go in preference to bullion, unless they can be purchased cheaper than bullion.
SECT. X — PAPER MONEY. 14il
SECTION X
SUBSTITUTES FOR MONEY.
The only substitute for money of sufficient im- portance to require explanation in this epitome of the science, is that species of written obligation to pay a sum of money, which has obtained the appella- tion of paper money.
The use of this species of obligation, as a substi- tute for money, seems to have originated in the in- vention of bills of exchange, ascribed to the Jews in the feudal and barbarous ages.
When two countries, as England and Holland, traded with one another; when England, for ex- ample, imported Dutch goods, and Holland im- ported English goods, the question immediately arose how payment was to be made for them. If England was under the necessity of sending gold and silver for the goods which she had brought from Holland, the expense was considerable. If Holland was under the necessity of sending gold and silver to England, the expense was also considerable. It was very obvious, however, that if therj^ were two indi-
l( CNIVEESII-S-V
142 CHAP. Ill — INTERCHANGE.
viduals one of whom owed to the other £100, and the other owed to him £100, instead of the first man's taking the trouble to count down £100 to the second, and the second man's taking the same trouble to count down £100 to the first, all they had to do was to exchange their mutual obligations. The case was the same between England and Holland. If England had to pay a million of money to Holland, and had an equal sum to receive from Holland, instead of sending the money from England to Holland, it would save expense and trouble to con* sign to her creditors, in Holland, the money due to her in Holland; and .those merchants in Holland, who owed money to England, and must have been at the expence of sending it, would be well pleased to be saved from that expense, by obeying an order to pay, in Holland, what they owed to a merchant in England. A bill of exchange was, literally, such an order. The merchant in England wrote to the merchant in Holland, who owed him a sum of money, " Pay to such and such a person, such and such a sum ;" and this was called drawing a bill upon that person. The merchants in Holland acted in the same manner, with respect to the per- sons in England from whom they had money to receive and to whom they had money to pay. When it so happened, that the money which the two countries owed to one another was equal, the pay- ments balanced one another, and each country paid for the goods which it had received, free, altogether.
SECT. X — PAPER MONEY. 143
from the expense of transmitting money. Even when it happened that one of the two owed more than it had to receive, it had only the balance to discharge, and was relieved from all the rest of the expense.
. The advantage, therefore, derived from the in- vention and use of bills of exchange, was very con- siderable. The use of them was recommended by a still stronger necessity at the period of the invention, because the coarse policy of those times prohibited the exportation of the precious metals, and punished with the greatest severity any infringement of that bar- barous law.
Bills of exchange not only served the purpose of discharging debts between country and country, they very often acted as a substitute for money in the country to which they were sent. When a bill was drawn payable after a certain time, the merchant to whom it was sent, if he had a debt to pay, or purchase to make, without having money ready for the purpose, paid with the bill, instead of money. One of these bills would often pass through several hands, and be the medium of payment in a number of transactions, before it was finally discharged by the person on whom it was drawn. To this extent, it performed the precise functions of paper money, and led the way to the further use of that important substitute.
144 CHAP. Ill — INTERCHANGE.
As soon as it was discovered that the obligation of a merchant of credit, to pay a sum of money, was, from the assurance that it would be paid as soon as demanded, considered of equal value with the money itself, and was without difficulty received in exchanges, as the money itself would have been received, there was motive sufficient to extend the use of the substitute. Those persons who had been accustomed to perform the functions of bankers, in keeping the money of individuals, and exchanging against one another the coins of different countries, were the first who issued promises to pay certain sums of money, in the expectation that they would operate, as substitutes for money, in the business of purchase and sale. As soon as the use of such a substitute for money has begun, nothing is wanting but freedom, and the confidence of the public in the written promises, to enable the paper to supersede the use of the metal, and operate, almost exclusively, as the medium of exchange.
It remains to inquire what are the advantages derived from the use of this substitute; and what are the inconveniences to which it is hable.
SECT. XI— ^PAPER MONEY. 145
iff '^rn.*
SECTION XL
ADVANTAGES DERIVED FROM THE USE OF PAPER MONEY.
'i
The precious metals, which are necessary to per- form the functions of a medium of exchange, are bought with the commodities of the country. The produce of the land, and manufactures, are exported ; and instead of other commodities, to be turned to use, gold and silver to be employed as the medium of exchange, are imported for them. The value of the gold and silver, when they alone perform the business of the medium of exchange, always bears a consider- able proportion, — in countries but little advanced in the arts of exchange, a large proportion, to the wliole of the annual produce of the country. If each piece performs a hundred purchases in once exchanging the goods which fall to be exchanged in a year, the value of the money required is equal to a hundredth part of the whole of such goods, which, though not exactly corresponding with the annual produce, cor- respond with it so nearly, that we need not scruple to speak of them under that name. In countries in which money does not pass rapidly from hand to hand, it may be equal to a tenth of the whole of the annual produce.
L
146 CHAP. Ill — INTERCHANGE.
It is evident that whatsoever part of the national property goes to provide the medium of exchange is wholly inoperative with regard to production. No- thing produces, but the immediate instruments of production ; the food of the labourer, the tools or machinery with which he labours, and the raw ma- terial which he fabricates. If the whole, therefore, of the national property, which goes in this manner to provide a medium of exchange, equal to one-tenth, or one-hundredth part of the annual produce, could be taken from that employment, and converted into food, tools, and the materials of production, the pro- ductive powers of the country would receive a cor- responding increase.
If it be considered that the annual produce is equal, not only to the whole of the net revenue of the country, but, along with this, to the whole of the capital, excepting the part which is fixed in du- rable machinery, it may be easily understood how vast an accession is made to the means of production, by providing a substitute for the precious metals, as a medium of exchange.
Paper is also far more convenient, as a medium of exchange. A large sum in the shape of gold or silver is a cumbrous commodity. In performing exchanges of considerable value, the very counting of gold and silver is a tedious operation. By means of a bank note, the largest sum is paid as quickly as the smallest.
SECT. XII— PAPER MONEY. 147
SECTION XII.
INCONVENIENCES TO WHICH THE USE OF PAPER MONEY IS LIABLE.
The inconveniences to which paper money is liable, seem all to be comprehended under three heads.
First, — The failure of the parties, by whom the notes are issued, to fulfil their engagements.
Secondly, — Forgery.
r Thirdly, — The alteration of the value of the cur- rency. ~ »u» •_
1. The failure of the parties, by whom notes are issued, is an evil against which, under good institu- tions, the most powerful securities are spontaneously provided.
If competition were allowed to oj^erate freely, and if no restriction were imposed on the number of partners who might be engaged in a bank, the bu- siness of banking, and of issuing notes, would naturally place itself on a footing which would render paper, currency very secure.
L2
148 CHAP. Ill— INTERCHANGE.
The number of banks would of course be multi- plied ; and no one bank would be able to fill with its circulation more than a certain district.
As little risk, where the partners were numerous, would be incurred by each of them ; as the profits would be very sure, and the importance of having a good currency would be sensibly felt, there would be motive sufficient, to all the principal noblemen and gentlemen of the county, or other district, to hold shares in the local bank, and add to the security of the public.
In competition with such an establishment any bank of doubtful credit would vainly endeavour to introduce its notes into circulation. The sense of interest keeps the attention sufficiently awake on such an occasion ; and where education and know- ledge are tolerably advanced, and the press is free, intellect is not wanting to guide the most ignorant to the proper conclusions. The people may be trusted to reject the notes of a suspected party, when they may have those of a party in whom they confide.
Another great advantage is gained by the scheme of numerous banks, each supplying, under the safe- guard of freedom and competition, a limited district ; that if one of them fails, the evil is limited, and produces inconvenience to but a small portion of the community.
SECT, xii-^paper money. 149
The interest, also, which banks, where numerous, have in supplanting one another, places them on the watch to discover any symptom of deficiency on the part of a rival, and makes . them keen to disclose it ; while the knowledge which each of them has that it is vigilantly watched makes it careful to avoid any fault which can lead to a diminution of its credit.
In Scotland, where banking is nearly placed upon this desirable footing, and where paper money spon- taneously filled the channels of circulation, long before the suspension of cash payments at the Bank of England, there have been few failures in the numerous banks which issued paper, notwithstanding all the fluctuations in the value of money, produced by that suspension, and all the convulsions of credit of which those fluctuations were the cause.
Such are the securities which the interest and in- telligence of the parties would provide, without the intervention of the legislature. Of the securities which might be provided by the legislature, the following are two of those which most obviously present themselves.
It might be rendered imperative upon every bank to transmit to some organ of government two monthly statements, one of the amount of its notes, another of the securities with which it was provided to meet the demands to which it was liable. And appropriate
150 CHAP. Ill — INTERCHANGE.
powers might be granted for taking the necessary steps to protect the public, where proper securities might appear to be wanting.
As a great profit attends the issuing of notes in favourable circumstances, it is desirable that the benefit, if unattended with preponderant evil, should accrue to the public. The profit, it is observable, arising from the interest upon the notes as they are lent, is altogether distinct from the other benefit, arising from the conversion of a costly medium of exchange into instruments of production.
The issuing of notes is one of that small number of businesses which it suits a government to conduct ; a business which may be reduced to a strict routine^ and falls within the compass of a small number of clear and definite rules. As the public would, in this case, be its own banker, and could not fail in payments to itself, the evils, liable to arise from the failure of the parties who issue notes to fulfil their engagements, could not possibly have place. The people, in this case, would provide the funds to fulfil the engage- ments, and the peo])le would receive them. Political Economy does not contemplate the misapplication of the funds provided by the people. The cases of na- tional bankruptcy, and of the non-payment of a governraent paper, by which the people of various countries have suftered, have all been cases in which the,Mai\y have been plundered for the benefit of the
SECT. XII — PAPER MONEY. 151
Few. When the people, as a body, are to receive the payment which the people as a body provide the funds to make, it would be absurd to speak of their loss by a failure.
The chance of evil, then, from a failure in dis- charging the obligations contracted by the issue of paper money, is capable of being so much reduced, as to constitute no valid objection against an expedient, the benefits of which are great and indisputable. There are persons, however, who say, that if the benefits derived from paper money did surpass the chance of evil in quiet and orderly times, the case is very different in those of civil war, or foreign inva- sion.
Civil war, and foreign invasion, are words which raise up vague conceptions of danger ; and vague conceptions of danger are too apt to exert a mis- chievous influence on the understanding.
In the first place, there is, in the present advanced stage of the civilized world, in any country having a good government and a considerable population, so little chance of civil war or foreign invasion, that, in contriving the means of national fehcity, but little allowance can be ration all}' required for it. To adopt a course of action, disadvantageous at all times, except those of civil war and foreign invasion, only because it were good on those occasions, would be as
152 CHAP. Ill— INTEKCHANGE.
absurd, as it would be, in medicine, to confine all men continually to that species of regimen which suits a violent disease. If the advantages which arise from the use of paper money, are enjoyed, without any considerable abatement, at all times, excepting those of civil war and foreign invasion, the utility of paper money is sufficiently proved.
To save ourselves from the delusion which vague conceptions of danger are apt to create, it is proper to inquire what are the precise evils which may arise from paper money during those rare and extraordi- nary times.
A civil war, or a foreign invasion, is attended with a great derangement of the circulating medium, when it is composed of gold and silver. At such a period there is a general disposition to hoard : a considerable proportion, therefore, of the medium of exchange is withdrawn from circulation, and the evils of a scarcity of money are immediately felt ; the prices of commo- dities fall ; the value of money rises ; those who have goods to sell, and those who have debts to pay, are subject to losses ; and calamity is widely diffused.
' From the evils of hoarding, the community would be, in a great measure, secured by the prevalence of paper money. And there are many reasons which may draw us to conclude, that those arising from the diminution of credit would be very little to be feared.
SECT. XII— PAPER MONEY. 153
If the paper were issued by a government which deserved the confidence of the people, a foreign invasion, which would concentrate the affections of the people towards the government, would not destroy the credit of its notes.
It would not be the interest of the invaders to de- stroy their credit, even in that part of the country of which they might be in possession, because it would not be their interest to impair its productive powers.
Nobody would lose, ultimately; because, even if the circulation of the notes were prevented in the districts possessed by the enemy, they would recover their value the moment the enemy were expelled.
The effects would not be very different, if the cir- culation were provided by a well-conducted system of private banking. It would be the interest of all par- ties to preserve the circulating medium in credit. It would be the interest of' the enemy to preserve it in the districts which he possessed. At most, he could only prevent the circulation for a time ; for, after his expulsion, the notes would be redeemed, either by the responsible parties who had issued them, or, if they had lost their property through the operations of the enemy, out of the compensation money which the government would allow.
It is not probable, that, even in a civil war, any
154 CHAP. Ill — INTEKCHANGfe.
considerable discredit should attend a well-established paper currency. The country is, of course, divided between the hostile parties, in portions more or less nearly equal. It is evidently not the interest of the government in that part of the country which it commands, to discredit the paper currency, whether it had been issued by itself, or by private bankers. As little is it the interest of the opposite party to do any thing which shall disorder the regularity of trans- actions in that part of the country where it governs, and from which all its means of prevailing over its opponents must be drawn. If the circulating medium consists of the notes of private bankers, situated within that part of the country, it is the interest, on a double account, of the party to protect them. It is its interest to protect them, even if they are paper of the government. For whom would it injure, as the holders of them, but its own people? Whose bu- siness would it disturb by the want of a circulating medium, but the people upon whose means and affec- tions it wholly depends ? By protecting the paper of the government, it makes it, in reality, its own.
Experience is in favour of all these conclusions ; since it has been repeatedly found, that the presence of hostile armies, and even internal commotions, have occasioned little disturbance to a paper currency, the value of which was but tolerably secured.
S. Forgery, to which bank notes are exposed, is an
SECT. XII — PAPER MONEY. 155
evil of the same sort as counterfeiting. Though it is an evil of great magnitude, under so imperfect a system of banking as that which is created by the existence of a great monopolizing establishment, like the Bank of England ; under such a system of bank- ing as that which we have been just contemplating, it would be inconsiderable. Where one great bank supplies the circulation of a great part of the country, there is opportunity for the circulation of a great amount of forged notes, and motive to incur both a great risk and a great expense. But if every bank supplied only a small district, only a small amount of the forged notes of such a bank could find their way into the circulation. Banks, too, which are sub- ject to the useful principle of competition, are afraid to discredit their own notes and render the people shy of taking them, by refusing payment of such as are forged ; they choose rather to pay them in silence, and exert themselves as well as they can to detect the authors of the forgery, and circumscribe its amount. In tliis manner the public are exempted from loss ; and if a loss is willingly sustained by the banks, it is only because they find compensation.
3. The last of the three inconveniences, liable to arise from the use of paper money, is an alteration in the value of the currency.
This alteration is always an act of the government; and is not peculiar to paper money.
156 CHAP. Ill — INTERCHANGE.
We have already seen^ that the value of a metallic currency is determined by the value of the metal which it contains. That of a paper currency, there- fore, exchangeable at pleasure, either for coins or for bullion, is also determined by the value of the metal which can be obtained for it. The reason is obvious. If the paper should at any time be reduced below the value of the metal, every person who held a bank note, the less valuable commodity, would demand for it the more valuable commodity, the metal. If the promise were, as in England, to pay an ounce of gold for SI. 17s. lO^d. of paper, it would be the interest of the holders of the notes to demand gold in ex- change, the moment that 31. 17s. lO^d. in paper be- came of less value than an ounce of gold, — in the ordinary language, the moment that gold rose above the mint price.
But, in these circumstances, it would be the interest of those who issued the notes to raise their value by reducing their quantity. If they endeavour- ed lo maintain the high quantity, they would be con- demned perpetually to issue and perpetually to with- draw ; because every man who became possessed of any of their notes would have an interest in bringing them back again for gold ; and on each of these occasions the issuers would sustain a loss. They would issue the notes at the rate of 3/. 17^. 10|^. ; that is, they would receive a value of 3/. 17s. lO^d. when they issued them ; but when they received them back, and
SECT. XII— PAPER MONEY. 157
were obliged to pay an ounce of gold, of the value of 4/. if the metal had risen so much, for SI, 17^. lO^d. of their notes, they would lose the difference.
If the currency were supplied by paper without coins, the issuers of the paper could, by lessening its quantity, and thereby enhancing its value, reduce the price of gold. Suppose by this means they w^re to reduce it to 3/. per ounce. They might fill their coffers with gold at this price ; and having done so, they might raise its price by increasing their issues till it became the interest of the holders of their notes to demand it of them at SL 17s. lO^d, They would make a profit of 17^. 10^^^. on every ounce of gold thus trafficked ; and they might continually re- peat the operation. A simple expedient, however, would be an effectual security against this danger. As the obligation to sell gold at a fixed price renders it the interest of those who issue paper not to in^ crease their notes in such a manner as to raise gold above that price, so an obligation on them to buy gold at a fixed price would render it their interest not to reduce the amount of their notes in such a manner as to sink it below that price. The value of the notes might thus be kept very steadily conform- able to that of the metallic standard.
In the case of a metallic currency, government can reduce the value of the coins, only by lessening the quantity of the precious metal contained in them;
158 CHAP. Ill — INTERCHANGE.
otherwise, as soon as it reduced the value of the coins sufficiently to afford a motive for melting- them, they would, as fast as issued, disappear. In the case of a paper currency, it is only necessary for government to withdraw the obligation to pay metal for it on demand, when the quantity may be increased, and thereby the value diminished, to any amount.
Paper currency is issued without obligation to pay for it, in two ways: either, when government is the issuer, and renders its paper legal tender, without obligation to give metal for it in exchange ; or when the paper currency is regulated by one great est a. blishment, as the Bank of England, and government suspends its obligation to pay for its notes.
The effects of an increase of the quantity, and consequent diminution of the value of the currency in any particular country, are two : first, a rise of prices ; secondly, a loss to all those persons who had a right to receive a certain sum of money of the old and undiminished value.
By the term price^ I always understand the quan- tity of money which is given in exchange. An alteration in the value of money, it is obvious, alters the relative value of nothing else. All things — bread, cloth, shoes, &c. rise in value as compared with money ; but not one of them rises in value as compared with another.
SECT. XII— PAPER MONEY. 159
This difference of price is, in itself, of no conse- quence to any body. The man who has goods to sell gets more money for them, indeed ; but this money will purchase him just the same quantity of commo- dities, as he was enabled to purchase with the price he obtained before. The man who has goods to purchase has more money to give for them ; but he is enabled to do so, by getting just as much more for the commodities he has to sell. .
With respect to the second effect of a degradation in the value of money, it is to be observed, that there exists at all times, in civilized countries, a number of obligations to pay certain sums of money to indi- viduals ; either all at once, as debts ; or in succession, as annuities. It is very obvious, that the individual who has contracted with a man to receive 100/. sus- tains a loss when the currency is reduced in value and he receives no more than 100/. It is equally obvious that the party who has to pay the sum, is benefited to the same amount. These circumstances are reversed when the alteration which has taken place is an increase of the value. In that case the man who has to pay sustains the loss ; the man who receives payment makes the gain. These losses are evils of great magnitude, as far as men's feelings and happiness are concerned ; and they imply a gross violation of those rules for the guardianship of that happiness which are comprehended under the term
160 CHAP. III^-^INTERCHANGE.
justice. It is, however, no destruction, and conse- quently no loss, of property.
Mr. Hume has supposed that certain other effects are produced by the increase of the quantity of money. When an augmentation of money commences, indivi- duals, more or fewer, go into the market with greater sums. The consequence is, that they offer better prices. The increased prices give encouragement to the producers, who are incited to greater activity and industry ; and an increase of production is the consequence.
This doctrine implies a want of clear ideas res* pecting production. The agents of production are the commodities themselves, not the price of them. They are the food of the labourer, the tools and machinery with which he works, and the raw mate- rials which he works upon. These are not increased by the increase of money: how then can there be more production ? This is a demonstration that the conclusion of Hume is erroneous. It may be sa-^ tisfactory also to unravel the fallacy of his argument.
The man who goes first to market with the augmented quantity of money, either raises the price of the commodities which he purchases, or he does not.
If not, he gives no additional encouragement to
SECT. XII — PAPER MONEY. 161
production. The supposition, therefore, must be, that he does raise prices. But exactly in proportion as he raises prices, he sinks the value of money. He therefore gives no additional encouragement to pro- duction.
It will perhaps be said^ by a persevering objector, that the man who first goes to market with the addi- tional quantity of money, raises the price of the commodities which he immediately purchases ; that the producers of those commodities are therefore en- couraged to greater industry, because the price of other commodities, namely, of all those which they have occasion to purchase, has not risen. But this he is not allowed to say. The first man who came with an additional quantity of money into the mar- ket to purchase the commodities of those producers, raised the price of those commodities. And why ? Because he came with an additional quantity of money. They go into the market to purchase an- other set of commodities, and go with an additional quantity of money. They raise, therefore, the price of those commodities. And in this manner the sue- cession goes on. Of all those commodities with which no additional quantity of money has yet come in contact the price remains unaltered. The mo- ment an additional quantity of money comes in contact with them, the price is proportionally raised.
The whole of the business of any country may be
M
162 CHAP. in--INTERCHANG^.
considered as practically divided into a great number of little markets, some in one place, some in another, some of one sort of commodity, some of another; the money, of course, distributed proportionally among them. Into each of these markets, in the ordinary state of things, there comes, on the one side, a certain quantity of commodities ; on the other side a certain quantity of money ; and the one is exchanged against the other. Wherever any addition takes place in the quantity of goods, without any addition to the quantity of money, the price falls, and of necessity in the exact proportion of the addition which has been made. If this is not clear to every apprehension already, it may be rendered palpable by adducing a simple case. Sup- pose the market to be a very narrow one ; of bread solely, on the one side ; and money, on the other. Suppose that the ordinary state of the market is 100 loaves on the one side, and 100 shillings on the other ; the price of bread, accordingly, a shilling a loaf. Suppose, in these circumstances, that the quantity of loaves is increased to 200, while the money remains the same : it is obvious that the price of the bread must fall one half, or to six- pence per loaf. It would not be argument to say, that part of the bread would not be sold, but taken away unsold. If it is taken away unsold, it is the same thing, with respect to the market, as if it had never been brought. These conclusions, with respect to an increase in the quantity of commo-
SECT. XII — PAPER MQNEY. 16B
dities, na nian disputes. Is it not obvious that the same conclusions are true with respect to an increase in the quantity of the opposite commodity — ^the money? ^ ^,b^it^wi^^:^<.. ...-^ , . '-v.
All the consequences, therefore, of altering the value of money, whether by raising or depressing it, are injurious. There is no security, however, against it, as it is a deed of government, but that which is the sole security against the misdeeds of government ; its dependence upon the people. The obligation of paying the notes in the metal is a necessary security, whei*e they are issued at pleasure by private bankers. If they were issued by a govern- ment strictly responsible to the people, it would not be indispensable; fctf in that case the utiHty of keeping gold at the mint price, or, in other words, the currency of the same value as if it was metallic, might be so distinctly understood, that it would not be the interest of those intrusted with the powers of government to allow it to vary.
We have already seen, in treating of the proper- ties which recommended the precious metals for the instrument of exchange, that they are less than almost any other commodity subject to fluctuation of value. They are not^ however, exempt from changes, partly temporary, and partly permanent. The per- manent changes take place, chiefly in consequence of a
change in the cost of procuring them. The greatest
M 2
164j chap. Ill— interchange.
change of this kind, recorded in history, is that which took place on the discovery of the mines of America, from which, with the same quantity of labour, a greater quantity of the metals was obtained. The temporary changes take place, like the temporary changes in the value of other commodities, by a derangement of the balance of demand and supply. For the pay- ment of troops in a foreign country, or subsidies to foreign governments and other operations, a great quantity of gold or silver is sometimes bought up, and sent out of the country. This enhances the price, till the balance is restored by importation. The profit which may be acquired operates immediately as a motive to restore it. In the interval, however, an advantage may be derived from a paper money not convertible immediately into the metals. If conver- tible, gold will be demanded, paper will be diminished, and the value of the currency will be raised. If not convertible, the currency may be retained of the same, or nearly the same value as it was before. This, indeed, can scarcely be done, and the remedy applied with safety, unless where the whole is paper, and government has the supply in its own hands. In that case the sameness in the quantity of the cur- rency, as it would be perfectly known, would be a sufficient index and security. If the price of gold rose suddenly above the mint price, or, in otlier words, above the rate of the bank notes, without any alteration in the quantity of the currency, the same- ness in the quantity of currency would be a sufficient
SECT. XII — PAPER MONEY. 165
index that the rise was owing to a sudden absorption of the gold ; which, after a time, would retura. If in such circumstances the obligation of keeping up the value of the paper to that of the gold were sus- pended for a short time, a sufficient security agaiUvSt any considerable alteration in the value of the cur- rency would be found in the obligation of keeping the quantity of it the same; because, during any short period of time, there can be no such diminution or increase of the quantity of business to be done by it, as to require any material alteration. That in the hands of an irresponsible government such power of suspension would be dangerous, is true. But an irresponsible government involves all kinds of danger, and this among the rest.
186 CHA1\ in-*-INtEnCHANGE.
SECTION XIIL
THE VALUE OF THE PRECIOUS METALS DETER- ' MINES WHETHER A COUNTRY SHALL EXPORT mOB, IMPORT.
Metallic money, or more generally speaking, the precious metals, are nothing more, considered strictly, and in their essence, than that commodity which is the most generally bought and sold, whether by individuals, or by nations.
In ordinary language it is immediately acknow- ledged, that those commodities alone can be ex- ported, which are cheaper in the country from which, than in the country to which, they are sent; and that those commodities alone can be imported, which are dearer in the country to which, than in the country from which, they are sent.
According to this proposition, if gold is cheaper in any one country, as in England, for example, it will be exported from England. Again, if gold is dearer in England, than in other countries, it will be im- ported into England. But, by the very force of the terms, it is implied, that in any country where gold
SECT. XIII-^FOREIGN TRADE. 167
is cheap, other commodities are dear. Gold is cheap, when a greater quantity of it is required to purchase commodities ; and commodities are dear, for the same reason ; namely, when a greater quantity of gold is required to purchase them. When the value of gold, therefore, in England, is low, gold will be exported from England, on the principle that all commodities which are free to seek a market, go from the place where they are cheap to the place where they are dear. But as, in the fact that gold is cheap, is imqlied the correlative and inseparable fact that other commodities, at the same time, are dear, it follows, that, when gold is exported, less of other commodities can be exported ; that no commodities can be exported, if the value of gold is so low as to raise the price of all of them above the price in other countries ; that a diminished quantity alone can be exported, if the value of gold is only reduced so far as to raise the price of some of them above the price in other countries.
It is evident, therefore, that a country will export, that is, commodities other than the precious metals, only when the value of the precious metals is high. It is equally evident that she will import, only when the value of the precious metals is low. The increase, therefore, of the quantity of the precious metals, which diminishes the value of them, gradually dimi- nishes, and tends to destroy, the powei* of exporting other commodities ; the diminution of the quantity
16J CHAP. Ill— INTERCHANGE.
of the precious metals, which increases their value, increases, by a similar process, the motive to export- ation of other commodities, and, of course, in a state of freedom, the quantity exported.
SECT. XIV— FOREIGN TRADE. 169
SECTION XIV.
THE VALUE OF THE PRECIOUS METAL, OR MEDIUM OF EXCHANGE, WHICH DETERMINES EXPORTATION, IS NOT THE SAME IN ALL COUNTRIES.
When we speak of the value of the precious metal, we mean the quantity of other things for which it will exchange.
But it is well known that money is more valuable, that is, goes farther in the purchase of commodities, not only in pne country than another, but in one part than another of the same country. '
In some of the more distant places of Wales, for example, money is more valuable than in London : in common language, we say, that living is more cheap; in other words, commodities may be pur- chased with a smaller quantity of money : and this state of things is habitual, money having no tendency to go from London where its value is low, to increase its quantity in Wales where its value is high. This phenomenon requires explanation.
The fact is, that the whole of such difference as
170 CHAF, IlI^-^INTERCHANGKtB
is habitual, and has no tendency to produce a transit of the metals, resolves itself into cost of carriage. Corn, butchers'-meat, and other commodities, which are produced in Wales, are cheaper than in London, because the supply of London comes from a distance, and the original price is enhanced by cost of carriage. But as there are certain commodities which thus are cheaper in Wales than in London, so there are others which are cheaper in London than in Wales. Such are all the commodities which are either manufactured in London, or imported into London from abroad. Just as the corn, and other commodities, which come from Wales to London, are enhanced by the cost of carriage; so those commodi- ties which are sent from London to Wales, are dearer in Wales than in London> by the whole of the cost which is incurred in transporting them. The fact, therefore, is, that in Wales some commodities are cheaper, and some are dearer, than in London ; but those which are cheaper are the articles of principal importance ; they are the necessaries of life, the arti- cles the consumption of which constitutes the prin- cipal part of almost every man's expenditure. What is more, they are the articles the money-value of which determines the money- value of labour ; every thing which a man has done for him, therefore, is done cheaper than it is in London. And, lastly, the gross commodities, which are the produce of Wales, cost much more for carriage, in proportion to their value, than the fine commodities which are received from
SECT. XrV-^FOnEIGN TRADE. 171
London : the cost of the gross commodities in London is much more raised above the price of them in Wales, than the price of the fine commodities in Wales is raised above the price of them in London. The cost of living, therefore, is greater in London than in Wales, for this reason, solely, l)ecaiise people in London pay more for carriage. If the value of the metal in Wales rose ever so little above that limit, a profit equal to that rise would immediately operate as a motive for sending it to Wales. ^ : (
From two places in the same country, let us transfer the consideration to two different countries. The cost of living is higher; in other woixls, the value of the precious metals is lower in England, than in Poland. The difference here, also, resolves itself wholly into the cost of carriage. Let us suppose that England receives a considerable portion of her supply of corn from Poland, and sends her the whole, or the greater part, of her fine manufactures : corn, it is evident, will be dearer in England; but fine manufac- tures will be dearer in Poland. For the same reasons that money, as we have shown, goes farther in Wales than in London, it is easy to see that it will in this case, go farther in Poland than in England ; in other words, the value of gold in Poland will be greater than in England, just so much as to compensate for the greater cost of carriage which England sustains. The moment it rises above that value, a profit may be made by sending it to England.
ly? CHAP. Ill— INTERCHANGE.
SECTION XF.
MODE IN WHICH THE PRECIOUS METAL, OR MEDIUM OF EXCHANGE, DISTRIBUTES ITSELF AMONG THE NATIONS OF THE GLOBE.
In the country of the mines, whence gold distri- butes itself to the rest of the world, gold is in relative plenty. As an addition is constantly making to the quantity already possessed, there is a constant tendency in the gold of that country to fall in relative value ; in other words, a constant tend- ency in the price of other things to rise. As soon as any commodities have risen sufficiently high to enable them to be imported, they will come in from that country, be it what it may, from which, prime cost and cost of carriage taken together, they come the cheapest ; and gold will go out in exchange.
By this importation of gold into that second country, it becomes relatively plentiful there, and prices rise. Some commodity, or commodities, become there at last so dear, that they can be imported, with profit, from another country: com- modities, as in the previous instance, come in, and gold goes out. It is unnecessary to trace the opera- tion farther. In this manner gold proceeds from
SECT. XV — FOREIGN TRADE. 173
country to country, through the whole connected chain of the commercial world.
In a preceding section* we found that it is the interest of two nations to exchange with one another two sorts of commodities, as often as the relative cost of producing them is different in the two countries. If four quarters of corn, for example, and 20 yards of cloth, cost, each, the same quantity of labour in England, but not the same quantity in Poland, it would be the interest of the two countries, the one to produce corn, the other to produce cloth, and to exchange them with one another.
Suppose, while four quarters of corn and 20 yards of cloth required the same quantity of labour in Eng- land; that in Poland 20 yards of cloth required twice as much labour as four quarters of corn. In these circumstances, cloth, as compared with corn, would be twice as dear in Poland as in England ; in other words, four quarters of corn, which in England would be of equal value with 20 yards of cloth, would in Poland be equal to no more than 10 yards. If Poland, therefore, should send corn to England ; the quantity of labour which produced four quarters, or 10 yards of cloth in Poland, would purchase 20 yards in England. In like manner, if England should send cloth to Poland; the same quantity of labour which produced 20 yards of cloth, would obtain, not four quarters, only, of corn, all it could • P. 113—119.
174 CHAP. Ill — INTERCHANGE.
produce at home, but double that quantity, namely, eight quarters.
Such would be the interest which would operate to produce an exchange of commodities between two countries, in the way of barter, and without the intervention of money. In Poland we have supposed the circumstances to be such, that if she produced corn and cloth for herself, four quarters of corn would have the same value as 10 yards of cloth. Of course, if she had the use of money, the price of four quar- ters of corn and 10 yards of cloth would be the same. In England, according to the supposition, the price of four quarters of corn and that of 20 yards of cloth would be the same. There are two suppose- able cases. The price of one of the two commodi- ties, corn, for example, is either equal in the two countries, or not equal. The illustration of any one of these cases will suffice for both. Let us, then, suppose that, in the two countries, the price of corn is equal. If it is, the price of a yard of cloth must in Poland be twice as great as it is in England. In these circumstances, what will happen is obvious : the cloth, which is cheap in England, will go to Poland, where it is dear ; and there it will be sold for gold, because there can be no counter importation of corn, which, by supposition, is already as cheap in England as in Poland.
By the importation, in this manner, of English
SECT. XV— FOREIGN TRADE. 175
cloth into Poland, gold goes out of Poland, and comes into England. The consequence is, that gold becomes more plentiful in England, less plentiful in Poland. From this first consequence, a second ensues ; that prices gradually rise in England, fall ia Poland : the price of corn, for example, and, along with it, the price of cloth, rise in England, fall in Poland. If, when we suppose the traffic to begin, the price of corn in each country is 1/. per quarter, the price of cloth being, by consequence, in Poland 8^., in England 4*. per yard ; the supposed exchange of cloth for gold will gradually, in England, raise the price of corn above, in Poland sink it below, 1/. per quarter : raise the price of cloth in England above 4^. per yard, sink it below 8^. per yard in Poland. In this manner, the price of corn in the two countries gradually recedes from equality, the price of cloth gradually approaches it. At a certain point in this progress, corn becomes so dear in England, and cheap in Poland, that the difference of price will pay for the cost of carriage. At that moment a motive arises for the importation of corn into England; and prices regulate themselves in such a manner, that in Eng- land corn is dearer than in Poland, by the expense of carrying corn ; cloth is dearer in Poland than in Eng- land, by the expense of carrying cloth, from the one country to the other. At this point, the value of the cloth imported into the one country, and that of the corn imported into the other, balance one another.
176 CHAP. Ill — INTERCHANGE.
The exchange is then at par, and gold ceases to pass.
From the consideration of the same circumstances, it will farther be seen, that no alteration can take place in the interchange of commodities between the two countries, without a new distribution of the pre- cious metal ; that is, a change in the relative quan- tities which they previously possessed.
Let us suppose that, in England, some new com- modity is produced, which Poland desires to obtain. A quantity of this commodity is imported into Poland; and it can be paid for only in gold, because we have supposed that at this time, the corn and cloth, respec- tively imported, pay for one another. In this case, as in that which I have previously explained, the price of commodities soon begins to rise in England, fall in Poland. In proportion as prices rise in Eng- land, and fall in Poland, a motive is produced to im- port a greater quantity of Polish goods into England, a less quantity of English goods into Poland. And at last the balance is again restored.
SECT. XVI— THE EXCHANGE. 177
^ SECTION XFL
MONEY TRANSACTIONS BETWEEN NATIONS— BIL^S OF EXCHANGE.
The moneys of different countries are different ; that is to say, they consist of different portions of the precious metals, and go by different names. The pound steding, for example, is the money of England, the dollar is the money of certain other countries ; the pound sterling contains one quantity of the precious metal, the dollar contains a less quantity; and so of other varieties.
The purchases which are made by one country in another country, are, like other purchases, made by money. If the Dutch merchant, for example, purchase goods in England, he buys them at so many pounds sterling. If the Enghsh merchant buys goods in Holland, he buys them at so many guilders. To pay the pound sterling, the Dutch merchant must either send the English money, or an equivalent. The direct equivalent is a quantity of the precious metal equal to what is contained in the pounds sterling due. If the Dutch merchant has no other medium but
N
€^ CHAP. Ill— INTERCHANGE
guilders, he must send as many guilders as contain an equal quantity of the precious metals.
When the language now used by the merchants of Europe was estabhshed, a computation was made of the quantity of one currency which contained the same quantity of the precious metal, as a certain given quantity of another. This was called the par of exchange. The guilder contained not quite so much of the metal as two shillings English ; but to sim- plify our language, let us suppose that it contained just as much. The par of exchange was then, 10 guilders to 1/.; or, in the abridged language of the merchants, 10.
The business of exchange, however, between country and country, is carried on, not by transmitting cur- rency or the metals, but in a much greater degree, by the instrumentality of bills. The language which the merchants have adopted for carrying on the traffic of bills, is very elliptical and abridged ; and being, in several respects, not well chosen, is a source of obscurity and misapprehension.
The simple transaction is this. The merchant in London, to whom a merchant in Amsterdam owes a sum of money, writes a line to the merchant in Am- sterdam, directing him to pay the money. The writ- ing of this line is called drawing ; the line itself is called a bill ; and the person whom the line is written
SECT. XVI — THE EXCHANGE. 179
to, is said to be drawn upon. If the merchant in London, at the same time that he has money to re- ceive from Amsterdam, has money to pay in Am- sterdam, he draws his bill upon his debtor in Am- sterdam, to the order of his creditor ; or, in other words, his line written to the person who owes him money in Amsterdam, is a line directing him to pay the amount to that other person to whom he is in- debted. If the sum to be received is equal to the sum to be paid, the bill discharges the debt ; if it is less, it pays as far as it goes, and the difference con- stitutes a balance.
It so happens, in the course of business, that the individuals who import goods from Holland, for example, are not the sanie individuals who export goods to Holland. The merchants who import corn, or butter, or tallow, from Holland, are one set of mer- chants ; the merchants who export cottons and hard- ware to Holland, are merchants of another descrip- tion ; the individuals, therefore, who have money to receive from Holland, have nothing to do with any payments in Holland ; they make a demand for their money, and expect it shall be paid. There are other individuals, however, who have money to pay in Hol- land, and who, to save themselves the expense of sending money, are desirous of obtaining from the individuals, who have money to receive from Holland, orders upon their debtors, that is, bills drawn upon them, for the sum. The English exporters, who have
N2I
180 GHAP. III-«-iINTERCHAKGE.
money to receive from Holland, therefore, draw bills upon their correspondents in Holland, and, without needing to wait for the return from Holland, receive the money in England from the English importers.
There are thus two sets of persons in England : one, who have money to receive from Holland; an^ other, who have money to send to Holland. They who have money to send, are desirous of meeting with the persons who have money to receive, and bills to draw ; the persons, again, who have bills to draw, and money to receive, are desirous of meeting with the persons who have money to pay, and who would give it them immediately, and save them the delay of waiting the return from Holland. But these two sets of men do not always know how to find one another. This gives rise to a set of middle men, who, under the name of bill-brokers, and exchange- brokers, perform the function of bringing them to- gether, or rather act as the medium between them.
When it so happens that the amount for which bills are drawn is the same with that for which bills are wanted ; in other words, when those who have money to receive abroad, are equal to those who have money to pay, the amount of bills to be bought, and the amount to be sold, will be exactly the same : for each man, desirous to purchase a bill on Holland, there will be another man, equally desirous to sell one: there will be neither premium, therefore, on
SECT. XVI-^THE EXCHANGE. 181
the one side, nor discount on the other ; the bills, or, in the language of the merchants, the exchange, will be at par.
When it happens, however, that the debts and credits are not equal ; that England, for example, has more money to pay than she has to receive ; in other words, has imported to a greater amount than she has exported, there are more persons who want to purchase bills on Holland, than there are persons to sell them. Those who cannot obtain bills to discharge their debts in Holland must send the metals. That, however, is an operation attended with a considerable cost. There is, therefore, a competi- tion for bills ; and the merchants give for them rather more than they are worth. A bill, for ex- ample, drawn on Holland for 10,000 guilders, (the 10,000 guilders being, by supposition, equal to 1,000/.) will be Avillingly purchased for something more than 1000/. In this case, the exchange is said to be in favour of Holland, and against England. It is against England, because in Holland, when bills are drawn upon England, there are more people who have bills to sell, than people who have any occasion to buy. There is a competition, therefore, among the people who wish to sell, and the price falls. A bill on England for 1,000/., instead of selling for 10,000 guilders, will sell for something less. This, it is evident, is a discouragement to the Dutch merchant who exports goods to England,
183 CHAP. Ill — INTERCHANGE.
It is also a discouragement to the English merchant who imports goods from Holland, and who, in addi- tion to the 10,000 guilders which his goods have cost, must pay something more than 1,000/., or 10,000 guilders, for a bill to pay them. On the other hand, there is an encouragement to the English merchant who exports goods to Holland, inasmuch as he receives for his bill of 10,000 guilders on Holland, rather more than 1,000/., which is the value of his goods ; he is, therefore, stimulated, by this increase of profit, to increase the quantity of his trade.
It is very easy to see what is the limit to this variation in the price of bills, called in the language of merchants, the exchange. The motive to the purchase of a bill is the obligation of paying a debt. The merchant, however, on whom it is incumbent to pay a debt in Holland, can pay it without a bill, by sending the metal. To send the metal is attend- ed with a certain cost. If he can obtain the bill without paying beyond this cost, he will purchase the bill. This cost, therefore, is the utmost amount of the premium which he will pay for a bill, and the limit to the rise of its price. As the cost of sending the metal, which is a great value in a small bulk, is never considerable, the exchange can never vary from par to a considerable amount.
It is well known in commerce, how a balance is
SECT. XVI — THE EXCHANGE. 183
transferred from one country to another, by means of bills of exchange.
If a balance is due by England to Holland, and by Hamburgh to England, the holder of a bill at Amsterdam for 1,000/. upon England, will not send his bill to England, where it will fetch him only 1,000/. ; if by sending it to Hamburgh, it will fetch him something more ; (i. e.) if he has a debt to pay at Hamburgh when bills upon England are there at a premium, or if the premium will exceed the cost of transporting the gold from Hamburgh to Amsterdam. A debt, which England owed to Holland, is thus paid by a credit wl.ich she had at Hamburgh. In England, the merchants, who have imported from Holland, pay for the goods which they have im- ported, by paying the merchants, who have exported to Hamburgh, for the goods which they have ex- ported.
. Such are the transactions between country and country, by means of bills of exchange ; and such is the language in which they are expressed. There are two states of things in which these operations take place : The First, when the currency of both countries remains the same as at the time when the par of exchange was originally computed; when 10 guilders of Holland, for example, contained as much of the precious metal as 1/. sterling; and the par of exchange, of course, was said to be 10 : The Second,
184 CHAP. Ill— INTERCHANGE.
when the relative value of the two currencies does not remain the same; as, for example, when 1/., instead of being equal to 10 guilders, becomes equal to 12, or to no more than 8.
If we suppose the quantity of the precious metal in the pound sterling to be diminished in such a degree that it contains no greater quantity than that which is contained in 8 guilders, the par of exchange, in this case w^ould really be 8, instead of 10. The merchants, however, from the time at whicli the par of exchange appears to have been originally computed, never altered their language. If the par of exchange between the guilder and the pound sterling was 10, it continued to be called 10, however the relative value of the currencies might be changed ; though the pound sterling, for example, became equal to 8 guilders only, instead of 10. Notwithstanding this, the value of the bills w^as regulated according to the real value of the currencies ; a bill for so many pounds sterling was not equal to a bill for as many times 10 guilders, but for as many times 8. As the par of exchange, how- ever, still was called 10, though really 8, the ex- change was said to be against England, in the pro- portion of 10 to 8, or 20 per cent. This 20 per cent of unfavourable exchange was altogether nominal ; for when there was this 20 per cent, of discount on the English bill, the exchange was really at par. The language, therefore, was improper and deceptions; but if, in such a case, it is borne in mind.
SECT. XVI — THE EXCHANGE. 185
that 20 per cent, against England means the same as par, it will then be easy to see that every thing which we demonstrated, in the preceding pages, as true with respect to the par, will, in this case, be true with respect to the 20 per cent. Every thing which raises the exchange above par, according to the proper language, makes it as much less than 20, according to the improper ; every thing which reduces it below par, according to the proper, makes it as much more than 20, according to the improper. All the effects which follow from what is called the rise above, or fall below par, in the one case, follow from the same things, but called by different names, in the other. On this, therefore, I have no occasion to enlarge.
When the currencies of two countries are metallic, a change in their relative value beyond the fluctu- ations which are limited by the expense of transmit- ing the metals, and continually corrected by their transmission, can only happen by a change in the re- lative quantity of the metal they contain ; there being checks, as we have already seen, which prevent any considerable difference between the value of a me- tallic currency and that of the metal which it con- tains. There is, however, another case, namely, that of a paper money, not convertible into the me- tallic. This requires to be considered by itself.
Let us resume the former supposition, that the pound sterling contains as much of the precious
186 CHAP. Ill — INTERCHANGE-fJ
metal as 10 guilders ; and let us suppose that a paper money, not payable in the metals, is issued in England in such quantity, that a pound in that money is reduced 90 per cent, below the value of the metal contained in a pound sterling ; it is easy to see that a bill for 100/. sterling, in this case, js of the same value, exactly, as a bill for 100/. sterling when the currency was degraded by losing 20 per cent, of its metal. A bill for 1 00/. in both cases^ is equal not to 100 times 10 guilders, but 100 times 8 guil- ders. The reason is, that the bill will in England buy only as much of the metal as is contained in 100 times 8 guilders. It will exchange, therefore, of course, only for a bill of 800 guilders.
The facts may be expressed in the form of a ge- neral rule. A bill drawn upon any country is equal in value, when it arrives in that country, to all the precious metal which the money for which it is drawn can purchase in the market : a bill for 100/., for ex- ample, is equal to all the metal which it can purchase, whether it is the same quantity which would be purchased by 100/. sterHng, or less. To whatever amount the portion which it can purchase is less than what could be purchased by 100/. of the coins, to that amount the paper money is degraded below what would be the value of the coins, if they circulated in its stead. The exchange, therefore, against any country, can never exceed the amount of two sums ; the difference between the value of the degraded and the undegraded currency, or the difference between
SECT. XVI— THE EXCHANGE. 187
the nominal amount of the currency and the quantity of the precious metal which it can purchase, for the first item ; and the expense of sending the metal, when purchased, as the second. It thus appears how perfectly unfounded is the opinion of those (and some political economists of great eminence are included in the number) who conceive that the real, not merely the nominal, exchange, may exceed the expense of transmitting the precious metals. They say, that when by some particular cause a great absorption of the precious metals has taken place, creating a scarcity, in consequence of which goods must be sent from the country where it is scarce to bring it back from the countries where it abounds, bills drawn by the country in which it is scarce upon the coun- tries where it abounds, may bear a premium equal to the cost of sending goods which may fetch in the foreign market the value of the bill ; and this, in cer- tain cases, may greatly exceed the cost of sending the precious metals.
: If the facts are traced, the answer will be seen to be conclusive. What is the true account of the trade in commodities when the exchange is at par ? If that is understood, the difference which takes place when the exchange is not at par, will be easily explained.
When the exchange between two countries, (call them A and B) is at par, it is implied that the ex- ports and imports of both are equal : that each re-
188 CHAP. Ill — INTERCHANGE.
ceives from the other as much as it sends. In this case the goods which A sends to B must be so much cheaper in A than they can be made in B, that they can there be sold with all the addition required on account of the cost of carriage : in like manner the goods which B sends to A must be so much cheaper in B, that the cost of carriage is covered by the price which they fetch in A. This cost of carriage, it is obvious, does not affect the exchange any more than an item in the cost of production.
Next let us observe what happens when the state of the exchange is disturbed. Let us suppose that a demand is suddenly created in A, for the means of making payments in B, payments greatly beyond the value of the former exportations. The demand for bills on B is consequently increased beyond the sup- ply, and the price rises. The question is, what is the limit to that rise in the price of bills? At first, it is evident, the rise of price is limited to the cost of sending the precious metal. As the metal, however, departs, the value of it rises. If the currency is paper, and its value stationary, the gold will rise, and rise equally, both in currency and commodities. The final question, then, is, what is the limit to the rise in the value of gold ?
Before the premium on the bills commenced, goods in A were so cheap, that a portion of them could be sent to B, and sold, with all the addition of the cost
SECT. XVI— THE EXCHANGE. 18&
of carriage, and of course with the ordinary profits of stock. The whole of the premium on the bills, therefore, is an addition- to the ordinary profits of stock.
If A be taken for England, and B for the continent of Europe, the case will be, that English goods, when the «Hrchange is at par, go abroad, and are sold at a price which includes both profits and cost of car- riage ; when the premium on bills rises only so high as to equal the cost of sending bullion, it is to that extent an additional profit on the sending of goods.
It is evident that, in proportion as this premium should rise, it would not only enhance the motive to increase the exportation of the goods which could be exported with a profit before the rise of the bills, but that it would render many other kinds of goods ex- portable, which before could not be exported. Thus, when the exchange was at par, there were certain kinds of goods in England, which, after paying cost of carriage, could be sold abroad with a profit ; there were certiain other kinds which, on account of their high price in England, could not be thus exported ; some might thus be 1 per cent, too high to be ex- ported, others 2 per cent, too high, others 3 percent, and so on. It is obvious that a premium of 1 per cent, on bills would enable the first kind to be ex- ported ; a premium of 2 per cent, would enable the second ; and a premium of 1 0 per cent, would enable
-^i<
190 CHAP. Ill — INTERCHANGE.
two or three kinds to be exported, which could not have been exported before. As the counter opera- tion would be of the same kind and the same power, viz. to prevent the importation of foreign goods into England, exportation would be exceedingly increased, importation nearly prevented. The two operations to- gether would be so powerful, that any great deviation from the real par of exchange could never be of long duration. To the amount of the cost of sending the precious metal, permanent circumstances may give it a permanent duration. If England, for example, sent every year a large amount of the precious metal to India, and received it from Hamburgh, the exchange would be to the extent of the cost of sending the metals, permanently favourable with Hamburgh, unfavourable with India.
If bills of exchange were always drawn for so much weight of gold^ the case would be simple. Suppose a bill in London drawn upon Paris for 100 ounces of gold, no man would pay for that bill more gold be- yond the 100 ounces than the cost of sending the 100 ounces. He might purchase the 100 ounces at one time with 390/, of currency, at another with 410/. of currency, but that would be entirely owing to changes in the relative value of the cur- rency and the gold. These changes, it is said, may in certain circumstances, take place from a rise in the value of the gold, the currency remaining of the same value. This implies that gold can become more va-
SECT. XVI — THE EXCHANGE. 191
luable in one country than in the neighbouring coun- tries ; in England, for example, than on the Conti- nent. But this it cannot do without encreasing the exports in England, and diminishing, almost to nothing, the imports. Suppose the rise in the value of gold to be 1 per cent., 2 per cent., or to amount to 10 per cent. ; at this last rate the goods which could be sent abroad with the ordinary profit, could be now sent abroad with 10 per cent, more than the ordinary profit, while all the other kinds of goods, those 1 per cent., those 2 per cent., those 3 per cent., 4 per cent. 5 per cent., and so on, too dear to have been sent before, would now all be sent ; at the same time that the counter operation would be equally strong to prevent foreign goods from being imported. These are the necessary effects of a high value of gold in one country as compared with other countries ; and they are evidently such as to render it impossible that a high value of the precious metal in one country, compared with the neighbouring countries, can ever in a state of freedom be of long duration.
192 CHAP* HI—INTERCHANGE.
SECTION XVIL
BOUNTIES AND PROHIBITIONS.
Under this title I include all encouragements and discouragements, of whatsoever sort, the object of which is, to make more or less of production or exchange to flow in certain channels, than would go into them of its own accord.
The argument, on this subject, I trust, will be clear and conclusive, without a multiplicity of words.
If it should appear, that production and exchange fall into the most profitable channels, when they are left free to themselves ; it will necessarily follow that as often as they are diverted from those channels, by external interpositions of any sort, so often the in- dustry of the country is made to employ itself less advantageously.
That production and exchange do, when left to themselves, fall into the most profitable channels, is clear by a very short demonstration.
The cases of production and of exchange require to be considered separately ; for, in the case of pro-
SECT* XVII — BOUNTIES, &C. 193
duction, there is hardly any difference of opinion. If a country had no commercial intercourse with other countries, and employed the whole of its productive powers exclusively for the supply of its own consump- tion, nothing could be more obviously absurd, than to give premiums for the production of one set of commodities, and oppose obstructions of any sort to the production of another ; I mean in the view of Poli- tical Economy, or, on account of production : for if any country opposes obstructions to certain commodities, as spirituous liquors, because the use of them is hurtful, this regards morality, and has for its end to regulate, not production, but consumption. Wherever it is not intended to limit consumption, it seems admitted, even in practice, that the demand will always regu- late the supply, in the manner in which the benefit of the community is best consulted. The most stupid governments have not thought of giving a premium for the making of shoes, or imposing a preventive tax upon the production of stockings, in order to enrich the country by making a greater quantity of shoes, and a less quantity of stockings. With a view to the internal supply, it seems to be understood that just as many shoes, and just as many stockings, should be made, as there is a demand for : If a different policy were pursued ; if a premium were bestowed upon the production of shoes, a tax or other burthen imposed upon the . production of stockings, the effect would only be, that shoes would be afforded to the people cheaper, and stockings
o
194 CHAP. Ill — INTERCHANGE.
dearer thian they otherwise would be : that the people would be better supplied with shoes, worse supplied with stockings, than they would have been, if things had been left to their natural course, that is, if the people had been left to consult freely their own convenience ; in other words, if the greatest quantity of benefit from their labour had been allowed to be obtained.
All that regulation of industry, therefore^ the object of which, has been to increase the quantity of one sort of commodities, lessen the quantity of an- other, has been directed to the purpose of regulating the exchange of commodities with foreign countries ; of increasing or diminishing, most commonly dimi- nishing, the quantity of certain commodities which would be received from abroad.
Now it is certain, as has been already abundantly proved, that no commodity which can be made at home will ever be imported from a foreign country, unless it can be obtained by importation with a smaller quantity of labour, that is, cost, than it could be produced with at home. That it is desirable to have commodities produced with as small a cost of labour as possible, seems to be not only certain, but admitted. This is the object of all the improvements that are aimed at in production, by the division and distribution of labour, by refined methods of culture applied to the land, by the invention of more potent
SECT. XVH — BOUNTIES, &C. 195
and skilful machines. It seems, indeed, to be a self- evident proposition, that whatever the quantity which, a nation possesses of the means of production, the more productive they can possibly he rendered, so much the better ; for this is neither more nor less than saying, that to have all the objects we desire, and to have them with little trouble, is good for mankind.
Not oitly is it certain, that in a state of freedom no commodity which can be made at home will ever be imported, unless it can be imported with a less quantity or cost of labour than it could be produced with at home ; but whatever is the country from which it can be obtained with the smallest cost of labour, to that country recourse will be had for obtaining it, and whatever the commodity by the ex- portation of which it can be obtained with the smallest quantity of home labour, that is the commodity which will be exported in exchange. This results so obviously from the laws of trade, as not to require explanation. It is no more than saying, that the merchants, if left to themselves, will always buy in the cheapest market, and sell in the dearest.
It seems, therefore, to be fully established, that the business of production and exchange, if left to choose its own channels, is sure to choose those which are most advantageous to tiie community. It is sure to choose those channels, in which the com- modities which the community desires to obtain, are
03
196 CHAP, m— interchakge.
obtained with tlie smallest cost. To obtain the commodities which man desires, and to obtain them with the smallest cost, is the whole of the good which the business of production and exchange, con- sidered simply as such, is calculated to yield. In whatever degree, therefore, the business of produc- tion and exchange is forced out of the channels into which it would go of its own accord, to that degree the advantages arising from production and exchange are sacrificed ; or, at any rate, postponed to something else. If there is any case in which they ought-to be postponed to something else, that is a question of politics, and not of political economy.
There is no subject, upon which the policy of the restrictive and prohibitive system has been maintained with greater obstinacy, and with a greater quantity of sophistry, than that of the trade in corn. There can, however, be no doubt, that corn never will be im- ported, unless when it can be obtained from abroad with a smaller quantity of labour than it can be produced with at home.^ All the good, therefore, which is obtained from the importation of any com- modity, capable of being produced at home, is obtained from the importation of corn. Why should that advantage — an advantage which, in the case of corn, owing to the diversities of soil and extent of population, is liable to be much greater than in the
* See pp. 115—119.
SECT. XVII — BOUNTIES, &C. 197
case of any other commodity?— rbe denied to the com- munity? ■' , /> :--^i <t/r l^:?. •; /i*':^^
The reasons upon which the advocates for a re- striction of the corn trade chiefly support themselves, are two ; neither is of any value.
The first is. That unless the nation derive its corn from its own soil, it may, by the enmity of its neigh- bours, be deprived of its foreign supply, and may hence be reduced to the greatest distress. This argument implies an ignorance both of history, and of principle : Of history, because, in point of fact, those countries which have depended the most upon foreign countries for their supply of corn, have enjoyed, beyond all other countries, the advantage of a steady and invariable market for grain : Of principle, because it follows unavoidably, if what, in one country, is a favourable, is in other countries an un- favourable season, that nothing but obtaining a great part of its supply from various countries can save a nation from all the extensive and distressing fluctua- tions wlHch the variety of seasons is calculated to produce. Nor is the policy involved in this argu- ment better than the political economy. It sa- crifices a real good, to escape the chance of a chimeri- cal evil : an evil so much the less to be apprehended, that the country from which another derives its supply of corn is scarcely less dependant upon that
198 CHAP. Ill — INTERCHANGE.
other country for a vent to its produce, than the purchasing country is for its supply. It will not be pretended that a glut of corn in any country, from the loss of a great market, with that declension of price, that ruin of the farmers, and that depression of rents, which are its unavoidable consequences, is an immaterial evil.
The second reason upon which the advocates of the corn monopoly support themselves is. That if the merchants and manufacturers enjoy in certain cases the monopoly of the home supply, the farmers and landlords are subject to injustice, if a similar monopoly is not bestowed upon them. In the first place, it may be observed, that if this argument is good for the growers of corn^ it is good for every other species of producers whatsoever; if, because a tax is imposed upon the importation of woollens, a tax ought to be imposed upon the importation of corn, a tax ought also to be imposed upon the importation of every thing which the country can produce ; the country ought, in short, to have no foreign commerce, except in those articles alone which it has not the means of producing. This is a reduction to absurdity, which appears conclusive. The argument moreover supposes that an extraordinary gain is obtained by the manu- facturer, in consequence of his supposed protection ; and that a correspondent evil is sustained by the corn 'grower, unless he is favoured by a similar tax. The ignorance of principle is peculiarly visible in those
SECT. XVII — BOUNTIES^ &C. 199
suppositions, in neither of which is there a shadow of truth.
The man who embarks his capital in the woollen, or any other manufacture, with the produce of which that of the foreign manufacturers is not allowed to come into competition, does not, on that account, derive a greater profit from his capital. His profit is no greater than that of the man whose capital is embarked in trades open to the competition of all the world. All that happens is, that a greater number of capitalists find employment in that branch of manufacture; that a portion, in short, of the capital- ists of the country employ themselves in producing that particular species of manufacture, who would otherwise be employed in producing some other species, probably in producing something for the foreign market, with which that commodity, if imported from the foreign manufacturer, might be bought.
As the man who has embarked his capital in the trade which is called protected, derives no additional profit from the protection ; so the grower of corn sustains not any peculiar loss or inconvenience. No- thing, therefore, can be conceived more groundless than his demand of a compensation on that account. The market for corn is not diminished because a tax is laid upon the importation of woollens ; nor would that market be enlarged if the tax were taken off.
200 CHAP. III. — INTEllCHANGE.
His business, therefore, is not in the least degree affected by it.
It would be inconsistent with the plan of a work, confined to the exposition of general principles, to lay open all the fallacies which lurk in the arguments for restraining the trade in corn. One or two, however, of the sources of deception cannot be left altogether unnoticed.
The landlord endeavours to represent his own case, and that of the manufacturer, as perfectly similar; though, in the circumstances which concern this argument, they are not only different, but opposite. The landlord also endeavours to mix up his own case with that of the farmer; and upon the success of that endeavour almost all the plausibility of his pretensions depends. That no pretensions are more unfounded, may be seen by a very short process of reasoning. The farmer, as a producer, requires, like every other producer, that all his outgoings be re- turned to him, with the due profit upon the capital which he employs. The surplus which the land yields, over and above this return and profit, is what he pays to his landlord; and his interest is not affected by the quantity of that surplus, whether it be great or small. His interest, how- ever, is very much affected by w^ages ; because, in proportion as wages are low, his profits, like all other profits, are high. Wages cannot be low, if corn
SECT. XVII — BOUNTIES, &C. 201
is dear. The interest, therefore, the permanent in^ terest, of the class of farmers, consists, in having corn cheap. This or that individual in the class may, that is, during the currency of a lease, have an interest in high prices ; and the reason of the excep- tion shows the truth of the general rule. The indi- vidual, who, during the currency of a lease, has an interest in high prices, is, by his lease, converted to a certain extent, into a receiver of rent. During the continuance of his lease, if prices rise, he gets, not only his due return of profits as a farmer, but some- thing more, namely, a portion of what is truly rent, and which, but for his lease, would have gone to the landlord.
This, then, is the grand distinction. The re- ceivers of rent are benefited by a high price of corn ; the producers of cofn, as such, are not benefited by it, but the reverse. The case of the farmer corre- sponds with that of the manufacturer, not with that of the landlord. The farmer is a producer and capitalist ; the manufacturer is a producer and capi- talist ; and they have both received all that belongs to them, when their capital is replaced with its profits. The landlord is not a producer, nor a capitalist. He is the owner of certain productive powers in the soilj and all which the soil produces belongs to him, after paying the capital which is necessary to put those productive powers in operation. It thus appears that the case of the landlord is peculiar ; that a high
202 CHAP. Ill — INTERCHANGE.
price of corn is profitable to him, because, the higher the price, the smaller a portion of the produce will suffice to replace, with its profits, the capital of the farmer ; and all the rest belongs to himself. To the farmer, however, and to all the rest of the commu- nity, it is an evil, both as it tends to diminish profits, and as it enhances the charge to consumers.
SECT. XVIII — COLONIES. 203
SECTION XFIIL
'^^^'^ COLONIES.
Among the expedients which have been made use of, to force into particular channels a greater quan- tity of the means of production, than would have flowed into them of their own accord ; colonies are a subject of sufficient importance to require a particular consideration.
The only point of colonial policy, which it is here necessary to consider, is that of trade with the colonies. And the question is, whether any peculiar advantage may be derived from it.
With respect to colonies, as with respect to foreign countries, the proposition will, doubtless, be admitted as true, that whatever advantage is derived from trading with them, consists in what is received from them, not in what is sent, because that, if not fol- lowed by a return, would be altogether loss.
The return from them is either money or commo- dities. The reader is by this time fully aware that a country derives no advantage from receiving money, more than from receiving any other species of com-
204 CHAP. Ill — INTERCHANGE.
modity. It is also plain that where the colony has not mine3 of the precious metal, it cannot, under the monopoly of the mother country, have money, or any thing else, beside its own productions, to send.
It is needless to consider the case of free trade with a colony, because that falls under the case of trade with any foreign country.
The monopoly, which a mother country may re- serve to herself, of the trade with her colonies, is of two sorts.
First of all, she may trade with her colonies by means of an exclusive company. In this case, the colony has no purchaser to whom she is allowed to sell any thing, but the exclusive company, and no other seller from whom she is allowed to buy any thing. The company, therefore, can make her buy, as dear as it pleases, the goods which the mother country sends to her, and sell, as cheap as it pleases, the goods which she sends to the mother country. In other words, the colony may, in these circum- stances, be obliged to give for the produce of a certain quantity of the labour of the mother country, a much greaterquantity of goods than the mother country could obtain, with the same quantity, from any other country, or from the colony in a state of freedom.
The cases of a trade in these circumstances are
■ SECT. XVIII. — COLONIES. 205
two : the first, where the colony receives from the mother country, luxuries, comforts : the other, where she receives necessaries ; either the necessaries of life, or the necessaries of industry, as iron, &c.
In that case in which the colony receives luxuries and comforts only from the mother country, there is a limit to the degree in which the mother country is enabled to profit by the labour of the colony. The colony may decline receiving such luxuries or com- forts, if obliged to sacrifice for them too great a quantity of the produce of her labour, and may think it better to employ that great proportion of her labour, in providing such luxuries and comforts as she herself is capable of producing. m ih.} utiin ?■::•?•
If, however, the colony is dependant for necessa- ries upon the mother country, the exclusive company exercises over the colony a power altogether des- potic. It may compel her to give the whole produce of her labour, for no more of the necessaries in ques- tion, than what is just sufficient to enable the popu- lation of the colony to live. If it is the necessaries of life which the colony receives, the conclusion is obvious. If it is commodities, such as iron, and in- struments of iron, without which her labour cannot be productively employed, the result is precisely the same. She may be made to pay for these articles so much of the whole produce of her labour, that no- thing but what is necessary to keep the population
206 CHAP. Ill — INTERCHANGE.
alive may remain. It would be the interest of the mother country, not to lessen the population ; be- cause, with the population, the produce would be lessened, and hence the quantity of commodities which the mother country could receive.
Instead, however, of trading with her colonies by means of an exclusive company, the mother country may leave the trade open to all her own merchants, only prohibiting the colony from trading with the merchants of any other country. In this case, the competition of the merchants in the mother country reduces the price of all the articles received by the colony, as low as they can be afforded — in other words, as low as in the mother country itself, allowance being made for the expense of carrying them. If it be said that the colonies afford a market ; I reply, that the capital, which supplies commodities for that market, would still prepare commodities, if the colo- nies were annihilated ; and those commodrties would still find consumers. The labour and capital of a> country cannot prepare more than the country w ill be willing to consume. Every individual has a desire to consume, either productively or unpro- ductively, whatever he receives. Every country, therefore, contains within itself a market for all that it can produce. This will be made still more evident when the subject of consumption^ the cause and measure of markets, comes under consideration. There is, therefore, no advantage whatsoever derived.
SECT. XVIII — COLONIES. 207
under freedom of competition, from that part of the trade with a colony which consists in supplying it with goods, since no more is gained by it, than such ordinary profits of stock as would have been gained if no such trade had existed. It is nevertheless true that the colony may lose by such a traffic, if the goods which she is thus compelled to purchase of the mother country she might purchase cheaper in other countries.
If there be any peculiar advantage, therefore, to the mother country, it must be derived from the cheapness of the goods with which the colony supplies her. It is evident, that if the quantity of goods, sugar, for example, which the colony sends to the mother country, is so great as to glut the mother country ; that is, to supply its demand beyond the measure of other countries, and make the price of them in the mother country lower than it is in other countries, the mother country profits by compelling the colony to bring its goods exclusively to her market, since she would have to pay for them as high as other countries, if the people of the colony were at liberty to sell wherever they could obtain the greatest price.
This advantage, if drawn by the mother country, would be drawn at the expense of the colony. In free trade botli parties gain. In the advantage pro- duced by forcing, whatever is gained by the one
208 CHAP. Ill — INTERCHANGE.
party is lost by the other. The mother country, in compelling the colony to sell goods cheaper to her than she might sell them to other countries, merely imposes upon her a tribute ; not direct, indeed, but not the less real because it is disguised.
* If any advantage is derived from restraining, any otherwise than by an exclusive company, the trade with the colonies, it must consist in forcing the colo- nies to sell to none but the mother country, not in forcing them to buy from none but the mother country. A great improvement, therefore, in colo- nial policy would be, to throw open the supply of the colonies, permitting them to purchase the goods which they want, wherever they could find the most favourable market, only restraining them in the sale of their goods ; allowing them to buy wherever they pleased, permitting them to sell to none but the mother country.
It is at the same time to be observed, that if the merchants of the mother country have freedom to export the goods which are derived from the colonies, the price of these goods will be raised in their own country to the level of the price in other countries. The competition of the merchants will, also, raise the price of the goods to a correspondent height in the colonies ; and thus the benefit to the mother country is lost.
SECT. XVIII— COLONIES. 209
Treaties of commerce are sometimes concluded, for the purpose of limiting the freedom of trade. One country can be limited to another in but two ways ; either in its purchases, or its sales. Suppose that Great Britain binds some other country to purchase certain commodities exclusively from her ; Great Britain can derive no advantage from such a treaty. The competition of her merchants will make them sell those commodities as cheap to the merchants of that country, as to their own countrymen. Their stock is not more profitably employed than it would be if no such trade existed. There are cases in which a country may gain by binding another country to sell to none but itself. If one country is bound to sell no commodities whatsoever, except to another particular country; this is the same case, exactly, with that of a colony bound to sell to none but the mother country. As no free country, how- ever, is likely to bind itself to sell none of its com- modities except to one other, this is not a case which we need to regard as practicable or real.
One country may bind itself to sell exclusively to another particular country, not all the articles it has for foreign sale, but only some of them.
These may be articles which yield nothing, even in a state of freedom, but the ordinary profits of stock ; as cloth, hardware, hats, &c. : or they may be articles which yield something over and above
p
210 CHAP, in— INTEUCHANGE.
the ordinary profits of stock ; as corn, wine, minerals, &c. which are the source of rent.
One country can derive no advantage from com- pelling another to sell to it, exclusively, articles of the first sort If the price which the favoured country pays for the goods is not sufficient to afford the or- dinary profits of stock, they will not be produced. If the price which it pays is sufficient to afford the ordinary profits of stock, it would, at that price, obtain the goods, without any treaty of restriction.
The case is different, where the goods yield some- thing, as rent, or the profits of a monopoly, over and above the profits of stock. The quantity which may be sent in this case to the favoured country, may sink there the price of the restricted commodity lower than it is in the neighbouring countries ; and lower than the restricted country would, if not un- der restriction, be enabled to sell it in those countries. To this extent, and to this only, can one country benefit, by confining the trade of another to itself. The restriction may operate to a diminution of the profits of a monopolized commodity, or a diminution of rent.
There is one mode of presenting this subject, which is apt to puzzle a mind not accustomed to trace the intricacies of this science.
SECT. XVIII— COLONIES. 211
Suppose two countries, A and B, of which A is bound by treaty, or otherwise, to receive all its shoes from B, and to sell to B all its sugars : Suppose, also, that A could, if left at liberty, obtain its shoes 50 per cent, cheaper from some other country; in that case, it may for a moment appear, that B ob- tains the sugars which it buys of A, with 50 per cent less of its own labour, than it would if A were allowed to purchase shoes where it pleased.
If B paid for the supposed sugars in shoes, it would, no doubt, pay 50 per cent, more in the case of a free trade.
But if there were any other article with which it could purchase those sugars, and which it could afford as cheap as any other country, it would lose nothing in the case of a free trade ; it would purchase the same quantity of sugar with the produce of the same quantity of labour as before ; only, that produce would be, not shoes, but some other article.
That there would be articles which B could afford as cheap as any other country, is certain, because otherwise it could have no foreign trade.
It may be said, however, that though B might have articles which it could sell as cheap as other countries, they might not be in demand in the
P 2
2i2l CHAP. HI— INTERCHANGE.
country which produced the sugars. But if shoes only were in demand in the colonies, those other articles could purchase shoes where they were cheapest ; and thus obtain the same quantity of sugar, in the free, as in the restricted state of the trade.
K''i L ^j^. J'c /.* L
CHAPTER IV.
CONSUMPTION.
Of the four sets of operations, Production, Distri- bution, Exchange, and Consumption, which consti- tute the subject of Political Economy, the fiist three are means. No man produces for the sake of produc- ing, and nothing farther. Distribution, in the same manner, is not performed for the sake of distribution. Things are distributed, as also exchanged, to some end.
That end is Consumption. Things are produced, that they may be consumed ; and distribution and exchange are only the intermediate operations for bringing the things, which have been produced, inti the hands of those who are to consume them.
214 CHAP. IV— CONSUMPTION.
SECTION I.
OF PRODUCTIVE AND UNPRODUCTIVE CONSUMPTION. / , . .
Of Consumption, there are two species ; the dis- tinctive properties of which it is of great importance to comprehend. .^^
These are, 1st, Productive Consumption; 2dly, Unproductive Consumption.
1. That production may take place, a certain expenditure is required. It is necessary, that the labourer should be maintained; that he should be provided with the proper instruments of his labour, and with the materials of the commodity which it is his business to produce.
What is thus expended for the sake of something to be produced, is said to be consumed productively.
In productive consumption, three classes of things are included. The first is, the necessaries of the labourer, under which term are included all that his wages enable him to consume, whether these confine him to wjiat h required for the preservation of exist-
SECT. I — PRODUCTIVE AND UNPRODUCTIVE. 215
ence, or afford him something for enjoyment. The second class of things consumed for production is machinery ; including tools of all sorts, the buildings necessary for the productive operations, and even the cattle. The third is the materials of which the com- modity to be produced must be formed, or from which it must be derived. Such is the seed from which the corn must be produced, the flax or wool of which the linen or woollen cloth must be formed, the drugs with which it must be dyed, or the coals which must be consumed in any of the necessary operations. ♦
Of these three classes of things, it is only the second, the consumption of which is not completed in the course of the productive operations. The machinery and buildings, employed in production, may last for several years; the necessariesj however, of the labourer, and the materials, either primary or secondary, of the commodity to be produced, are all completely consumed. Even of the durable machinery, the wear and tear amount to a partial consumption.
2. Thus it is, that men consume for the sake of production. They also consume, however, without producing, and without any view to production. The wages which a man affords to a ploughman, are given for the sake of production ; the wages which he gives to his footman and his groom, are not given for the sake of production. The flax which the manufac-
^16 CIlA?. IV— CONSUMPTION-
turer purchases, and converts into linen, he consumes productively ; the wine which he purchases, and uses at his table, is a commodity which he consumes unproductively. These instances are sufficient to illustrate what is meant when we speak of unpro- ductive consumption. All consumption, which does not take place to the end that an income or revenue may be derived from it, is unproductive consumption.
From this explanation it follows, that productive consumption is itself a means ; it is a means to pro- duction. Unproductive consumption, on the other hand, is not a means. This species of consumption is the end. This, or the enjoyment which is involved in it, is the good which constituted the motive to all the operations by which it was preceded.
From this explanation, it also follows, that, by productive consumption, nothing is lost ; no diminu- tion is made of the property, either of the individual, or of the community ; for if one thing is destroyed, another is by that means produced. The case is totally different with unproductive consumption. Whatever is unproductively consumed, is lost. What- ever is consumed in this manner, is a diminution of the property, both of the individual and of the com- munity ; because, in consequence of this consump- tion, nothing whatever is produced. The commodity perishes in the using, and all that is derived is the good, the pleasure, the satisfaction, which the using of it yields.
SECT. I— rRODUCTIVE AND UNPRODUCTIVE. 217
That which is productively consumed is always capital. This is a property of productive consump- tion which deserves to be particularly remarked. The truth of the proposition is manifest. A man com- mences the manufacture of cloth with a certain capital. Part of this capital he allots for the payment of wages ; another part he lays out in machinery ; and with what remains he purchases the raw material of his cloth, and the other articles, the use of which is required in preparing it for the market. It thus appears that the whole of every capital undergoes the productive consumption. It is equally obvious that whatever is consumed productively becomes capital ; for if the manufacturer of cloth, whose capital we have seen to be productively consumed, should save a portion of his profits, and employ it in the different kinds of productive consumption required in his business, it would perform exactly the functions performed by his capital, and would, in truth, be an addition to that capital.
The whole of what the productive powers of the country have brought into existence in the course of a year is called the gross annual produce. Of this the greater part is required to replace the capital which has been consumed ; to restore to the capitalist what he has laid out in the wages of his labourers and the purchase of his materials, and to remunerate him for the wear and tear of his machinery. What remains of the gross produce, after replacing the
2[18 CHAP. IV — CONSUMPTION.
capital which has been consumed, is called the net produce ; and is always distributed either as profits of stock or as rent.
This net produce is the fund from which all addition to the national capital is commonly made. If the net produce is all consumed unproductively, the national capital remains unaltered. It is neither diminished nor increased. If more than the net produce is consumed unproductively, it is taken from the capital; and so far the capital of the nation is reduced. If less than the net produce is unpro- ductively consumed, the surplus is devoted to pro- ductive consumption; and the national capital is increased.
Though a very accurate conception may thus be formed of the two species of consumption, and the two species of labour, productive and unproductive, it is not easy to draw the line precisely between them. Almost all our classifications are liable to this incon- venience. Between things which differ the most widely, there is almost always an order of things which approach them by insensible gradations* We divide animals into two classes, the rational and irrational: and no two ideas can be more clearly dis- tinguished. Yet beings may be found, of which it would be difficult to say to which of the two classes they belonged. In like manner, there are consumers, and labourers, who may seem, with some propriety, to
SECT. I — PRODUCTIVE AND UNPlTODUCTIVE. 219
be capable of being ranked either in the productive or the unproductive class. Notwithstanding this diffi- culty, it is absolutely necessary, for the purposes of human discourse, that classification should be per- formed, and the line drawn somewhere. This may be done, with sufficient accuracy both for science and for practice. It is chiefly necessary that the more important properties of the objects classified should be distinctly marked in the definition of the class. It is not difficult, after this, to make allowance in prac- tice for those things which lie, as it were, upon the confines of two classes ; and partake, in some degree, of the properties of both. - ' ■.
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220 CHAP. IV— CONSUMPTION.
SECTION 11.
THAT WHICH IS ANNUAI^LY PRODUCED IS ANNUALLY CONSUMED.
From what we have now ascertained of the nature of production and consumption, it will easily be seen, that the whole of what is annually produced, is annually consumed ; or that what is produced in one year, is consumed in the next.
Every thing which is produced belongs to some- body, and is destined by the owners to some use. There are, however, but two sorts of use : that for immediate enjoyment, and that for ultimate profit. To use for ultimate profit, is to consume productively. To use for immediate enjoyment, is to consume unproductively.
We have just observed, that what is used for ulti- mate profit, is laid out, as expeditiously as possible, in wages of labour, machinery, and raw material. This is a fact of primary importance; and many errors of those who reason loosely in Political Economy, arise from the neglect of it. Whatever is saved from the annual produce, in order to be con- verted into capital, is necessarily consumed ; because
SECT. II — ANNUAL CONSUMPTION. 22!l
to make it answer the purpose of capital it must be employed in the payment of wages, in the purchase of raw material to be worked into a finished com- modity ; or lastly, in the making of machines, effected in like manner by the payment of wages, and the working up of raw materials. With respect to that part of the annual produce which is destined for un- productive consumption, there is less frequently any mistake. As it would be attended with a loss to lay in a greater stock of articles of this class than is re- quired for immediate use, all of them, except a few of which the quality is improved by their age, are al- ways expeditiously consumed, or put in a course of consumption.
'^'^A year is assumed in political economy as the period which includes a revolving circle of production and consumption. No period does so exactly. Some articles are produced and consumed in a period much less than a year. In others the circle is greater than a year. It is necessary, for the ends of discourse, that some period should be assumed as including this circle. The period of a year is the most convenient. It corresponds with one great class of productions, those derived from the cultivation of the ground. 'And it is easy, when we have obtained forms of ex- *pression which correspond accurately to this assump- tion, to modify them in practice to the case of those commodities, the circle of whose production and con- sumption is either greater or less than the standard to which our general propositions are conformed.
222 CHAP. IV^-CONSrMPTION.
«**.:
SECTION III.
THAT CONSUMPTION IS CO.EXTENSIVE AVITH PRODUCTION.
It requires only a few explanations to show, that this is a direct corollary from the proposition est^i bjished in the preceding section.
A man produces, only because he wishes to possess. If the commodity which he produces is the commo- dity which he desires to possess, he stops when he has produced as much as he desires ; and his supply is exactly proportioned to his demand. The savagq who makes his own bow and arrows, does not make bows and arrows beyond what he wishes to possess.
When a man produces a greater quantity of any commodity than he desires for himself, it can only be on one account; namely, that he desires some other commodity, which he can obtain in exchange for the surplus of what he himself has produced. It seems hardly necessary to offer any thing in support of so necessary a proposition ; it would be inconsis- tent with the known laws of human nature to suppose, that a man would take the trouble to produce any tjl^Mi without desiring to have any thing. If he
SECT. Ill — EXTENT OF CONSUMPTION. 223
desires one thing, and produces another, it is only because the thing which he desires can be obtained by means of the thing which he produces, and better obtained than if he had endeavoured to produce it himself.
After labour has been divided and distributed, to any considerable extent, and each producer confines himself to some one commodity or part of a commo- dity, a small portion only of what he produces is used for his own consumption. The remainder he destines for the purpose of supplying him with all the other commodities which he desires ; and when each man confines himself to one commodity, and exchanges Vv^hat he produces for what is produced by other peo- ple, it is found that each obtains more of the several things which he desires, than he would have obtained had he endeavoured to produce them all for himself.
So far as a man consumes that which he produces, there is, properly speaking, neither supply nor de- mand. Demand and supply, it is evident, are terms which have reference to exchange ; to a buyer and a seller. But in the case of the man who produces for himself, there is no exchange. He neither offers to buy any thing, nor to sell any thing. He has the property ; he has produced it ; and does not mean to part with it. If we apply, by a sort of metaphor, the terms demand and supply to this case, it is implied, in the very terms of the supposition, that the
224 CHAP. IV — CONSUMPTION.
demand and supply are exactly proportioned to one another. As far then as regards the demand and supply of the market, we may leave that portion of the annual produce, which each of the owners con- sumes in the shape in which he produces or receives it, altogether out of the question.
In speaking here of demand and supply, it is evi- dent that we speak of aggregates. When we say of any particular nation, at any particular time, that its supply is equal to its demand, we do not mean in any one commodity, or any two commodities. We mean, that the amount of its demand in all commodities taken together, is equal to the amount of its supply in all commodities taken together. It may very well happen, notwithstanding this equality in the general sum of demands and supplies, that some one commo- dity or commodities may have been produced in a quantity either above or below the demand for those particular commodities.
Two things are necessary to constitute a demand. These are, 1st, a wish for the commodity, 2dly, an equivalent to give for it. A demand means, the will to purchase, and the means of purchasing. If either is wanting, the purchase does not take place. An equivalent is the necessary foundation of all demand. It is in vain that a man wishes for commodities, if he has nothing to give for them. The equivalent which a man brings is the instrument of demand. The
SECT. Ill — EXTENT OF CONSUMPTION. 2^5
extent of his demand is measured by the extent of his equivalent. The demand and the equivalent are convertible terms, and the one may be substituted for the other. The equivalent may be called the de- mand, and the demand the equivalent.
We have already seen, that every man, who pro- duces, has a wish for other commodities, than those which he has produced, to the extent of all that he brings to market. And it is evident, that whatever a man has produced and does not wish to keep for his own consumption, is a stock which he may give in exchange for other commodities. His will, there- fore, to purchase, and his means of purchasing, in other words, his demand, is exactly equal to the amount of what he has produced and does not mean to consume.
But it is evident, that each man contributes to the general supply the whole of what he has produced and does not mean to consume. In whatever shape any part of the annual produce has come into his hands, if he proposes to consume no part of it him- self, he wishes to dispose of the whole ; and the whole, therefore, becomes matter of supply : if he consumes a part, he wishes to dispose of all the rest, and all the rest becomes matter of supply.
As every man*s demand, therefore, is equal to that part of the annual produce, or of the property gene-
Q
226 CHAP. TVr-^CONSUMPTION,
rally, which he has to dispose of, and each man's supply is exactly the same thing, the supply and demand of every individual are of necessity equal.
Demand and supply are terms related in a peculiar manner. A commodity which is supplied, is always, at the same time, a commodity which is the instru- ment of demand. A commodity which is the instru- ment of demand, is always, at the same time, a commodity added to the stock of supply. Every commodity is always at one and the same time matter of demand and matter of supply. Of two men who perform an exchange, the one does not come with only a supply, the other with only a demand ; each of them comes with both a demand and a supply. The supply which he brings is the instrument of his demand ; and his demand and supply are of course exactly equal to one another.
But if the demand and supply of every individual are always equal to one another, the demand and supply of all the individuals in the nation, taken aggregately, must be equal. Whatever, therefore, be the amount of the annual produce, it never can exceed the amount of the annual demand. The whole of the annual produce is divided into a number of shares equal to that of the people to whom it is distributed. The whole of the demand is equal to as much of the whole of the shares as the owners do not keep for their own consumption. But the whole of the shares
SECT. ni--EXT^NT OF CONSUMPTION. 22T
is equal to the whole of the produce. The demon- stration, therefore, is complete.
How complete soever the demonstration may appear to be, that the demand of a nation must always be equal to its supply, and th^t it never Can be without a market, sufficiently enlarged for the whole of its produce, this proposition is seldom well uncle r- stoodj and is sometimes expressly contradictecl.
The objection is raised upon this foundation, that commodities are often found to be too abundant for demand.
The matter of fact is not disputed. It will easily, however, be seen, that it affects not the qertainty of the proposition which it is bypught to oppugn.
Though it be undeniable, th^t the demand which every man brings is equal to the supply which he brings, he may not find in the market t|i^ sort of purchaser which he wants. No m^^n iiiciy have come desiring that sort of commodity of which he has to dispose. It is not the less necessarily true, that Jie came with a dern^nd ^qual to his supply ; for he wanted something in return for the goods which he brought. It makes no difference to §ay5 that per- haps he only wanted money ; for money is itself goods; and, besides, no man wants money but in
Q 2
228 CHAP. IV— CONSUMPTION.
order to lay it out, either in articles of productive, or articles of unproductive consumption.
Every man having a demand and a supply, both equal ; if any commodity be in greater quantity than the demand, some other commodity must be in less.
If every man has a demand and supply both equal, the demand and supply in the aggregate are always equal. Suppose, that of these two equal quantities, demand and supply, the one is divided into a certain number of parts, and the other into as many parts, all equal ; and that these parts correspond exactly with one another ; that as many parts of the demand as are for corn, just so many parts of the supply are of corn ; as many of the one as are for cloth, so many of the other are of cloth, and so on : it is evident, in this case, that there will be no glut of any thing, whether the amount of the annual produce is great or small. Let us next suppose, that this exact adaptation to one another of the parts of demand and supply is disturbed ; let us suppose, the demand for all things remaining the same, that the supply of cloth is considerably increased: there will of course be a glut of cloth, because there has been no increase of demand. But to the very same amount there must of necessity be a deficiency of other things ; for the additional quantity of cloth, which has been made, could be made by one means only, by with-
SECT. Ill— EXTENT OF CONSUMPTION. 229
drawing capital from the production of other commo- dities, and thereby lessening the quantity produced. But if the quantity of any commodity is diminished, a demand equal to the greater quantity remaining, the quantity of that commodity is defective. It is, therefore, impossible, that there should ever be in any country a commodity or commodities in quantity greater than the demand, without there being, to an equal amount, some other commodity or commodi- ties in quantity less than the demand.
The effects, which are produced in practice, by the want of adaptation in the parts of demand and supply, are familiar. The commodity which happens to be in superabundance declines in price ; the commodity which is defective in quantity rises. This is the fluctuation of the market, which every body sufficiently understands. The lowness of the price in the article which is superabundant soon removes, by the diminution of profits, a portion of capital from that line of production : The highness of price, in the article which is scarce, invites a quantity of capital to that branch of production ; till profits are equalized, that is, till the demand and supply are adapted to one another.
The strongest case which could be put, in favour of the supposition that produce may increase faster than consumption, would undoubtedly be that in which, every man consuming nothing but necessaries, all
230 CHAP. IV— COln^StJMPTlON.
the test of the annual producie should be saved. This is, indeed, an impossible case, because it is incon- sistent with the laws of human nature. The conse- quences of it, however, are capable of being traced ; and they serve to throw light upon the argument by which the constant equality has been demonstrated, of produce and demand.
In such a case, what came to every man's share of the annual produce, bating his own consumption of necessaries, would be devoted to production. All production would of course be directed to raw produce and a few of the coarser manufactures ; because these are the articles fdr which alone there would be any demand. As every man's share of the annual pro- duce, bating his own consumption, would be laid out for the sake of production, it would be laid out in the articles subservient to the production of raw produce and the coarser manufactures. But these articles are precisely raw produce and a few of the coarser manufactures themselves. Every man's demand, therefore, would consist wholly in these articles ; but the whole of the*" supply would consist also in the same articles. And it has been proved^ that the aggregate demand and agregate supply are equal of necessity ; because the whole of the annual produce, bating the portion consumed by the share- holders, is brought as the instrument of demand ; and the whole of the annual produce, with the same abatement, is brought as supply.
SECT. Ill— EXTENT OF CONSUMPTION. 231
It appearsi therefore, by accumulated proof, that production can never be too rapid for demand. Pro- duction is the cause, and the sole cause, of demand. It never furnishes supply, without furnishing demand, both at the same time, and both to an equal extent.
Mr. Blake has said that this argument, " grant- ing that new tastes and new wants spring up With the new capital, appears to him unanswerable."* A single reflection will, I think, to a tnind as acute as that of Mr. Blake, make it clear that the taste, and wants, of which he speaks, are essentially and necessa- rily implied in the very existence of the capital*
The new capital is all to be laid out in the pur- chase of something, according to the plans of the owner. It is of infinite importance to observe that every creatioh of capital is the creation of a demand. It is surprising that this material point is so fre- quently overlooked. It seems to be little less than self-evident, and, if admitted, it carries in itself an answer to every argument that has been, or that can be adduced in favour of the glut.
What is it that we mean, when we say the de-
* Observations on the Effects produced by the Expenditure of Government, during the Restriction of Cash Payments, by W. Blake, Esq. F.R.S. (p. 59) j a pamphlet in which Mr. Blake has very ably illustrated his own view of several important topics.
232 CHAP. IV— CONSUMPTION.
maud of a nation, speaking of the aggregate, and including a definite circle of production and con- sumption, such as that of a year? Do we, or can we, mean any thing but its power of purchasing ? And what is its power of purchasing ? Of course, the goods which come to market. What, on the other hand, is it we mean, when, speaking in like manner aggregately, and including the same circle, we say the supply of the nation? Do we, or can we mean any thing but the goods which come to market ? The conclusion is too obvious to need to be drawn.
What produces the confusion of ideas which so often occurs in the consideration of this subject is the glut which may and does take place of particular commodities. Does it follow from this, that there can be a glut of commodities in the aggregate, when it is necessarily true that there cannot be an aggre- gate supply without an equal aggregate demand, equal both in quantity and in value ?
To the argument which shows that to the same degree in which one or more commodities may be in such abundance as exceeds the demand, some other commodities must fall short of the demand, it has been replied, that the commodities which are supplied in superabundance fall in value, that this involves all the evil of the glut, and is therefore a reply to the whole of the argument which denies its existence.
SECT. Ill — EXTENT OF CONSUMPTION. 233
This is a reply in words only : attend to the ideas, and it is no reply at all. What is maintained in my argument is, that there can be no glut of commodi- ties in the aggregate, though there may be in parti- cular instances. The answer made to me is, that there may be a glut in particular instances.
In the very words of the pretended reply, the cer- tainty of the disputed fact is admitted. The value, it is said, of the goods which are in the state of su- perabundance, falls. If this is not a play upon the word, it implies the very thing which it is brought to dispute, that whenever one set of goods is supplied above the demand, another is supplied below the de- mand.
What is it that is necessarily meant, when we say that the supply and the demand are accommodated to one another ? It is this : that goods which have been produced by a certain quantity of labour, ex- change for goods which have been produced by an equal quantity of labour. Let this proposition be duly attended to, and all the rest is clear.
Thus, if a pair of shoes is produced with an equal quantity of labour as a hat, so long as a hat ex- changes for a pair of shoes, so long the supply and demand are accommodated to one another. If it should so happen that shoes fell in value as com- pared with hats, which is the same thing as hats
234 CHAP. IV — CONSUMPTION.
rlsitig in value compared with shoes, this would im- ply that more shoes had been brought to market, as compared with hats. Shoes would then be in more than the due abundance. Why ? Because in them the produce of a certain quantity of labour would not exchange for the produce of an equal quantity. But for the very same reason hats would be in less than the due abundance, because the produce of a certain quantity of labour in them would exchange for the produce of more than an equal quantity in shoes.
What is true of any one instance is true of any number of instances. It is therefore universally true, that as the aggregate demand and aggregate supply of a nation never can be unequal to one another, so there never can be a superabundant sup- ply in particular instances, and hence a, fall in ex- changeable value below the cost of production, with- out a corresponding deficiency of supply, and hence a rise in exchangeable value beyond cost of produc- tion in other instances. The doctrine of the glut, therefore, seems to be disproved by a chain of rea- soning perfectly indissoluble.
Let us recapitulate the points. A glut, as it is supposed in this doctrine, namely an excess of pro- duction in the aggregate, can take place only by a continued increase of production. Let us imagine that we have just come to the supposed point, when, the supply being full, any additional production will
SECT. Ili-^EXTENT OF CONSUMPTION. 235
be so much of glut. The additional production takes place, and comes to market. What is the conse- quence ? This new product seeks an equivalent. That is to say, it is a new demand. How then is it possi- ble to say that every new supply is a glut, when a tiew demand is created equal to it ? It is obviously ilugatory to say, that this new supply may not find purchasers, or the new demand may not find the commodities to which it is directed ; for this is only to say that in particular instances there may, from miscalculation, be superabundance or defect. The natural effects in such a case may be easily traced, and they afford decisive evidence. The commodities of which the additional production consists, may be naturally supposed to consist of some of the sorts which are previously in the market. By the suppo- sition made, the goods previously in the market were accommodated to one another, no species being either in defective or superabundant supply. The addition which is made to some sorts of these goods, by the new production, \vould render them superabundant, if there was not a new demand created. These goods would fall in exchangeable value as compared with others, others would rise in exchangeable value as compared with them. But there is a new demand created ; for the owner of the new produce, as he has come into the market to sell goods of some kinds, so he has come to buy goods of some other kinds. As the supply which he brought of certain kinds of goods tended to reduce their value, so the demand which
236 CHAP. IV — CONSUMPTION.
he brings for other kinds tends to increase their vahie. The result is, that now there are certain kinds of goods which it is less profitable than usual to produce ; others which it is more profitable than usual to produce : and this is an inequality which tends immediately to correct itself. This is the mode in which every addition is made to the productions of a country, and it is a mode which is evidently the same at every stage of the progress, from the greatest defect, to the greatest excess, of national riches. It commonly, of course, happens, that the man who brings into the market an addition of produce, endeavours to bring it in goods that are in defective supply, and to pur- chase goods that are in superabundant supply ; and the state of the market generally enables him to do so : so that an addition of produce brought into the market may just as often remedy a glut as be in any degree the cause of it. *
The doctrine of Mr. Malthus on the subject of the glut, seems, at last, to amount to this: that if saving were to go on at a certain rate, capital would increase faster than population ; and that if capital did so increase, wages would become very high, and profits would sustain a corresponding depression. But this, if it were all allowed, does not prove the existence of a glut; it only proves another thing, namely, that there would be high wages and low profits. Whether such an increase of capital, scarcely coming within the range even of a rational supposi-
SECT. Ill — EXTENT OF CONSUMPTION. 237
tion, would be a good thing or an evil thing, it would infallibly produce its own remedy, as the power of capital to increase is diminished with the diminu- tion of profits.
Mr. Malthus further says, that the high wages thus produced will generate idleness in the class of labourers. The prediction may be disputed; but, allowed to be correct, what is its import? If wages continuing the same, less work is done, this is higher pay for an equal quantity of labour ,* it is therefore the same thing as a rise of wages. It would merely accelerate that diminution of profits, which must in time retard and finally stop the increase of capital, in consequence of which wages would naturally fall. This, therefore, is not a different objection from the former ; it is precisely the same objection, only in a different form.
Mr Malthus thus totally failing to prove a glut, even from a continued increase of capital greater than the greatest increase of population, substitutes, for arguments to prove that effect, arguments to prove certain other effects.
He says, that were the annual produce thus to go on increasing, its value would be diminished. But this is merely a play upon the word. He says, I call the value of a commodity the number of days' wages it is equal to. If then wages are more than
238 CHAP. IV— CONSUMPTION.
doubled, though you double the amount of your com- modities, and have twice as much of every thing, yet you will have less value. An arbitrary change, how- ever, in the meaning of a word proves nothing. The facts, and their relations, remain the same, whatever Mr. Malthus or I may choose to call them. The facts still are merely these, that society would have the supposed amount of commodities, and all its bene- fits, and that wages would be very high.
Mr. Malthus further says, that this rapid increase of capital would tend to diminish production. That on which the increase of production depends, is the increase of its two instruments, capital and labourers. By the very supposition which Mr. Malthus himself has made, and on which he is reasoning, both of these instruments are increasing at their most rapid possible rate. It seems therefore a most extraordi- nary supposition, that production should not be in- creasing at its most rapid possible rate.
If it be true, as Mr. Malthus supposes, that the high w^ages supposed would diminish labour, it will be true that less work w^ill be done, and less produc- tion effected, than if every man worked more. Let us suppose that the diminution of labour goes on gra- dually, as wages increase, till at last each man does only half as much work as before, what then is the consequence ? Merely this, that if population is going on at its greatest possible rate, doubling itself in
SECT. Ill— EXTENT OF CONSUMPTION. 239
twenty years, there will not be a greater increase of production from labour, than there would be if it doubled itself only in forty years, and each man per- formed twice as much work. This would still be a more rapid rate than that at which capital increases, except in some very rare and extraordinary circum- stances. But if labour were so very dear, and capi- tal so abundant, as little as possible of production would be performed by man's labour, as much as possible by machinery and cattle. Ingenuity would be racked to find the means of superseding the most costly instrument. Machines would be multiplied and improved without end ; and a much greater pro- portion of the annual produce would be the result of capital, a much less the result of immediate labour. The diminution of production would not therefore be nearly in proportion to the diminution of each man's labour.
The supposed effects therefore are really of no im^ portance, otherwise it might still be questioned how far the inference is warranted, that high wages tend to diminish industry. Experience seems to be largely on the opposite side. Where wages are e^icessively low, as in Ireland, there is no industry; where ex- cessively high, as in the American United States, there is the greatest. What does Mr. Malthus him- self mean by the stimulus which he says is given to industry by an enlargement of the market ?
240 CHAP. IV— CONSUMPTION.
SECTION IF.
IN WHAT MANNER GOVERNMENT CONSUMES.
All consumption is either by individuals, or by the government. Having treated of the consumption of individuals, it only remains that we treat of that which has government for its cause.
Although the consumption by government, as far as really necessary, is of the highest importance, it is not, unless very indirectly, subservient to production. That which is consumed by government, instead of being consumed as capital, and replaced by a produce, is consumed, and produces nothing. This consump- tion is, indeed, the cause of that protection, under which all production has taken place ; but if other things were not consumed in a way different from that in which things are consumed by government, there would be no produce. These are reasons for placing the expenditure of government under the head of unproductive consumption.
The revenue of government must be derived from rent, from profits of stock, or from wages of labour.
. It is, indeed, possible for government to consume
SECT. IV— -CONSUMPTION BY GOVERNMENT. 241
part of the capital of the country. This, however, it can only do for one year, or for a few years. Each year in which it consumes any portion of the capital, it so far reduces the annual produce; and, if it continues, it must desolate the country. This, there- fore, cannot be regarded as a permanent source of revenue.
"If the revenue of government must always be derived from one or more of three sources, — rent, profits, wages, the only questions which require to be answered, are, in what manner, and in what proportion, should it be taken from each ?
The direct method is that which most obviously suggests itself. I shall, therefore, first, consider what seems to be most important in the direct mode of deriving a revenue to government from rent, profits, and wages; and, secondly, I shall consider the more remarkable of the expedients which have been employed for deriving it from them indirectly.
242 CHAP. IV — CONSUMPTION.
SECTION F.
TAXES ON RENT.
It is sufficiently obvious, that the share of the rent of land, which may be taken to defray the expenses of the government, does not affect the industry of the country. The cultivation of the land depends upon the capitalist ; who devotes himself to that occupation, when it affords him the ordinary profits of stock. To him it is a matter of perfect indifference whether he pays the surplus, in the shape of rent, to an individual proprietor, or, in that of revenue, to a government collector.
In Europe, at one period, the greater part of at least the ordinary expenses of the sovereign were defrayed by land which he held as a proprietor ; while the expense of his military o|)erations was chiefly defrayed by his barons, to whom a property in certain portions of the land had been granted on that ex- press condition. In those times, the whole expense of the government, with some trifling exception, was, therefore, defrayed from the rent of land.
In the principal monarchies of Asia, almost the whole expenses of the state have in all ages been
SECT. V — TAXES ON RENT. 243
defrayed from the rent of land ; but in a manner somewhat different. The land was held by the immediate cultivators, generally in small portions, with a perpetual and transferrable title ; but under an obligation of paying, annually, the government demand ; which might be increased at the pleasure of the sovereign ; and seldom amounted to less than a full rent.
If a body of people were to migrate into a new country, and land had not yet become private pro- perty, there would be this reason for considering the rent of land as a source peculiarly adapted to supply the exigencies of the government ; that industry would not by that means sustain the smallest de- pression ; and that the expense of the government would be defrayed without imposing any burden upon any individual. The owners of capital would enjoy its profits ; the class of labourers would enjoy their wages ; without any deduction whatsoever ; and every man would employ his capital, in the way which was really most advantageous, without re- ceiving any inducement, by the mischievous opera- tion of a tax, to remove it from a channel in which it was more, to one in which it would be less productive to the nation. There is, therefore, a peculiar advantage in reserving the rent of land as a fund for supplying the exigencies of the state.
■HI There would be this inconvenience, indeed, even
R 2
244 CHAP. IV^CONSUMPTION.
in a state of things in which land had not been made private property ; that the rent of the land in a coun- try of a certain extent, and peopled up to a certain degree, would exceed the amount of what govern- ment would need to expend. The surplus ought undoubtedly to be distributed among the people, in the way likely to contribute the most to their hap- piness ; and there is no way, perhaps, in which this end can be so well accomphshed, as by rendering the land private property. As there is no difficulty, however, in rendering the land private property, with the rent liable for a part of the public burdens ; so there seems no difficulty in rendering it private pro- perty, with the rent answerable for the whole of the public burdens. It would only in this case require a greater quantity of land to be a property of equal value. Practice would teach its value as accurately, under these, as under present circumstances ; and the business of^ociety would, it is evident, proceed without alteration in every other respect.
Where land has, however, been converted into private property, without making rent in a peculiar manner answerable for the public expenses; where it has been bought and sold upon such terms, and the expectations of individuals have been adjusted to that order of things, rent of land could not be taken to supply exclusively the wants of the government, without injustice. It would be partial and unequal taxation ; laying the burden of the state upon one
SECT. V— TAXES ON UENT. 245
set of individuals, and exempting the rest. It is a measure, therefore, never to be thought of by any government whidi would regulate its proceedings by the principles of justice.
That i-eht which is bought and sold, hdWevfef; that rent upon which the expectations of individuals are founded, and which, therefore, ought to be ex- empt from any peculiar tax, is the present rent ; or at least the present, with the reasonable prospect of improvement. Beyond this, no man's specu lations, either in making a purchase, or in making provision for a family, are entitled to extend. Sup- pose, now, that, in these circumstances, it were in the power of the legislature, by an act of its own, all other things remaining the same, to double that por- tion of the produce of the land which is strictly and properly rent : there would be no reason, in point of justice, why the legislature should not, and great reason, in point of expediency, why it should, avail itself of this, its own power, in behalf of the state ; should devote as much as might be requisite of this new fund to defray the expenses of the government, and exempt the subjects fi^om any burden on that account. No injury would be done to the original land- owner. His rent, such as he had enjoyed it, and to a great degree such even as he had expected to enjoy it, would remain the same. A great ad- . vantage would at the same time accrue to every indi- vidual in the community, by exemption from those
246 CHAP. IV — CONSUMPTION.
contributions for the expense of the government to which he would otherwise have had to submit.
The legislature may, without any straining of lan- guage, be said to possess that power, which I have now spoken of only as a fiction. By all those mea- sures which increase the amount of population and the demand for food, the legislature does as certainly increase the net produce of the land, as if it had the power of doing so by a miraculous act. That it does so by a gradual progress in the real, would do so by an immediate operation in the imaginary case, makes no difference with regard to the result. The original rent, which belonged to the owner, upon which he regulated his purchase if he did purchase, and on which alone, if he had a family to provide for, his arrangements in their favour were to be framed, is easily distinguishable from any addition capable of being made to the net produce of the land, whether it be made by a slow or a sudden process. If an addition made by the sudden process might, without injustice to the owner, be appropriated to the pur- poses of the state, no reason can be assigned why an addition by the slow process might not be so appro- priated.
It is certain, that as population increases, and as capital is applied with less and less productive power to the land, a greater and a greater share of the whole, of the net produce of the country accrues as rent, while
' SECT. V — TAXES ON RENT. 247
the profits of stock proportionally decrease. This continual increase, arising from the circumstances of the community, and from nothing in which the landholders themselves have any peculiar share, does seem a fund no less peculiarly fitted for appropriation to the purposes of the state, than the whole of the rent in a country where land had never been appropriated. While the original rent of the landholder, that upon which alone all his arrangements, with respect both to himself and his family, must be framed, is secured from any pecu- liar burden, he can have no reason to complain, should a new source of income, which cost him nothing, be appropriated to the service of the state ; and if so, it evidently makes no differ- ence to the merits of the case, whether this new source is found upon the land, or found any where else.
I do not perceive any incongruity in the ideas by which I have arrived at this conclusion, either with one another, or with any acknowledged principle of legislation ; though I allow difficulties in practice, which would in many cases render such taxation in- expedient. These indeed would all resolve them- selves into the difficulty of distinguishing correctly between the quantum of benefit from the land, which ought to be considered as conferred upon the owner by the previous legislation, and which it would be unjust to take from him ; and what might be regarded as
1248 CHAP. JV— CONSUMPTION.
something over and above that benefit, and which, therefore, might, without any injustice to him, be re- served for the service of the state.
If we assume with Mr. M*Culloch,* that the whole of what the land can ever yield, is conferred, in the case supposed, on the owner of the land, by the previous legislation, there is an end of the question ; for it is impossible for any one to express a more de- cided opinion, than I entertain, against partial taxa- tion, against imposing burthens upon the property of any one class, more than upon the property of an- other class. The real question is, whether any thing, beyond a certain amount of annual benefit, namely, what is at present derived, with such increase as can be rationally anticipated within the number of years' purchase for which the land would sell, can, in a really equitable, excluding a merely technical, mode of considering the subject, be regarded as the pro- perty of the land-owner. The considerations which I have adduced seem to me to establish, that no point of utility would be violated by such a restriction df the meaning of the term as I have proposed.
I utterly disallow the parallelism of the case of ca- pital, which Mr. IM'CulIoch has adduced ; as if be-
♦ See a very masterly article on Taxation in the Supplement to the Encyc. Britan. p. 617.
SECT. V— TAXES ON I16nT. 249
cause increased profits of stock ought not to be ex- clusively taxed, therefore the rent, which accrues in the manner above supposed, could not be justly ap- propriated to the service of the state. Nobody is more aware of the fundamental differences between profits of stock and rent of land than Mr. ISV CuU loch; it is, therefore, the more surprising that he should have founded an argument on an agreement between them which does not exist.
Only a few lines before, in the same passage, he recognizes such a distinction between rent and profits, as in my opinion is fatal to his argument. " The circumstance," he says, " of rent unavoidably rising in the progress of society, inclines us to think that it would be good policy for the governments of coun- tries, such as the United States, which are possessed of large tracts of fertile and unappropriated land, to retain the property of this land in their own hands :*' that is, in other words, to reserve the rent for the service of the state. The case of profits is not only different, but the reverse. Instead of rising in the progress of society, they decrease. Land exists by the gift of nature ; capital is the product of human industry. Land is originally not the pro- perty of any man ; capital always is. The profits of stock must be secured to the owner to afford a mo- tive for its preservation and augmentation. For the preservation of the land, or the augmentation of its
N
250 CHAP. IV — CONSUMPTION.
produce, it is not of the least importance to whom the rent is consigned. Profits are in reality the fund out of which rent is always taken, and every increase of rent, in the progress of society, is a deduction from profits.
SECT. VI— TAXES ON PROFITS. 251
SECTION Vl.
A TAX ON PROFITS.
A DIRECT tax on profits of stock offers no question of any difficulty. It would fall entirely upon the owners of capital, and could not be shifted upon any other portion of the community.
As all capitalists would be affected equally, there would be no motive to the man engaged in any one species of production, to remove his capital to any other. If he paid a certain portion of his profits, derived from the business in which he was already engaged, he would pay an equal portion derived from any other business to which he could resort. There would not, therefore, in consequence of such a tax, be any shifting of capital from one species of employ- ment to another. The same quantity of every species of goods would be produced, if there was the same demand for them. That there would, on the whole, be the same aggregate of demand, is also immediately apparent. The same capital is supposed to be employed in the business of production ; and if part of what accrued to the capitaHst was taken from him, lessening to that extent his means of
25^ CtiAP. IV — CONSUMPTION.
purchasing, it would be transferred to the govern- ment, whose power of purchasing would be thence to the same degree increased.
There would, therefore, be the same demand, and the same supply : there would also be the same quantity of money, and the same rapidity of circula- tion ; and therefore the value of money would re- main the same as before.
SECT, VH — TAXES QN WAGES. 253
SECTION FIL
A TAX ON WAGES.
If wages are already at the lowest point to which they can be reduced; that is, just sufficient to keep up the number of labourers, and no more ; the state of wages which seems to have been contemplated, by Mr. Ricardo, throughout his disquisitions on political economy, and which the tendency of population to in- crease faster than capital, undoubtedly leads us to re-^ gard as the natural state ; no tax can fall upon the labourer ; and if any tax is imposed upon wages, it is easy to trace in what way it must produce a corre- sponding rise of wages. If wages are as low as is consistent with the preservation of the number of labourers, take any thing away from those wages, and the number of labourers must be reduced. The reduction of the number of labourers must be fol- lowed by a rise of wages, and this process must con- tinue till wages rise sufficiently high to be consis- tent with the preservation of the number of la- bourers ; in other words, just as high as they were before the tax was imposed.
If wages are not at this lowest rate ; if they are
2,S¥^ '*HAP. IV — CONSUMPTION.
sufficiently high to afford the labourers something more than what is necessary to keep up their num- bers, a surplus which may be retrenched without a diminution of their numbers, they may, to this ex- tent, be made subject to taxation.
Wages, like the price of any other commodity, rise or fall, in proportion as the demand for labour rises or falls compared with the supply.
In the case of wages so low as barely to keep up the number of labourers, wages must rise to the amount of any tax imposed upon them, because there is a continued diminution of the supply of la- bourers till this rise is effected.
In the case of wages above this level, there is no necessary reduction of the number of labourers in consequence of a tax imposed upon wages. There is no alteration, therefore, in the state of supply. From this it follows, that if there is not an increase of demand for labourers, in consequence of such a tax, there can be no rise of wages ; and if there be no rise of wages, the tax must fall upon the labourers. The solution, therefore, of the question, whether a tax upon wages falls upon the labourer, depends upon the inquiry, whether there is, or is not, such increase of demand.
An increase of demand for labour can arise from
SECT. VIt~TAXES ON WAGES. 255
two causes only ; either from an increase of capital, the fund destined for the employment of labour ; or a difference in the proportions between the demand for the produce of fixed capital and that of immediate labour.
The first of these causes needs no illustration. The operation of the second we proceed to trace. As the demand of a nation consists of a great number of demands of a great number of individuals, the case of one individual will exemplify the whole.
Suppose a man with a certain income ; to deter- mine our ideas, let us call it 1000/. per annum ; this is his demand. Let us suppose it divided into two portions, the one of which constitutes his demand for the produce of fixed capital ; the other his de- mand for that of immediate labour : and let us sup- pose that these proportions are different at two differ- ent times. We have to examine what are the con- sequences.
Let us suppose that, first, he spends 500/. of this income on the produce of fixed capital ; 500/. on that of immediate labour.
In the first case he purchases commodities only; in the second case he purchases either commodities or services, but gives the same employment to labour whether he purchases the one or the other. If a
256 CHAP. IV — CONSUMPTION.
man makes a basket in a day, for which you pay him a shilling, or weeds in your garden a day at a shil- ling's wages; in both cases the demand you furnish for labour is precisely the same. The 500/. expended in the produce of immediate labour, is a demand for that number of labourers^ whose wages for a year amount to 500/. ; say for 1000 labourers.
I If the commodities, made with fixed capital, on which he spends the other 500/., are made purely with fixed capital ; an imaginary case, but which we may suppose, for the sake of illustration ; this portion of his income presents no demand for labour at all. The price of the commodities which are thus pur- chased is wholly made up of profits. It is the result of labour formerly expended, and with the portion of labour now in the market it has nothing to do.
Suppose that of this 500/. one half is turned, by a change in the taste of the owner, from the purchase of commodities, the produce of fixed capital, to the purchase of the produce of immediate labour. Two things happen : a demand is created for 250/. worth of mere labour : a demand is annihilated for 250/. worth of the produce of fixed capital ; that is to say, as much of the capital of the country as yielded 250/. of profits, becomes useless. This is entirely distinct from a fall in the rate of profits. Such a fall may or may not accompany such a change in the two species of demand. This is a loss of capital. Capi-
SECT. VII — TAXfeS ON WAGES. 257
tal, to this extent, ceasing to be employed, ceasing to be needed, is, to any useful purpose, destroyed. Along with it there is destroyed a productive power to the extent of 250/. per annum. This is not compensated by any new production ; for by the supposition the number of labourers is not increased. Every labourer that is employed, under the new application of this 250/. of the supposed income, would have been em- ployed if the new application had not taken place, if the capital had not been destroyed.
Under the new distribution of the 1000/. income, as much is awarded to the class of labourers as is taken from the class of capitalists. 250/. were for- merly awarded as profits, which are now awarded as wages. So far, there is no absolute loss, as much being gained by one, as lost by another. The loss arises from this, that, while no new labour is brought into employment, and no addition is made to the productive powers of labour, nor of course to its produce, a portion of capital is thrown out of employment, its productive powers are lost, and the annual produce of the country is diminished.
This case is reversed when machinery is invented which performs the work of immediate labour. Let us make the same supposition of the extreme cases as before : that the machine invented performs the functions of labour without the aid of labour, that the produce is purely the result of capital. Let us sup-
258 CHAP, IV — CONSUMPTION.
pose a capital of £10,000; wholly, in the first in- stance, employed in the payment of wages. Let us suppose that this £10,000 is afterwards expended in making a machine which produces the same commo- dity, and the same quantity of it. In this case the whole of the labourers who received the £10,000 of wages, are deprived of their old employment. The consequence is, not that they are thrown out of em- ployment, but that they increase the supply of labour in the market and reduce wages. The labourers, in this case, do not necessarily cease to produce ; they produce just as much as before. The whole of the produce of the machine, therefore, is a new produc- tion, an addition to the former amount of the annual produce.
Compare now the two cases; the case where the demand for the produce of fixed capital is diminished, and that for immediate labour is increased ; and the case where the demand for the produce of fixed ca- pital is increased, and that for immediate labour is diminished. In the first there is a rise of wages, and a diminution of profits, and so far there is compen-* sation : but there is besides this a defalcation of pro- duction to the extent of the productive powers of all the capital superseded ; and this is a dead loss. In the second case, there is a fall of wages, and a rise of profits, so far again there is compensation : but in this case there is an increase of production to the ex- tent of the productive powers of the whole of the fixed capital created.
SECT, VII— TAXES ON WAGES. 259
Having thus illustrated the only case in which an increase of demand for labour can take place, without an increase in the amount of capital, which in the case before us is not supposed, we are prepared to see where an increase of demand for labour, in conse- quence of a tax upon wages, can, and where it cannot, . exempt the labourer from the tm*
The effect of a tax upon wages, elevated as in the case under supposition, is, to transfer a certain power of commanding the produce of labour and capital from the class of labourers to the government. With the amount of the tax, before it was taken from the labourers, they presented a demand for so much of the operations of fixed capital, so much of those of immediate labour. Where the same amount is trans- ferred to the government, the government presents in like manner a demand for so much of the opera- tions of fixed capital, so much of those of immediate labour. If the proportions of the demand for thei produce of fixed capital and immediate labour were the same in both cases, there would be no alteration in the demand for labour, in consequence of the tax, and the whole of it would fall upon the labourers. If the government presented a greater demand for the produce of immediate labour, less for that of fixed ca-- pital, than was presented by the labourers, there would so far be an increase of demand for labour, and a rise of wages, which would so far be a compensation to the labourer for the tax, at the expense, however, of pro-
s 2
260 CHAP. IV — CONSUMPTION.
fits, and with an uncompensated loss to the value of all the produce which the superseded capital would have yielded.
Properly speaking, however, this rise of wages is not an effect of the tax upon wages. It is the effect of a very different cause ; of a supposed peculiarity in the nature of the government expenditure. When we are talking, therefore, of the effect of a tax upon wages, in increasing or diminishing the demand for labour, this extraneous circumstance, which may or may not be concomitant, ought to be left out of the account. The only essential effect of a tax upon wages is to take so much from the labourer, just as a tax upon profits takes so much from the capitalist, a tax upon rent takes so much from the landlord.
It is further essential to this question to observe, that the effect of the government expenditure in raising wages, by furnishing a greater demand for immediate labour, less for the produce of fixed capital, would take place equally if the tax were levied upon profits, or upon rent. If this is the effect of the ex- penditure of government, upon whatever source of income the tax is levied, to lay the tax upon wages is only to prevent the labourer from reaping the be- nefit of that rise of wages, the full benefit of which he would otherwise enjoy. In this sense, therefore, also, and, when this is included, all are included, it is evident that the tax really falls upon the labourer.
SECT. VII — TAXES ON WAGES. 261
The argument may be shortly stated thus. Before the tax was imposed there was a certain demand for labour. This arose, in part, from the funds of the landlord, in part from those of the capitalist, and in part from those of the labourer. After the tax the two former remain the same. But the demand arising from the funds of the labourer is diminished. If this loss of demand were not compensated, the la- bourer would sustain two evils in consequence of the tax. He would pay the tax ; and his wages would fall The second of these evils he does not sustain, because the diminution of demand on the part of the labourers is compensated. The increase of demand on the part of government is exactly equal to the diminution of the demand on the part of the la- bourers. This prevents wages from falling, but it does no more. It yields nothing in compensation for the tax.
^6^ CHAP. IV— CONSUMPTION.
SECTION VIIL-
DIRECT TAXES WHICH ARE DESTINED TO FALL EQUALLY UPON ALL SOURCES OF INCOME.
Assessed taxes, poll taxes, and income taxes are of this description. After what has been said, it is not difficult to see upon whom, in each instance, the burden of them falls.
In as far as they are paid by the man whose in- come is derived from rent, or the man whose income is derived from profits of stock, the burden of them is borne by these classes. No additional demand arises from the tax ; and, therefore, neither can landlords raise their rents, nor capitalists the price of their com- modities.
In respect to the labourer, the result is different in different cases. If his wages are already at their lowest rate, no portion of such tax can fall upon him. His wages will rise, and throw his share upon the capitalist. If the wages of the labourer are sufficiently high, he will sustain his share of the burthen.
TAXES ON ALL SOURCES OF INCOME. 263
The effect of these taxes upon prices may be easily ascertained. A tax upon rent would produce no alteration in the price of any thing. Rent is the effect of price ; and the effect cannot operate upon the cause. A tax upon profits would alter prices, only as a tax upon wages alters them.
Of the tax upon wages, there are two cases ; that in which it raises wages, and that in which it does not raise them. In the case in which it does not raise them, it will hardly be supposed that any al- teration of prices should ensue. The capital of the country is not supposed to undergo any alteration^ nor, of course, the quantity of produce. With re- spect to the demand, a portion of the power of pur- chasing which belonged to the labourers, is taken from them : but the whole of what is taken from them is transferred to the government. Government may send abroad the amount of the tax. If we sup- pose, however, that it sends it abroad in goods, it is evident, that no diminution of prices will ensue. And if it sends it abroad in bullion, the case in the long run, is the same; for as the vacuity which is thus made in the bullion market, is to be supplied^ goods must go abroad to purchase it. The expor- tation of the bullion, if it diminishes the quantity of money, will produce a temporary depression of price. But the same effect would follow from the same cause on any other occasion.
In the case in which wages do rise, it may also be
264 CHAP. IV — CONSUMPTION..
seen, that the capital and produce of the country remain the same, the amount of demand and supply the same, and the value of money the same. The aggregate of prices, therefore, one thing being com- pensated by another, is the same. That change, indeed, which takes place in the relative value of certain kinds of commodities, as often as wages rise and profits fall, is necessarily produced on this occa- sion. Those commodities, the produce of which is chiefly owing to fixed capital, and where little pay- ment of wages is required, fall in price, as compared with those in the produce of which immediate labour is the principal instrument, and where little or no- thing of fixed capital is required. The compensation, however, is complete; for as much as the one of these two sets of commodities falls in price, the other rises : and the price of both taken aggregately, or the medium of the two, remains the same as before.
The several species of property, which, in the ordi- nary and coarse application of language, pass under the name of income, are exceedingly different. This gives occasion to a question, whether it is equitable to levy the same rate of tax upon all incomes. The question, however, in what proportion taxes ought to fall, is rather a question of general policy, than of poli- tical economy ; which in regard to taxes confines itself to two questions : first, on which of the three origi- nal shares of the annual produce, rent, wages, or profits, a tax falls : and next, whether it operates un-
TAXES OlSr ALL SOURCES OF INCOME. 265
favourably on production. As this question, however, is generally introduced into books on political eco- nomy, it is proper here to point out the way to its solution.
The grand distinction of incomes, as regards this question, seems to be, the value of them. All pro- perty may, with trifling exceptions, be regarded as income. But the value of incomes depends upon two circumstances ; first, upon what is called their amount, as 100/. per annum, or 1,000/. per annum ; secondly their permanence and certainty. Thus the value of a man's property is ten times as great, if he has 1,000/. a year, as if he has 100 ; but that only if the permanence and security are equal : for if 100/. a year is secure for ever, while 1000/. a year is only to endure for a few years, the 100/. a year will be the more valuable property of the two. That pro- perty is to be estimated according to one of the elements of its value, and not according to all of them, on the occasion of imposing a tax, is a proposi- tion which ought not to be admitted except on very substantial grounds.
Why is a tax to be proportional to the amount ? Why is 1000/. a year to be taxed ten times as much as 100/. a year? Because the man who has it can afford it ; such is the presumption. This is a sort of aim at proportioning the tax to the property ; but, leaving out an essential element, it is an exceedingly
266 CHAP. IV— CONSUMPTION.
erroneous aim. If the aim itself be recommended by reason, it must be equally recommended that it should be correct. To make it so, both elements of value should be included. Let us suppose, that one man's income is 100/. the rent of land; that another man's income is 500/. the salary of his office, depending not only upon his life and health, but in some degree upon the pleasure of his employers. The first will be worth 30 years' purchase ; the last, in certain circumstances, not worth moi^ than six. The real value of the property of these two men will, in these circumstances, be the same; and upon the principle of equal burthens upon equal property, the tax upon these ought to be the same.
It is true that if the tax, proportional to the amount, is paid for 30 years upon the 100/. and six years upon the 500/. the amount of tax will be the same. But this, as a principle of taxation, is liable to this objection, that it excludes from consideration that to which all consideration should tend, individuals and their feelings.
There. is another point of view in which we must consider the question. The period of enjoyment of the man whose income is 100/. in rent, may be as short as that of the man whose income is 500/. in salary ; the life of the first may not be worth a greater number of years' purchase than the salary of the second.
TAXES ON ALL SOURCES OF INCOME. 267
In this way, undoubtedly, all incomes may be re- garded as measured by the life of the individual.
It may also be affirmed, that in like manner as the income of the man who draws rent passes to his de- scendants ; so the income of the man who draws salary passes to his successors. Strictly speaking, the two species of income are both equally perma- nent : the rent flows in a permanent stream, through one generation after another, and so does the salary. It would follow, therefore, that if rent were taxed at one rate, salaries at another, there would be two perennial streams of income, taxed in different de- grees, the one more, the other less heavily*
This is true, and the only reason for such differ- ence is, the difference of those who succeed to the incomes. In the case of income derived from land or from capital, the income passes to a man's children, to the persons most dear to him: in the case of salaries, it passes to those with whom the man has no connex- ion. Whether this reason is sufficient, requires to be considered. There can be no doubt that in regard to feelings, in regard to the happiness of the individuals,^ it makes a great difference, whether their incomes are to pass to their children at their deaths, or to their successors, in their offices, or their professions. On this score it would seem to be required by the principle of all good legislation, that a corresponding difference should be observed in the imposition of taxes.
268 CHAP. IV — CONSUMPTION.
This, however, would be a step, it is said, towards the equalizing of fortunes. It would lessen the in- comes of the descendants of the owners of permanent incomes, in order to increase those of the descendants of persons with life incomes. This is liable to the same objections as raising the scale of taxation in proportion to the scale of income ; taxing commo- dities, for example, higher to the man of 1000/. than the man of 100/. a year. It would lesgen the motive to make savings, by lessening the value of great ac- cumulations. It is to be inquired whether this alle- gation is well founded.
A tax operating fairly, ought to leave the relative condition of the different classes of contributors the same after the tax as before it. In regard to the sums required for the service of the state, this is the true principle of distribution.
The difficulty lies in determining, in the case of incomes of different permanency, what does leave the relative condition the same.
% It is quite clear that the prospect for a man's chil- dren is one part of that condition. If a tax so ope- rates upon two classes, as to reduce the condition of the children of the one class lower, as compared with the condition of the children of the other class, than it would otherwise be, it does not leave the relative condition of these two classes the same.
TAXES ON ALL SOURCES OF INCOME. 269
Suppose two men, each of 1000/. a year, the one rent, the other salary ; the latter worth 15 years' purchase. Suppose that to make a provision for his children, the man with the salary saves one-half; the man with the rent spends all. With respect to expenditure, the man with the salary stands to the other in the relative condition of a man of half the income.
Next let us examine how it is with the children. The annual sum of 500/. saved for 15 years, at com- pound interest, would amount, say, to 10,000/. This at 5 per cent, interest, would afford a perpetual in- come to the children of the man with the salary, of 500/. a year. The children of the man with the rent would have 1000/. In this way, as the father's con- dition was that of a man with half the income, so is that of the children.
It is perfectly plain, therefore, that if the one is taxed at more than one half the rate of the other, he is taxed too high. The salary we supposed to be worth 15 years' purchase : the rent is worth 30 : one half is here also the proportion. It therefore points out the rule. If one income is worth half as many years' purchase as another, it ought to be half as much taxed ; if it is worth one-third of as many years' purchase, it ought to be taxed one-third, and so on.
It may be said, that if the class who live upon
270 CHAP. IV— CONSUMPTION.
salaries are loaded with more than their due share of their burthen, the balance will adjust itself; because, the situation having been rendered less desirable, fewer people will go into it, and the salaries will rise. This does not remove the objection. For, first of all, why should legislation disturb the natural proportion, in order that the force of things may restore it? In the next place, the restoration of the equiHbrium in this case is a slow operation. It requires a genera- tion to pass away before the diminution of the num- bers of those who live upon salaries can raise their condition. A whole generation is therefore sacrificed.
yhi
SECT. IX~TAXES ON COMMODITIES. S71
SECTION IX.
TAXES ON commodities; either some parti- cular commodities; or all commodities
EQUALLY, ^,5,-j
Taxes on commodities may either affect soit^q particular kinds, or all commodities equally.
When a tax is laid on any particular commodity, not on others, the commodity rises in price, or eX' changeable value ; and the dealer or producer is re- imbursed for what he has advanced on account of the tax. If he were not re-imbursed, he would not remain upon a level with others, and would discontinue his trade. As the tax is, in this case, added to the price of the goods, it falls wholly upon the consumers.
When a tax, in proportion to their value, is laid upon all commodities, there is this difference, that no one commodity rises in exchangeable value, as compared with another. If one yard of broad cloth was equal in value to four yards of linen, and if a duty of ten per cent, on the value were laid upon each, a yard of cloth would still be equal to four yards of linen.
272 CHAP. IV — CONSUMPTION.
An ad valorem duty upon all commodities would have the effect of raising prices.
The members of the community would come to market, each with the same quantity of money as before. One-tenth of it, however, as it came into the hands of the producers, would be transferred to the government. But it would again be immediately laid out in purchases, either by the government itself, or by those to whom the government might dispose of it. This portion, therefore, would come into the hands of the producers oftener by once, after the tax was imposed, than befoie. Before the tax was im- posed, it came once into the hands of the producers, from those of the purchasers, of goods, and there it remained. After the tax was imposed, it would come into the hands of the producers in the same manner : but it would not remain ; it would go from them to the government, and from the government come back into the hands of the producers a second time.
The producers in this manner, would receive for their goods, not only the whole ten-tenths of the money of the country, as before; but they would receive one-tenth twice, where they received it only once before. This is the same thing exactly as if they had received eleven- tenths, or as if the money of the country had been increased one-tenth. The purchasing power of the money, therefore, is dimi- nished one-tenth ; in other words, the price of com- modities has risen one-tenth.
SECT. IX — TAXES ON COMMODITIES. 2?^
Upon whom the tax would, in that case, fall, is abundantly obvious. The purchasers would come with the same quantity of money as before. The pur- chasing power of that money, however, would be reduced one-tenth, and they would be able to com- mand one-tenth less of commodities than before. The tax would^ of com^se, fall upon purchasers. ;
As this argument has not produced, in some minds whose decisions I highly respect, the same conviction which it has in my own, I will endeavour to render it still more perspicuous, by recurrence to one of the simplest possible cases. f
Let us suppose a community of 10 persons, with only two species of commodities, bread, and meat. Let us suppose that 5 of these persons hav^e 5 loaves to dispose of, and that the other 5 have 5 pounds of meat, the value of a loaf the same as that of a pound of meat. Let us suppose that the exchange takes place, as in a more complicated state of things, by the intervention of money; and, as the simplest possible case, let us suppose that the whole of the goods is exchanged against the whole of the money; in other words, that one exchange of the whole of the goods is performed by one operation of the money. If each loaf is worth 10 pence, and each pound of meat the same, it is necessary, under this supposition, that the 5 persons having the 5 loaves of bread should . > T
274f CHAP. IV — CONSUMPTION.
have 50 pence, and the persons having the 5 pounds of meat should have 50 pence.
It is obvious that the persons having the 5 loaves going to market with 50 pence to buy the 5 pounds of meat, will pay for it at the rate of 10 pence per pound, and that the persons with the meat, going to market for the bread, will pay for it at the rate of 10 pence the loaf. If we suppose that the production of the loaves and the meat is perpetually renewed, it is evident that the same exchanges, at the same money price, may take place for ever. All this I think is abundantly clear.
H; Let us then suppose that government taxes these commodities 10 per cent and observe attentively what happens. When the first loaf of bread is sold for 10 pence, one penny out of the 10 pence received is paid by the seller to the government, and when one pound of meat is sold, one penny out of the 10 pence received is in like manner paid to the government. By the time that one exchange of all the com- modities is effected, one-tenth of the money has been paid to government. With the money, government, as fast as it received it, has come into the market to purchase the same goods. The former purchasers came with all the former quantity, namely with 1 00 pence, government came with a tenth more. For the same quantity of goods, therefore, for which 100 pence were paid before, 110 pence have been paid
SECT. IX— TAXES ON COMMODITIES. 275
now ; it is therefore proved that the price of goods is raised at the rate of the tax. The reason is, that one portion of the money which only performed one operation, in effecting one exchange of the goods, now performs two operations.
The case would be precisely the same, if we sup- posed the rapidity of circulation to be much greater, and that each piece of money had to perform 10 operations in order to effect one exchange of the whole of the commodities. It is necessary to observe that this is the only correct meaning of the term rapidity of circulation. This is the only meaning in which rapidity of circulation has any effect upon the value of the money. This is strictly, therefore, the sense in which the term is here employed. If we suppose that in order to perform one exchange of the whole of the commodities, the money has to be ex- changed 10 times, it is obvious, as before explained, that it exchanges each time for precisely one-tenth of the goods. Let us conceive that the bread and the meat supposed in the former case are 10 times as great, the loaves 50, and the pounds of meat 50, the money remaining the same, but performing 10 ope- rations to effect one exchange of the whole. It is very obvious that the effect which we have just ex- plained, as taking place, in consequence of the tax, upon the whole of the goods, when the whole was exchanged by one operation of the money, will now take place upon the one-tenth of the goods which is
T 2
276 CHAP. IV — CONSUMPTION.
exchanged by one operation of the money ; it will be raised one-tenth in money value ; each tenth will be so raised; and therefore by necessary consequence the whole.
SECT, X — tAXES ON RAW PllODUCE. 277
SECTION X.
A TAX UPON THE PRODUCE OF THE LAND.
A TAX upon the produce of land — a tax upon corn, for example, would raise the price of corn, as of any other commodity. It would fall, by consequence, neither upon the farmer, nor upon the landlord, but upon the consumer. The farmer is situated as any other capitalist, or producer ; and we have seen sufficiently in what manner the tax upon commodi- ties is transferred from him that produces to him that consumes.
The landlord is equally exempted. We have already seen that there is a portion of the capital employed upon the land, the return to which is sufficient to yield the ordinary profits of stock, and no more. The price of produce must be sufficient to yield this profit, otherwise the capital would be with- drawn. If a tax is imposed upon produce, and levied upon the cultivator, it follows that the price of produce must rise sufficiently to refund the tax. If the tax is 10 per cent, or any other rate, upon the selling price, corn must rise in value one-tenth, or any other proportion.
278 CHAP. IV—CONSUMPTION.
In that case it is easy to see, that no part of the tax falls upon the landlord. It is the same as if one- tenth of the produce were paid in kind. In that case, it is evident, that one tenth less of the produce would come to the landlord; but as it would rise one-tenth in value, his compensation would be com- plete. His rent, though not the same in point of produce, would be the same in point of value.
If, instead of a money-tax, varying according to price, it were a fixed money-tax upon the bushel, or the quarter, the money-rent of the landlord would still be the same. Suppose the land or capital, which, as explained above, yields no rent, to produce in all two quarters, that which does yield rent to produce six quarters ; four quarters, in that case, are the share of the landlord. Suppose the tax per quarter to be 1/.; corn must rise 1/. per quarter. The farmer, before the imposition of the tax, paid the landlord the price of four quarters ; after it, he pays him the price of four quarters, deducting 1/. per quarter for what he had paid as tax. But corn has risen 1/. per quarter. He, therefore, pays him the same sum as before.
SECT. XI— TAX UPON PROFITS OF FARMER. 279
SECTION XL
A TAX UPON THE PROFITS OF THE FARMER, AND UPON AGRICULTURAL INSTRUMENTS.
If a tax were imposed upon the profits of the farmer, without being imposed upon the profits of any other class of producers, the following would be its effects.
It would in the first place raise the price of raw produce ; because that price is determined by the pro- duce of the capital which pays no rent, and which, if it sustains a tax, must rise like any other taxed com- modity to indemnify the producer.
In consequence of this rise of price, it would in- crease the rent of the landlords. Suppose that ca- pital is employed on the land in this case under three degrees of productiveness : the most productive por- tion yielding 10 quarters, the second 8, and the last 6. A landlord who had land cultivated under these circumstances, would receive 6 quarters of corn as rent, 4 produced by the first portion, and 2 by the second. Suppose a tax imposed such as to raise
8j^ / CHAP. IV — CONSUMPTION.
the price of corn 5 per cent. : it leaves the 6 quarters of corn accruing to the landlord, the same as before ; but the value of these 6 quarters is 5 per cent, higher; the landlord's rent, therefore, is increased 5 per cent.
The .difference between this case, and those treated of in the preceding section, is, that the landlord's portion of the produce is not taxed, when the profits of the farmer are taxed.
A tax upon the instruments of agriculture, is the same thing in effect, as a tax upon the profits of the farmer. It raises the value of produce, without affecting the quantity which goes as rent to the landlord. Thus, if a tax is laid upon agricultural horses, it increases the expense of production to the farmen just as a tax upon coals would increase the cost of production to the iron-founder. For this cost the farmer can only be indemnified by a rise in the price of the produce. The quantities, however, of the corn, the 10, the 8, the 6 quarters, yielded to the different portions of his capital, are not affected. Six quarters of corn are the rent of the landlord the same as before. Not only, therefore, does the whole of the tax fall upon the consumer, but another sum, which is paid to the landlord. The community is taxed, in part for the use of the government, in part for the benefit of the landlords.
SECT. XII— TITHES AND POOR RATES. 281
SECTION XIL
TITHES AND POOR RATES.
Tithes are a tax upon the produce of the land ; a tenth of the produce, perfectly or imperfectly collected.
The operation, therefore, of this tax, has been already ascertained. It raises the price of produce, and falls wholly upon the consumer.
If the poor rate were levied in proportion to profits, upon farmers, manufacturers, and merchants, it would be a tax upon profits. If it were levied in proportion to the rent of land, it would be a tax upon the rent of land. If it were levied upon the rent of houses, it would fall upon the inmates, and be a tax upon income. From the mode in which it is levied, it is drawn in part from all these sources. If it falls disproportionately upon the profits of any one class of capitalists, that class receives compensation. If the farmers, as is usually supposed, pay a higher rate for the maintenance of the poor than other pro- ducers, this, as far as the excess extends, is the same thing as a separate and additional tax upon them. But if a separate tax is laid upon the farmers, we
282 CHAP. IV — CONSUMPTION.
have already seen that it operates immediately to raise the price of corn sufficiently high to afford them compensation for the tax, and raises the rent of the landlords. It is to them a benefit, not a burthen.
Of all such taxes as raise the price of corn, one effect is remarkable. As a certain quantity of corn is necessary to the subsistence of the labourer, his wages must be competent to the purchase of that quantity. They must often, therefore, rise as the price of that quantity rises. But we have already seen, that, in proportion as wages rise, profits fall. A tax upon corn, therefore, operates upon all men as consumers. Upon capitalists it is apt to operate in two ways ; it is, first, a tax upon them as consumers ; and, secondly, it has often the same effect upon them as a tax upon their profits.
SfiCT. XIII— LAND TAX, Q83
SECTION XIII.
A TAX PER ACHE ON THE LAND.
We have already considered in what manner a tax laid upon the land, and proportional to the rent, would operate ; in what manner a tax laid upon the land, and proportional to the produce, would ope- rate; and* in what manner a tax laid upon the land, and proportional to the farmer's profits, would operate. The first would be a tax upon the landlord ; the se- cond would be a tax upon the consumer, and would not affect the landlord ; the third would be a tax upon the consumer, and would benefit the landlord. A tax may also be laid upon the land at so much per acre.
The operation of this tax would be different, if it were levied upon cultivated land only, and if it were levied on both cultivated and uncultivated.
If it were levied dh cultivated and uncultivated, it would not raise the price of produce, and would fall wholly upon the landlord ; if it were levied on culti- vated land only, it would raise the price of produce, would fall wholly on the consumers, and would increase the rent of the landlords.
, We have seen that there is a portion of capital
2S4i CHAP. IV — CONSUMPTION.
employed upon the land, the return to which is sufficient to afford the ordinary profits of stock, but no more. If any addition is made to the cost of producing, a rise of price must afford compensation. If no addition is made to such cost, price will not he affected.
If a tax is laid at so much per acre on land, both cultivated and uncultivated, no addition will be made to the cost of producing. There are two cases in which portions of capital are employed on the land without yielding more than the ordinary profits of stock ; of course yielding nothing for rent : the one is, where, after two or more doses of capital have been bestowed upon land, each yielding less than the former, a third or a fourth comes to be employed ; the other is, where, after land of the second or third degree of fertility has been exhausted, cultivation is forced upon land of a still inferior quality.
In the first of these cases, it is evident, imme- diately, that a tax on the acije does not affect the cost of production upon any subsequent dose of capi- tal. When the first dose only is applied, the tax is paid ; and it is, therefore, the interest of the farmer to apply a second, as soon as the price of produce has risen sufficiently high to afford him a full profit, and nothing more. No allowance remains to be made for the tax which was already paid.
SECT. XIII — LAND TAX. il85
The same conclusion holds/ when capital is ap- plied to new land of inferior quality. In this case, also, if the tax was previously paid, the owner of the land has an interest in cultivating it, the moment when produce rises sufficiently high to afford the profits of the stock which the cultivation may require.
The case, however, is different, when the tax is levied only on cultivated land. When capital passes downwards from the more fertile land which has been cultivated before, to the less fertile, which has not been cultivated, a tax then begins immediately to be paid. The produce to be raised must yield, not only the ordinary profits of stock, but the tax also ; such land will not be cultivated till the price of produce has risen sufficiently high to yield that accumulated return. The tax, therefore, is included in the price.
The consequence, with regard to the landlord, is beneficial. Suppose that land of the third degree of fertility is the last to which cultivation has de- scended ; that such land yields at the rate of two quarters per acre, land of the next degree above it at the rate of four quarters, and land of the first degree of fertiHty six quarters ; in this case, it is , evident, that two quarters upon each acre affords both the tax, and the remuneration to the farmer. The landlord, therefore, may derive two quarters ?^^from the acre of second quality, four quarters
286 CHAP. IV — CONSUMPTION.
from the acre of first. He draws this quantity of produce equally in both cases, as well when such a tax is levied, as when it is not levied. But in the case of the tax, the price is raised, and each of his quarters of corn is of greater value. Such a tax would, there- fore, raise upon the consumers, not only so much per acre to the government, but a great deal more for -the benefit of the landlords.
SECT. XIV— TAXES UPON TRANSFER. 287
SECTION xm
TAXES UPON THE TRANSFER OF PROPERTY.
Taxes upon the transfer of property are of several kinds; as stamp duties upon purchase and sale, legacy duties, duties upon the writings required in the conveying of property, and others of the same nature.
In the case of all property which is the produce of labour and capital, the tax upon purchase and sale falls upon the purchaser, because the cost of produc- tion, including the profits of stock, must be afforded along with the tax.
Taxes upon the transfer of land, which is a source of production, and not the effect of labour and capital, fall upon the seller ; because the purchaser considers what benefit he could derive from his capital employed in another way ; and if the land will not afford him an equivalent, he will refuse to exchange it for the land.
■Mk Legacy duties, and duties upon free gifts, fall, it is evident, upon the receivers.
288 CHAP. IV-^CONSUMPTION.
SECTION XF.
LAW TAXES.
Taxes upon proceedings at law are levied chiefly in the form of stamps on the different writings employed in the business of judicature ; and in that of fees, on the several steps and incidents of the judicial procedure. *
It is evident enough that they fall upon the suitors. It is equally evident that they are a tax upon tlie demand for justice.
Justice is demanded in two cases ; either that in which it is a matter of doubt to which of two persons a certain right belongs ; or that in which the right of some person has been violated, and a remedy is required.
There is no peculiar propriety in taxing a man because he has a right which is unfortunately disputed. But there is the greatest of all improprieties in
taxing a man because he has sustained an act of in-
. . •. «-.. - ^
It is very evident that all such taxes are a bar in" *'•**
SECT. XV — LAW TAXES. 889
the way of obtaining redress of injury ; and just in so far as any thing obstructs the redress of injury, injustice is promoted. A tax upon justice, therefore, is a premium upon injustice.
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290 CHAP. IV — ^iCONSUMPTION.
SECTION XFL
TAXES ON MONEY, AND THE PRECIOUS METALS.
A TAX upon money cannot be conveniently levied, excepting either upon the occasion of its coinage, or that of the first acquisition of the bullion. It might be levied upon the bullion, either upon its import- ation from abroad ; or, if the mine were within the country, upon its issuing from the mine.
A tax upon coinage is the same thing, in effect, with what has been called a seignorage. It is the paying of something more for the coins, than the quantity of bullion of which they are composed.
The effect of this is evident, when a currency consists entirely of the metals. No man will carry bullion to be coined, unless the metal in the coin is of as much more value than the bullion, as the amount of the tax. The currency, therefore, is raised in value; that is to say, the metal in the state of currency is raised in value, to an amount equal to that of the tax. , ^
*• ii . / .
This is a tax which possesses the peculiar property ^^. of falling upon nobody. It falls npt upon the man *^
-^
SECT. XVI — TAXES ON MONEY. 291
who carries bullion to be coined, because he carries it only when the coins are equal in value to the tax and bullion together. It falls not upon the persons to whom the coins are paid as the medium of exchange ; because they are of the same value to them, as if they contained the whole of the bullion for which they will exchange.
This is a tax, therefore, which ought always to be carried as far as the peculiar limit to which it is sub- ject will admit. The limit to w-hich it is subject, is the inducement to illicit coining. If the tax is raised so highj as to pay the coiner for his expenses and the risk of detection, illicit coinage is ensured.
In a country in which paper circulates along with gold, the paper has a tendency to prevent the effect of a seignorage.
It is the interest of those who issue paper, to main- tain i;n circulation as great a quantity of it as they 1^. They may go on increasing the quantity, till it becomes the interest of those who hold their notes, to bring the notes to them for coins.
It is the interest of those who are the possessors of
notes, to carry them to the bank for coins, only when
there is a profit by. melting. The coins, as coins, are
.^not mt)re valuable than the .paper, so long as they
^circulate, vyithoMjt a premium, along with the paper.
292 CHAP. IV — CONSUMPTION.
But if the paper has been issued in great quantity, the value of the currency may be so reduced, that the metal in the coins may be of more value as bullion than as coin. Melting for the sake of this profit, is the only check upon the quantity of a paper money convertible into coins at the option of the holder.
It is very obvious, that if coins are issued under a seignorage, with the metal in the coins of greater value than the metal in the state of bullion, the coins can be retained of that value only if the currency is limited in amount. When paper is issued without restriction, that limit is removed. The paper issued increases the quantity of currency, till the metal in the coins is reduced, first to the same value as that in bullion, next to a less value. At that point, it becomes the interest of individuals to demand coins at the bank, for the purpose of melting ; and then it is the interest of the bank to contract its issues.
A very simple, however, and a Very effectual ex- pedient, is capable of being adopted, for preventing this effect of a paper currency. That is an obliga- tion on the bank to pay for its notes, either in coins, or in bullion, at the option of tlie hotder. Suppose that an ounce of gold is coined into 3/., deducting five per cent, for seignorage, and suppose that a bank which issues notes is bound to pay, on deniand,^ "^^^- only 3/. of coins, but an ounce of bullion, if )^'
SECT. XVI — TAXES ON MONEY. 293
ferred ; it is evident that the bank, in that case, has an interest in preventing the currency from sinking in value. If the currency is so high in value, that SI. of currency is really equal in value to an ounce of bullion, the bank loses nothing by being obliged to give for it an ounce of bullion ; if it is so depressed in value that 3/. of it is not worth an ounce of bul* lion, it does lose. The check upon the issue of paper is thus made to operate earlier.
A tax upon the precious metals, when imported, or extracted from the mines^ would, as far as the metals were destined to the ordinary purposes of use or ornament, fall upon the consumers ; it would, as far as the metals were used for currency, fall upon no- body.
It would raise the exchangeable value of the metal. But a smaller quantity of a valuable metal is not less convenient as the medium of exchange, than a greater quantity of a less valuable. It would be ex- pedient, therefore, to derive as much as possible from this source. The facility, however, of carrying and conceahng a -commodity which involves a great value in small dimensions, renders it a source from which much canno^. Ue derived. ^ Under a very moderate duty, illicit importation would be unavoidable.
, i^ ^ ' =# ' *.
.;{v.Though' a t^x ug«i the precious metals,^ as im- ^.^ ported, or isgueafrom the^ mines, \i^5uld, like all other
^\; ..
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294 CHAP. IV*— -CONSUMPTION.
taxes upon particular commodities, fall ultimately
upon the consumer, it would not do so immediately.
That which enables the producers, when a tax is laid
upon any commodity, to throw the burden upon the
consumers, is the power they have of raising the price,
by lessening" the supply. Of most commodities, the
quantity in use is speedily consumed. The annual
supply required bears, therefore, a great proportion
to the quantity in use ; and if it is withheld, or only
a part of it withheld, the supply becomes so far
diminished as greatly to raise the price. The case
is different with the precious metals. If the annual
supply were wholly withheld, it would for some time
make no great defalcation from the quantity in use.
It would, therefore, have little effect upon prices.
During that interval, the sellers of the metals would
not be indemnified. During that time, more or less
of the tax would fall upon them. ^^
The same observation applies to houses, and all other commodities of whicfi the quantity in use is great in proportion to the annual supply:
.^ /. ^-. ..;■.♦.--■- ^ n ^
SECT. XVII—EFFECTS UPON PRICE, &C. 295
SECTION XFIL
EFFECTS OF THE TAXATION OF COMMODITIES UPON THE VALUE OF MONEY, AND THE EM- PLOYMENT OF CAPITAL.
Capital is most advantageously employed, when no inducement whatsoever is made use of to turn it out of one employment into another. It is most advantageously employed, when it follows that direc- tion which the interest of the owners would give to it of its own accord.
Suppose that broad cloth is in England twenty
'^^shillings per yard ; that linen, if made at home, would
be three shillings per yard : that in Germany on the
contrary, linen is at two shillings per yard ; and that
broad cloth,, if made there, would be twenty-four
shillings per yaiM. 2^' -*t#
% . • 4 ^ ..-
It is very evident that in these circumstances, it would be the u interest of England to employ her labour in making broad clpth for Germany, instead of linen for herself; and that of Germany, in making linen for England, instead of broad cloth for herself.
In England the same quantity of labour that pro-
*; > - -■-'. • A, .
\M ^\
296 CHAP. IV — ^CONSUMPTION.
duced one yard of broad cloth, would produce only seven yards of linen. But in Germany one yard of this cloth would purchase twelve yards of linen. England, therefore, by exporting broad cloth in exchange for linen, would gain the whole of the difference between seven yards of linen and twelve.
If, in these circumstances, a tax in England were laid upon broad cloth, which raised the price to twenty-four shillings, what would be the consequences?
In the first place, it is evident, that no broad cloth could be exported to Germany. The price, however, of linen, would still be so low in Germany, that it would be imported into England. Money, instead of cloth, would go abroad to pay for it. Money^ therefore, would become comparatively scarce in England ; and prices would fall. It would become comparatively abundant in Germany, and prices would rise. Linen would, therefore, become too dear to be imported into England ; unless iji the mean time some other commodity, in consequence of the increasing value of money, became cheap Enough in England to allow exportation. In the first case, England would, by a tax upon her own broad cloth, be dep>rived of the advantage of obtainifig cheap linen from Germany, and would be obliged to produce it for herself. In the other case^ she would be compelled to export, in exchange for the linen, another commodity, which.
SECT. XVII— EFFECTS UPON PRICE, &C. 297
by the supposition, she produced on less favourable terms than the first.
In this manner it is evident that, by a tax imposed upon broad cloth, the people of England would suffer, not only by paying the tax upon broad cloth, but by being obliged to pay also more for their linen.
The effect of this tax upon prices would be, to raise the money value of broad cloth a certain degree, though not to the amount of the tax ; and to lower the money value of all other commodities : not to raise, at least permanently, the price of cloth to the whole amount of the tax; because it would send part of the money out of the country : to lower the price of all other commodities, because by this departure of the money, its value would be raised.
If, when the tax was imposed upon broad cloth, a drawback of the whole of -the duty was allowed upon exportation, there would be no alteration in the trade with Germany ; English* broad cloth would be -sent there, and linen would be imported, on the same terms as before. Tlie people of England would sus- tain the burdeu-of the tax, and would sufler no other injury. There .would be no transit of the precious metals. >/ The price of broad cloth would be raised in England; and the ^pri&^^f all other things would repiain as b^fore;.^ -^^iv ^* ^- •*►
298 CHAP. IV--C0NSUMPTION.
Even if no drawback were allowed, taxes have not a necessary tendency to lessen the quantity of foreign trade. Though England, as in the case already supposed, were hindered, by the tax on broad cloth, from exporting broad cloth ; she might soon, by the transit of money, have it in her power to export some other commodity. The reason of this case, it will easily be seen, applies to all other cases. A highly taxed country may possibly export to as great an extent as if she had not been taxed at all. If care, however, has not been taken, and it seldom is .taken, to compensate exactly for established duties by countervailing duties and drawbacks, it does not export with the same advantage.
There are two cases, in which the money cost of commodities may be raised by taxation: that in which any number of commodities are taxed one by^ one, as in the instance, just adduced, of broad cloth: and that in which all commodities are taxed by an ad valorem duty. In neither of these cases, it will be seen, has the high price of commodities, in other words, the'low purchasing powpr of money, a necessary tendency to send money put of,the country. t
* - '' •^ - V.
In the case adduced aoove, the broafl clpth alone was enhanced in price by the tax. The .purchasing power of money was lessened, therefore, only in * respect to broad cloth. But money could not go out of the country with any greater advantage to pur-
SECT. XVII — EFFECTS UPON PRICE, kc. 299
chase broad cloth ; because that commodity, on im- portation, would have to pay the tax; and there would not be a new distrif)ution of the precious me- tal, if the tax were drawn back.
Neither would an ad valorem duty, though it would raise, in the manner already explained, the price of all commodities, and reduce the purchasing power of money, have a tendency to send money out of the country. Suppose the duty ten per cent. ; and the purchasing power of money reduced as much below the level of the surrounding countries. It would be of no avail to the merchant that his money would purchase ten per cent, more of goods abroad, if he were obliged to pay ten per cent, duty upon their importation. It thus appears, that the price of com- modities may be raised by taxation to any amount, in one country, above the price in other countries, if drawbacks and countervaiHng duties are applied upon exportation and importation.
THE END,
V
X^ or THE '^
"UNIV'EBSITY
■^'vr
By the same Author, HISTORY
OF
BRITISH INDIA.
SECOND EDITION, 6 VOLS. 8V0. 3/. 125,
BY JAMES MILL, ESQ.
'^ We have already had occasion, in examining the several parts of this elaborate work, to express our opinion of its merits. The hibour which lias been employed in collecting and examining materials, the skil- ful distribution of the facts into proper compartments, the high tone of moral feeling, and the enlarged philosophy which everywhere pervade the narrative, entitle the History of British India to be regarded as a valuable addition to our national literature. It gives a clear, connected view of a series of transactions, peculiar in their nature and important in their consequences, which till now were involved in obscurity, but which cannot be made familiar to the mind without enriching our intel- lectual stores with new views of society and of individual character. The extensive circulation of Mr. Mill's History will be a benefit both to England and to India." — British Review, No. XXIV. ^
" The appearance of a work of the higher class naturally suggests a comparison with some acknowledged model ; and the philosophic tone of these volumes points strongly to a parallel with the labpurs of Hume. When we compare the preparatory attainments of these writers, we find both intimately acquainted with the historians, the philosophers, and the Orators of Greece and Rome; and both also remarkable for their reasoning powers, and for that turn of mind which in the relation of events, looks less to the gratification than the instruction of the reader ; which makes a history a continued lesson, and in the past seeks not objects of wonder, but rules for the guidance of the future. In this their mutual province, what is the difference betsyeen their re- spective attainments ? Mr. Hume had studied more the workings of tlie human min^ in the individual : Mr. Mill the same workings as they affect society ; the one was qualified to unfol'd the motives of leading actors, the other the progress of collective bodies. Ou'thesame side is the balance with regard to diligence in research ; for even, the Decline and Fall of the Roman Empire does not discover a more varied or pains-taking investigation of authorities, than the present History of India." — MontJily Review, Oct, 1821. • - ,
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